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INTX > SEC Filings for INTX > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for INTERSECTIONS INC

Form 10-Q for INTERSECTIONS INC


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our audited consolidated financial statements as of December 31, 2011 and 2010, and for the years ended December 31, 2011, 2010 and 2009, included in our Annual Report on Form 10-K for the year ended December 31, 2011 (the "Form 10-K") and with the unaudited condensed consolidated financial statements and related notes thereto presented in this Form 10-Q.


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Forward Looking Statements

Information contained in this discussion and analysis, other than historical information, may constitute "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995. Words or phrases such as "should result," "are expected to," "we anticipate," "we estimate," "we project," or similar expressions are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in any forward-looking statements. These risks and uncertainties include, but are not limited to, those disclosed in our Form 10-K under "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere, our quarterly and current reports filed with the Securities and Exchange Commission and the following important factors: demand for our products and services; the impact of legal and regulatory requirements on our business, specifically the consumer marketing, financial products and services, credit information and consumer credit markets; the impact of competition; our ability to continue our long-term business strategy, including growth through acquisition and investments; the concentration of our products and services; the concentration of our suppliers and clients; product development; maintaining acceptable margins; maintaining secure systems; ability to control costs general economic conditions, including the recent recession and the pace of economic recovery; disruptions to the credit and financial markets in the U.S. and worldwide; economic conditions specific to our financial institutions clients; ability to attract and retain qualified personnel; and the possibility that we may not make further dividend payments. A detailed discussion of these and other factors that may affect our future results is contained in our Form 10-K.

Readers are cautioned not to place undue reliance on forward-looking statements, since the statements speak only as of the date that they are made, and we have no intention or obligation to publicly update or revise any forward-looking statement unless required to do so by securities laws.

Overview

We have three reportable operating segments through the period ended September 30, 2012. Our Consumer Products and Services segment includes our identity theft protection and credit information management, data breach response, and insurance and membership products and services. Our Online Brand Protection segment includes the corporate brand protection and business intelligence services provided by our subsidiaries Net Enforcers and Intersections Business Intelligence Services. Our Bail Bonds Industry Solutions segment includes the software management solutions for the bail bond industry provided by our subsidiary Captira Analytical.

Consumer Products and Services

Our identity theft protection and credit information management products and services provide multiple benefits to consumers, including access to their credit reports, credit monitoring, educational credit scores, credit education, reports and monitoring of additional information, identity theft recovery services, identity theft cost reimbursement insurance, and software and other technology tools and services. Our membership and insurance products and services are offered by our subsidiary, Intersections Insurance Services, and include accidental death and disability insurance and access or purchasing programs for healthcare, home, auto, financial and other services and information. Our consumer services are offered through relationships with clients, including many of the largest financial institutions in the United States and Canada, and clients in other industries.

We also operate the Identity Theft Assistance Center ("ITAC") on behalf of the Identity Theft Assistance Corporation. ITAC provides victim assistance services without charge to the consumer customers of financial institutions that are members of ITAC. In addition to our service agreement for operation of ITAC, we have a license agreement with the Identity Theft Assistance Corporation under which our identity theft protection products and services, including victim assistance through ITAC, are offered through financial institutions and other entities. We contract directly with those financial institution and entities, and the Identity Theft Assistance Corporation receives license fees from us. In addition, we offer breach response services to organizations responding to compromises of sensitive personal information. We help these clients notify the affected individuals and we provide the affected individuals with identity theft recovery and credit monitoring services. We are paid fees by the clients for the services we provide their customers.

Our products and services are marketed to customers of our clients, and often are branded and tailored to meet our clients' specifications. Our clients are principally financial institutions, including many of the largest financial institutions in the United States and Canada. A majority of our subscriber base was acquired through our financial institution clients. We also are continuing our efforts to acquire subscribers through clients in other industries.


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With our clients, our services may be marketed to potential subscribers and non-subscriber customers through a variety of marketing channels, including direct mail, outbound telemarketing, inbound telemarketing, inbound customer service and account activation calls, email, mass media and the Internet. Our marketing arrangements with our clients sometimes call for us to fund and manage marketing activity. The mix between our company-funded and client-funded marketing programs varies from year to year based upon our and our clients' strategies. We conduct our own consumer direct marketing primarily through the Internet and broadcast media. We also may market through other channels, including direct mail, outbound telemarketing, inbound telemarketing, email and through marketing and distribution relationships.

