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RATE > SEC Filings for RATE > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for BANKRATE, INC.

Form 10-Q for BANKRATE, INC.


8-Aug-2014

Quarterly Report


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

You should read the following discussion of our results of operations and financial condition with the financial statements and related notes included elsewhere in this quarterly report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and that involve numerous risks and uncertainties, including, but not limited to, those described in the "Cautionary Statement Concerning Forward-Looking Statements" section of this quarterly report and in the materials referenced therein. Actual results may differ materially from those contained in any forward-looking statements. See "Cautionary Statement Concerning Forward-Looking Statements."

Introduction

Our Company

We are a leading publisher, aggregator and distributor of personal finance content on the Internet. We provide consumers with proprietary, fully researched, comprehensive, independent and objective personal finance editorial content across multiple vertical categories including mortgages, deposits, insurance, credit cards, and other personal finance categories.

Our sources of revenue include display advertising, performance-based advertising, lead generation, distribution arrangements and traditional media avenues, such as syndication of editorial content and subscriptions.

We generate revenue through the sale of leads in the credit card, insurance and senior care vertical categories. Primarily through our CreditCards.com, Bankrate.com and CreditCardGuide.com brands, and through our affiliate networks, we provide leads to credit card issuers and principally record sales after the credit card issuers approve the leads' credit applications. Through our InsWeb, InsureMe and NetQuote brands, we sell leads to insurance agents and insurance carriers. We generate revenue on a per-lead basis based on the actual number of qualified insurance leads generated, and on a per-action basis for credit card applications (i.e., upon approval or completion of an application). Leads are generated not only organically within the Bankrate network of websites, but also through our various affiliate networks, via co-brands, and through display advertisements. We sell to advertisers targeting a specific audience in a city or state and also to national advertisers targeting the entire country. Through our Caring brand, we provide leads to senior care communities and principally record sales after the leads have moved into the community.

Advertisers that are listed in our mortgage and deposit rate tables have the opportunity to hyperlink their listings. Additionally, advertisers can buy hyperlinked placement within our qualified insurance listings. By clicking on the hyperlink, users are taken to the advertiser's website. We typically sell our hyperlinks on a per-click pricing model. Under this arrangement, advertisers pay Bankrate a specific, pre-determined cost each time a consumer clicks on that advertiser's hyperlink or phone icon (usually found under the advertiser's name in the rate or insurance table listings). All clicks are screened for fraudulent characteristics in accordance with IAB advertising standards by either an independent third party vendor (for our mortgage and deposit products) or internally (for our insurance products) and then charged to the customer's account.

We provide a variety of digital display formats. Our most common digital display advertisement sizes are leader boards and banners, which are prominently displayed at the top or bottom of a page, as well as skyscrapers, islands, and posters. We charge for these advertisements based on the number of times the advertisement is displayed or based on a fixed amount for a campaign. Advertising rates may vary depending upon the product areas targeted, geo-targeting, the quantity of advertisements purchased by an advertiser, and the length of time an advertiser runs an advertisement on our online network. We sell to advertisers targeting a specific audience in a city or state and also to national advertisers targeting the entire country.

Lead generation, display advertisements and hyperlink listings, which we refer to as online revenue, represented approximately 99% and 98% of our revenue for the six months ended June 30, 2014 and 2013. We also derive revenue through the sale of print advertisements and the distribution (or syndication) of our editorial content, which we refer to as print publishing and licensing revenue.


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Company Developments

Acquisitions Fiscal Year 2013

During the six months ended June 30, 2013, the Company acquired certain assets and liabilities of an entity for an aggregate purchase price of $11.8 million, including $8.8 million in fair value of contingent acquisition consideration. The Company paid $3.0 million during the six months ended June 30, 2013 and assumed a net liability of $165,000. This entity is individually immaterial to the Company's net assets and operations. This acquisition was accounted for as a purchase and is included in the Company's consolidated results from its acquisition date. The purchase price recorded by the Company included $226,000 in goodwill and $11.7 million in intangible assets for trademarks and URLs related to this acquisition.

Acquisitions Fiscal Year 2014

During the six months ended June 30, 2014, the Company completed the stock acquisition of Caring, Inc., a Delaware corporation ("Caring") for $53.7 million, net of cash acquired. This acquisition was accounted for as a stock acquisition and is included in the Company's consolidated results from its acquisition date. The purchase price recorded by the Company included $26.2 million in goodwill and $29.5 million in intangible assets for Internet domain name, customer relationships and developed technology related to this acquisition.

Certain Trends Influencing Our Business

Our business benefits from the secular shift toward consumer use of the Internet to research and shop for personal finance products coupled with increased consumer interest in comparison shopping for such products, and the related shift by advertiser demand from offline to online and targeting of in-market consumers. Our ability to benefit from these trends depends on the strength of our position in the personal finance services markets driven by our brands, proprietary and aggregated content, breadth and depth of personal finance products, distribution, position in algorithmic search results and monetization capabilities. The key drivers of our business include the number of ready-to-transact consumers visiting our online network, including the number of page views they generate, the availability of financial products and the demand of our online network advertisers, each of which are correlated to general macroeconomic conditions in the United States. We believe that increases in housing activity and general consumer financial activity and fluctuations in interest rates positively impact these drivers while decreases in these areas, or a deterioration in macroeconomic conditions, could have a negative impact on these drivers.

Key Initiatives

We are focused on the following key initiatives to drive our business:

increasing the visitor traffic to our online network;

mobile traffic optimization and monetization;

optimizing the revenue of our cost-per-thousand-impressions, cost-per-click and cost-per-approval models on our online network;

revenue optimization associated with the new look, design and functionality of our mortgage and deposit cost-per-click as well as cost-per-call initiatives;

enhancing search engine marketing and keyword buying to drive targeted impressions into our online network;

expanding our co-brand and affiliate footprint;

broadening the breadth and depth of the personal finance content and products that we offer on our online network;

continue the transition to a higher conversion lead model with a greater percentage of owned and operated traffic from a high volume third party lead model;

further develop our mobile applications and optimize the consumer experience across different modes of accessing our online network;

develop an ongoing relationship with our visitors;

containing our costs and expenses; and

continuing to integrate our acquisitions to maximize synergies and efficiencies.


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Revenue

The amount of advertising we sell is a function of (1) the number of visitors to our online network and our affiliates' websites, (2) the number of ad pages we serve to those visitors, (3) the click through rate of visitors on hyperlinks,
(4) the number of advertisements per page, (5) the rate at which consumers apply for financial product offerings, and (6) advertiser demand.

Lead Generation Revenue

Lead generation revenue consists of cost-per-approval (CPA) and cost-per-lead (CPL) revenue. We generate revenue by delivering measurable online marketing results to our clients in the credit card, personal insurance and senior care vertical categories. These results are typically in the form of qualified leads, the outcomes of customers submitting an application for a credit card, customers being contacted regarding a quote for a personal insurance product, or customers moving in to a senior care community. These qualified leads are generated from our marketing activities on our websites or on third party websites with whom we have relationships.

Click and Call Revenue

We also sell hyperlinks (e.g., in our interest rate or insurance table listings) on our online network on a cost-per-click (CPC) and on a cost-per-call basis. We generate revenue upon delivery of qualified and reported click-throughs to our advertisers from a hyperlink in a rate or insurance rate table listing and qualified phone calls. These advertisers pay us a designated transaction fee for each click-through or phone call, which occurs when a user clicks on any of their advertisement listings or makes a phone call to the advertiser. Each phone call or click-through on an advertisement listing represents a completed transaction once it passes our filtering validation process.

Display Advertising Revenue

We sell display advertisements on our online network consisting primarily of leaderboards, banners, badges, islands, posters, and skyscraper advertisements on a cost-per-impression (CPM) basis. We typically charge for these advertisements based on the number of times the advertisement is displayed.