Our client arrangements are distinguished from one another in part by the allocation between us and the client of the economic risk and reward of the marketing campaigns. The general characteristics of each arrangement are described below, although the arrangements with particular clients may contain unique characteristics:

Direct marketing arrangements: Under direct marketing arrangements, we bear most of the new subscriber marketing costs and pay our client a commission for revenue derived from subscribers These commissions could be payable upfront in a lump sum on a per newly enrolled subscriber basis, periodically over the life of a subscriber, or through a combination of both. These arrangements generally result in negative cash flow over the first several months after a program is launched due to the upfront nature of the marketing investments. In some arrangements, we pay the client a service fee for access to the client's customers or billing of the subscribers by the client, and we may reimburse the client for certain of its out-of-pocket marketing costs incurred in obtaining the subscriber. Even in a direct marketing arrangement, some marketing channels may entail limited or no marketing expenses. In those cases, we generally pay higher commissions to our clients compared to channels where we incur more substantial marketing expenses. In addition to these direct marketing arrangements with clients, the financial results we report under direct marketing includes our direct marketing to consumers independent of these client arrangements.

Indirect marketing arrangements: Under indirect marketing arrangements, our client bears the marketing expense and pays us a service fee or percentage of the revenue. Indirect marketing arrangements also include some clients who pay us fees for operational services including but not limited to fulfillment events, information technology development hours and customer service time. Because the subscriber acquisition cost is borne by our client under these arrangements, our revenue per subscriber is typically lower than under direct marketing arrangements. Indirect marketing arrangements generally provide positive cash flow earlier than direct arrangements. The majority of our non-subscriber customers are acquired under indirect marketing relationships that primarily generate little or no revenue per customer for us.

The classification of a client relationship as direct or indirect is based primarily on whether we or the client pay the marketing expenses. Our accounting policies for revenue recognition, however, are not based on the classification of a client arrangement as direct or indirect. We look to the specific client arrangement to determine the appropriate revenue recognition policy, as discussed in detail in Note 2 to our condensed consolidated financial statements. In the past, we have purchased from clients certain customer portfolios, including the rights to future cash flows. We typically classify the post-purchase customer portfolio as a direct marketing arrangement regardless of how it may have been characterized prior to purchase because we receive all future revenues and bear all associated risks and expenses for these customers following the purchase transaction.

Our typical contracts for direct marketing arrangements, and some indirect marketing arrangements, provide that, after termination of the contract, we may continue to provide our services to existing subscribers, for periods ranging from two years to indefinite, substantially under the applicable terms in effect at the time of termination. Under certain of our agreements, however, including most indirect marketing arrangements, the clients may require us to cease providing services under existing subscriptions. Clients under most direct and indirect contracts, including our largest clients, may also require us to cease providing services to their customers under existing subscriptions if the contract is terminated for material breach by us or based on various events such as certain legal or regulatory changes, a party's bankruptcy or insolvency, or other events.

Bank of America has ceased marketing of our services, and the portions of our agreement with Bank of America under which our identity theft protection services were being marketed to prospective subscribers expired on December 31, 2011. As a result, we are not obtaining new subscribers or new subscriber revenue through Bank of America, and expect a reduction in marketing and commissions expenses through at least December 31, 2012. We continue to provide our services to the subscribers we acquired through Bank of America before December 31, 2011. We believe that our agreement with Bank of America provides for us to continue to service those subscribers substantially under the applicable terms currently in effect. Under our agreement, however, Bank of America may require us to cease providing services to the existing subscribers if the agreement is terminated for material breach by us or based on various events such as certain legal or regulatory changes. We have been engaged in discussions with Bank of America about certain terms and conditions governing the continued servicing of those subscribers. We do not believe that the terms and conditions we currently are discussing are material to our continued servicing of the existing subscribers, and to date those discussions have not resulted in a material modification of our agreement. We do not know, however, whether Bank of America will agree with our interpretation of our agreement, or whether material terms may become the subject of discussion, and there can be no guarantee that Bank of America will continue to provide the cooperation necessary to continued servicing of the subscribers, including continued billing of the subscribers. Bank of America has indicated that it has been responding to inquiries from regulatory authorities regarding the billing of certain customers for identity theft protection products, which we believe include our products and products from a different provider.

We historically have depended upon financial institutions in the U.S. for a significant share of our new subscriber additions and our revenue. For example, in 2011, more than 70% of our new subscribers and our consumer products and services revenue were derived from agreements with U.S. financial institutions. Increased regulatory scrutiny has resulted in a decrease in the marketing by financial institutions of third party and other products, including our products. As a result, our new subscriber additions have decreased 59% for the first nine months of 2012 compared to the same period in 2011. We do not know whether the marketing of our products by those financial institutions will be resumed, whether, if resumed, they will return to prior levels, or whether other financial institutions also will halt, resume or postpone marketing of our products. Several of our financial institution clients also have canceled or suspended billing of certain subscriber accounts and may cancel or suspend billing of other subscriber accounts. We believe these cancellations and suspensions are based on regulatory actions or changes in the regulatory environment.