Print Publishing and Licensing Revenue

Print publishing and licensing revenue represent advertising revenue from the sale of advertising in our Mortgage Guide (formerly called the Consumer Mortgage Guide) and CD & Deposit Guide, rate tables, newsletter subscriptions, and licensing of research information.

We also earn fees from distributing editorial rate tables that are published in newspapers and magazines across the United States, from paid subscriptions to three newsletters, and from providing rate surveys to institutions and government agencies. In addition, we license research data under agreements that permit the use of rate information we develop to advertise the licensee's products in print, radio, television, and website promotions.

Cost of Revenue (excludes depreciation and amortization)

Cost of revenue represents expenses directly associated with the creation of revenue. These costs include contractual revenue sharing obligations resulting from our distribution arrangements ("distribution payments"), salaries, editorial costs, market analysis and research costs, stock-based compensation expense, and allocated overhead. Distribution payments are made to website operators for visitors directed to our online network as well as to affiliates for leads directed to our online network and lead generation websites. These costs increase proportionately with gains related to revenue from our online network and lead generation websites. Editorial costs relate to writers and editors who create original content for our online publications and associates who build web pages. These costs have increased as we have added online publications and co-branded versions of Bankrate.com under distribution arrangements. These websites must be maintained on a daily basis. Research costs include expenses related to gathering data on banking and credit products and consist primarily of compensation and benefits along with allocated overhead.

We are also involved in revenue sharing arrangements with our online partners where the consumer uses co-branded websites to which we provide web services. Revenue is effectively allocated to each partner based on the revenue earned from each website. The allocated revenue is shared according to distribution agreements.


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Operating Expenses

Sales

Sales costs represent direct selling expenses, principally for online advertising, and include compensation and benefits, sales commissions, allocated facility costs, and stock-based compensation expense.

Marketing

Marketing expenses represent expenses associated with expanding brand awareness of our products and services to consumers and include search engine marketing ("SEM") expense, print and Internet advertising, marketing and promotion costs including email marketing, and stock-based compensation expense.

Product Development and Technology

Product development and technology costs represent compensation and benefits related to site development, network systems and telecommunications infrastructure support, programming, new product design and development, other technology costs, and stock-based compensation expense.

General and Administrative

General and administrative expenses represent compensation and benefits for executive, finance and administrative personnel, professional fees, stock-based compensation expense, allocated facility costs and other general corporate expenses.

Acquisition, Offering and Related Expenses

Acquisition, offering and related expenses represent direct expenses related to our acquisitions.

Depreciation and Amortization

Depreciation and amortization expense includes the cost of capital asset acquisitions spread over their expected useful lives. These expenses are spread over 1 to 25 years and are calculated mostly on a straight-line basis. Depreciation and amortization also includes the amortization of intangible assets, consisting primarily of trademarks and URLs, software licenses, customer relationships, agent/vendor relationships, developed technologies and non-compete agreements, all of which were either acquired separately or as part of business combinations recorded under the acquisition method of accounting. The amortization periods for intangible assets are as follows:

Estimated Useful Life

Trademarks and URLs          2-25 years
Customer relationships       3-15 years
Affiliate relationships      1-15 years
Developed technologies        1-6 years

Interest and Other Expenses, Net

Interest and other expenses, net primarily consists of expenses associated with our long-term debt, amortization of the debt issuance costs, interest income earned on cash and cash equivalents and other income.

Changes in Fair Value of Contingent Acquisition Consideration

Changes in fair value of contingent acquisition consideration primarily consists of adjustments to the fair value of contingent acquisition consideration due to the passage of time, or changes to the underlying assumptions.


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Income Tax Expense

Income tax expense consists of federal and state income taxes in the United States and taxes in certain foreign jurisdictions.

Critical Accounting Policies

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP, requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent gains and losses at the date of the financial statements and the reported amounts of revenue and expenses during the period. We base our judgments, estimates and assumptions on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. There have been no significant changes in our critical accounting policies or estimates during the three months ended June 30, 2014 as compared to the critical accounting policies and estimates disclosed in management's discussion and analysis of financial condition and results of operations included our Annual Report dated February 27, 2014 and filed with the SEC on Form 10-K.

Recent Accounting Pronouncements

See Note 1 in Notes to Condensed Consolidated Financial Statements.

Results of Operations

The following is our analysis of the results of operations for the periods covered by our interim consolidated financial statements. This analysis should be read in conjunction with our annual financial statements, including the related notes to the annual financial statements included within our Annual Report dated February 27, 2014 and filed with the SEC on Form 10-K.

The following table displays our results for the respective periods expressed as a percentage of total revenue.

                                       Three months ended         Six months ended
                                      June 30,     June 30,     June 30,     June 30,
Statement of Operations Data:           2014         2013         2014         2013
Revenue                                   100%         100%         100%         100%
Cost of revenue (excludes
depreciation and amortization)             36%          36%          35%          34%
Gross margin                               64%          64%          65%          66%

Operating expenses:
Sales                                       3%           4%           3%           3%
Marketing                                  25%          24%          25%          24%
Product development and technology          5%           5%           4%           4%
General and administrative                 11%          11%          11%          11%
Legal settlements                           7%           0%           3%           0%
Acquisition, offering and related
expenses                                    0%           0%           1%           0%
Changes in fair value of contingent
acquisition consideration                   1%           3%           1%           2%
Depreciation and amortization              12%          14%          11%          14%
                                           64%          61%          59%          58%
Income from operations                      0%           3%           6%           8%

Interest and other expenses, net            4%           6%           4%           6%

(Loss) income before taxes                 (4%)         (3%)          2%           2%
Income tax expense (benefit)               (1%)          0%           1%           1%
Net (loss) income                          (3%)         (3%)          1%           1%


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Revenue

                             Three months ended                   Six months ended
(In thousands)        June 30, 2014      June 30, 2013     June 30, 2014     June 30, 2013
Online (1)            $      129,346    $      103,564    $      264,411    $      210,029
Print publishing               1,316             1,982             2,726             3,965
Total revenue         $      130,662    $      105,546    $      267,137    $      213,994

(1) Consists of display advertising, hyperlink and lead generation.

Cost of Revenue (excludes depreciation and amortization) and Gross Margin

                                      Three months ended                   Six months ended
(In thousands)                  June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013
Revenue                        $      130,662    $      105,546    $      267,137    $      213,994
Cost of revenue                        46,494            37,542            92,789            73,650
Gross margin                   $       84,168    $       68,004    $      174,348    $      140,344
Gross margin as a percentage
of revenue                                64%               64%               65%               66%

Three months ended June 30, 2014 Compared to Three months ended June 30, 2013

Revenue

Total revenue was $130.7 million and $105.5 million for the three months ended June 30, 2014 and 2013, respectively, representing an increase of 24%, due primarily to the reasons set forth below.

Total lead revenue increased by $19.7 million for the three months ended June 30, 2014 compared to the same period in 2013 as cost per approval (CPA) and cost per lead (CPL) revenue increased 33% and 20%, respectively. The increase in CPA revenue is as a result of an increase in volume in our affiliate networks ($4.1 million impact) as well as an increase in price ($10.1 million impact) partially impacted by the acquisition of Caring. The increase in CPL revenue was due to the Company's quality initiative to substantially reduce lower quality affiliate leads and boost the overall quality and conversion of its insurance products. This initiative resulted in an increase in the overall revenue per lead ($5.3 million impact).

Click and Call revenue (cost-per-click or CPC) increased by $5.2 million ended June 30, 2014 compared to the same period in 2013, due to an increase in the number of clicks ($3.6 million impact) and an increase in the overall rate ($1.6 million impact). The increase in volume was seen in both insurance and deposits offset by a decline in mortgage clicks due to the softening refinance market.