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Trends in Regulatory Environment

Sales by financial institutions of various fee-based products, sometimes called add-on products, are the subject of increasing scrutiny by federal and state regulators, private plaintiffs and consumer groups. We believe that some financial institutions, including some of our current and past financial institution clients, are or may be the subject of government examinations, investigations or enforcement proceedings concerning sales of add-on products. For example, the federal Consumer Financial Protection Bureau (the "CFPB") and other financial regulatory agencies have entered into consent orders with financial institutions regarding the sales of add-on products, including consent orders with our client Capital One regarding the sale of payment protection products and our identity theft protection products during certain time periods. Under these consent orders financial institutions have agreed to make restitution of fees collected from their customers, take other remedial actions, and cease marketing of the applicable products until their compliance plans are approved by regulators. Certain state attorneys general also have brought enforcement actions against financial institutions regarding the sales of add-on products. We are not a party to those actions.

On July 11, 2012, we received a Civil Investigative Demand (a "CID") from the CFPB requesting production of documents and answers to questions regarding the provision of "ancillary products related to credit card or deposit accounts." The CFPB has not alleged a violation by us of any law or regulation. We are in the process of responding to the CID.

We continuously review our practices and make adjustments as necessary or as may otherwise be appropriate to address any potential regulatory concerns, including guidelines, reports, rules and regulations that have been or may be issued by the CFPB or other government agencies. At this time, we do not know the potential impact of any changes we may make on our revenue or the extent to which such changes will increase our costs.


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Other Data

The following table details other selected subscriber and financial data (in
thousands):



                                                    Three Months Ended             Nine Months Ended
                                                      September 30,                  September 30,
                                                   2012            2011           2012           2011
Subscribers at beginning of period                   4,668          4,742          4,945          4,150
Reclassed subscribers                                    0              0              0            148
New subscribers - indirect                             197            398            527          1,218
New subscribers - direct                               118            274            357            932
Cancelled subscribers within first 90 days of
subscription                                           (58 )         (133 )         (196 )         (460 )
Cancelled subscribers after first 90 days of
subscription                                          (305 )         (387 )       (1,013 )       (1,094 )

Subscribers at end of period                         4,620          4,894          4,620          4,894
Non-Subscriber Customers                             3,658          4,741          3,658          4,741

Total Customers at end of period                     8,278          9,635          8,278          9,635

Indirect subscribers                                  51.8 %         49.1 %         51.8 %         49.1 %
Direct subscribers                                    48.2 %         50.9 %         48.2 %         50.9 %

                                                     100.0 %        100.0 %        100.0 %        100.0 %

*Cancellations within first 90 days of
subscription                                          18.4 %         19.8 %         22.2 %         17.7 %
**Cancellations after first 90 days of
subscription                                          23.4 %         23.7 %         23.4 %         23.7 %
***Overall retention                                  73.1 %         71.7 %         73.1 %         71.7 %

* Percentage of cancellation within the first 90 days to subscriber additions for the period

** Percentage of cancellations greater than 90 days to the number of subscribers at the beginning of the period plus new subscribers during the period less cancellations within the first 90 days on a rolling 12 month basis.

*** On a rolling 12 month basis by taking subscribers at the end of the period divided by the sum of the subscribers at the beginning of the period plus additions for the period.

Non-Subscriber Customers include consumers who receive or are eligible for certain limited versions of our products and services as benefits of their accounts with our clients. Non-Subscriber Customers also include consumers for whom we provide limited administrative services in connection with their transfer from a client's prior service provider. We generate an immaterial percentage of our revenue from Non-Subscriber Customers. Our Non-Subscriber Customers decreased 1.1 million since December 31, 2011 primarily due to the expected cancellation of Non-Subscriber Customers transferred to us by a client from another provider.

Online Brand Protection

Through our subsidiaries, Net Enforcers and Intersections Business Intelligence Services, we provide corporate brand protection services including online channel monitoring, auction monitoring, and other services. The services include the use of technology and operations staff to search the Internet for instances of our clients' brands and/or specific products, categorize each instance as potentially threatening to our clients based upon client provided criteria, and report our findings back to our clients. We also offers additional value added services to assist our clients to take actions to remediate perceived threats detected online. Our services are typically priced as monthly subscriptions for a defined set of monitoring services, as well as per transaction charges for value added communications services and hourly based fees for certain project work. Prices for our services vary based upon the specific configuration of services purchased by each client and range from several hundred dollars per month to tens of thousands of dollars per month. Beginning in the three months ended September 30, 2012, we began recognizing expenses in this segment for a new corporate brand protection service we intend to launch in early 2013.


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Bail Bonds Industry Solutions

Through our subsidiary, Captira Analytical, we provide automated service solutions for the bail bonds industry. These services include accounting, reporting, and decision making tools which allow bail bondsmen, general agents and sureties to run their offices more efficiently, to exercise greater operational and financial control over their businesses, and to make better underwriting decisions. We believe Captira Analytical's services are the only fully integrated suite of bail bonds management applications of comparable scope available in the marketplace today. Captira Analytical's services are sold to retail bail bondsmen on a "per seat" license basis plus additional transactional or subscription charges for various optional services. Additionally, Captira Analytical has developed a suite of services for bail bonds insurance companies, general agents and sureties which are also sold on either a transactional or recurring revenue basis.

Critical Accounting Policies

Management Estimates

In preparing our condensed consolidated financial statements, we make estimates and assumptions that can have a significant impact on our financial position and results of operations. The application of our critical accounting policies requires an evaluation of a number of complex criteria and significant accounting judgments by us. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions. We have identified the following policies as critical to our business operations and the understanding of our results of operations. For further information on our critical and other accounting policies, see Note 2 to our condensed consolidated financial statements.

Revenue Recognition

We recognize revenue on 1) identity theft and credit management services,
2) accidental death insurance and 3) other membership products.

Our products and services are offered to consumers principally on a monthly subscription basis. Subscription fees are generally billed to the subscriber's credit card, mortgage bill or demand deposit accounts by our clients, but may be billed by us in some circumstances. The prices to subscribers of various configurations of our products and services range generally from $4.99 to $25.00 per month. As a means of allowing customers to become familiar with our services, we sometimes offer free trial or guaranteed refund periods. No revenues are recognized until applicable trial periods are completed.

Identity Theft and Credit Management Services

We recognize revenue from our services when: a) persuasive evidence of an arrangement exists as we maintain signed contracts with all of our large financial institution customers and paper and electronic confirmations with individual purchasers, b) delivery has occurred, c) the seller's price to the buyer is fixed as sales are generally based on contract or list prices and
d) collectability is reasonably assured as individual customers pay by credit card which has limited our risk of non-collection and payments from large financial institutions are collected within 30 to 45 days with no significant write-offs. Revenue for monthly subscriptions is recognized in the month the subscription fee is earned. We also generate revenue through a collaborative arrangement which involves joint marketing and servicing activities. We recognize our share of revenues and expenses from this arrangement.

Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the service. Annual subscriptions include subscribers with full refund provisions at any time during the subscription period and pro-rata refund provisions. Revenue related to annual subscription with full refund provisions is recognized on the expiration of these refund provisions. Revenue related to annual subscribers with pro-rata provisions is recognized based on a pro rata share of revenue earned. An allowance for discretionary subscription refunds is established based on our historical experience. For subscriptions with refund provisions whereby only the prorated subscription fee is refunded upon cancellation by the subscriber, deferred subscription fees are recorded when billed and amortized as subscription fee revenue on a straight-line basis over the subscription period, generally one year.

We also provide services for which certain financial institution clients are the primary obligors directly to their customers. Revenue from these arrangements is recognized when earned, which is at the time we provide the service, generally on a monthly basis. In some instances, we recognize revenue for the delivery of operational services including but not limited to fulfillment events, information technology development hours and customer service minutes, rather than per customer fees.


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We record revenue on a gross basis in the amount that we bill the subscriber when our arrangements with financial institution clients provide for us to serve as the primary obligor in the transaction, we have latitude in establishing price and we bear the risk of physical loss of inventory and credit risk for the amount billed to the subscriber. We record revenue in the amount that we bill our financial institution clients, and not the amount billed to their customers, when our financial institution client is the primary obligor, establishes price to the customer and bears the credit risk.

Accidental Death Insurance

We recognize revenue from our services when: a) persuasive evidence of an arrangement exists as we maintain paper and electronic confirmations with individual purchasers, b) delivery has occurred at the completion of a product trial period, c) the seller's price to the buyer is fixed as the price of the product is agreed to by the customer as a condition of the sales transaction which established the sales arrangement, and d) collectability is reasonably assured as evidenced by our collection of revenue through the monthly mortgage payments of our customers or through checking account debits to our customers' accounts. Revenues from insurance contracts are recognized when earned. Marketing of our insurance products generally involves a trial period during which time the product is made available at no cost to the customer. No revenues are recognized until applicable trial periods are completed.

For insurance products, we record revenue on a net basis as we perform as an agent or broker for the insurance products without assuming the risks of ownership of the insurance products.

We participate in agency relationships with insurance carriers that underwrite insurance products offered by us. Accordingly, insurance premiums collected from . . .

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