Display advertising revenue (cost-per-impression or CPM) revenue increased $674,000 for the three months ended June 30, 2014 compared to the same period in 2013 which was driven by an increase in sold impressions ($1.4 million impact) offset by a decline in revenue per impression ($750,000 impact).

Cost of Revenue (excludes depreciation and amortization) and Gross Margin

Cost of revenue for the three months ended June 30, 2014 of $46.5 million was $9.0 million higher than the same period in 2013. The Company incurred $7.8 million more in distribution payments to our online partners and affiliates as a result of higher online revenue on affiliate sites and $1.0 million in higher employee costs. Our gross margin for the three months ended June 30, 2014 was 64%, compared to 64% for the same period in 2013.

Operating Expenses

Sales

Sales expenses for the three months ended June 30, 2014 of $3.7 million were $77,000 lower than the same period in 2013, primarily due to a decrease of outside labor costs.


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Marketing

Marketing expenses for the three months ended June 30, 2014 of $33.2 million were $8.3 million higher than the same period in 2013. The increase is primarily due to an $8.1 million increase in paid marketing expense which includes search engine marketing ("SEM") and email marketing expense and $25,000 in higher compensation costs. The increase in marketing is in an effort to drive increased traffic to our owned and operated sites.

Product Development and Technology

Product development and technology costs for the three months ended June 30, 2014 of $5.9 million were approximately $1.1 million higher than the comparable period in 2013, primarily due to $549,000 in higher compensation costs due to increased headcount, $319,000 in higher stock compensation expense, and $143,000 in higher general information technology costs.

General and Administrative

General and administrative expenses for the three months ended June 30, 2014 of $14.2 million were $2.9 million higher due primarily to $1.1 million in higher stock compensation expense, increases of $1.2 million in employee costs associated with increased headcount and higher projected incentive plan payments, $286,000 in higher professional fees, $186,000 in higher general information technology costs and $101,000 in higher allocated facility costs.

Legal Settlements

Legal settlements for the three months ended June 30, 2014 were $9.2 million which consists of legal settlements related primarily to the Company's securities litigation (see Note 9 for further details), net of insurance recoveries.

Acquisition, Offering and Related Expenses

Acquisition, offering and related expenses for the three months ended June 30, 2014 was $158,000 as compared to $20,000 for the same period in 2013. The acquisition, offering and related expenses for the three months ended June 30, 2014 were primarily related to costs associated with our acquisition of Caring, Inc.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended June 30, 2014 of $15.2 million was $351,000 higher than the same period in 2013 primarily as a result of amortization expense associated with new intangibles recorded in connection with the acquisition of Caring of approximately $604,000, partially offset by lower amortization due to fully amortized assets.

Interest and Other Expenses, net

Interest and other expenses, net for the three months ended June 30, 2014 primarily consists of expenses associated with our Senior Notes, partially offset by other income and de minimis interest earned on cash and cash equivalents. Interest and other expenses, net for the three months ended June 30, 2014 was $5.2 million, which primarily consisted of $4.6 million for the Senior Notes and $544,000 for the amortization of deferred financing costs and original issue discounts on the Senior Notes and the New Credit Agreement. This amount was partially offset by de minimis interest and other income.

Interest and other expenses, net for the three months ended June 30, 2013 primarily consisted of expenses associated with the Senior Secured Notes, partially offset by other income and de minimis interest earned on cash equivalents. Interest and other expenses, net for the three months ended June 30, 2013 was $6.5 million, which primarily consisted of $5.7 million for the Senior Secured Notes and $686,000 for amortization of deferred financing notes and original issue discount.

Changes in Fair Value of Contingent Acquisition Consideration

Changes in fair value of contingent acquisition consideration for the three months ended June 30, 2014 was $744,000 and consisted of increases to the fair value due to the passage of time of $702,000 and increases to fair value due to change in estimates of $42,000.

Changes in fair value of contingent acquisition consideration for the three . . .

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