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BANKRATE, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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 and insurance vertical categories. Through our Nationwide Card Services, CreditCardGuide.com, and CreditCards.com brands, we sell leads to credit card issuers. Through our InsWeb, InsureMe.com 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. 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 98% of our revenue for the three months ended March 31, 2013 and 2012. 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. Significant Developments Acquisitions Fiscal Year 2013 During the three months ended March 31, 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 three months ended March 31, 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 preliminary purchase accounting recorded by the Company included $225,000 in goodwill and $11.7 million in intangible assets for trademarks and URLs related to this acquisition 25 -------------------------------------------------------------------------------- Table of Contents Acquisitions Fiscal Year 2012 During the fiscal year ended December 31, 2012, the Company acquired certain assets and liabilities of certain entities for an aggregate purchase price of $52.7 million, including $20.8 million in potential earn out consideration. These certain entities are individually and in the aggregate immaterial to the Company's net assets and operations. All acquisitions were accounted for as purchases and are included in the Company's consolidated results from their acquisition dates. The Company recorded $6.7 million in goodwill and $46.0 million in intangible assets related to these acquisitions consisting of $33.7 million of trademarks and URLs, $8.0 million of affiliate network, $4.0 million of customer relationships and $0.3 million of developed technology. 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 several key initiatives to drive our business: • increasing the visitor traffic to our online network of websites; • optimizing the revenue of our cost-per-thousand-impressions and cost-per-click models on our online network including the integration of the new acquisitions; • 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; • transition to a higher conversion lead model with a greater percentage of owned and operated traffic from a high volume third party lead model, • containing our costs and expenses; and • continuing to integrate our recent acquisitions to maximize synergies and efficiencies. 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. Display Advertising Revenue We sell display advertisements on our online network consisting primarily of leaderboards, banners, badges, islands, posters, and skyscraper advertisements. We typically charge for these advertisements based on the number of times the advertisement is displayed. 26 -------------------------------------------------------------------------------- Table of Contents Hyperlink Revenue We also sell hyperlinks (e.g., in our interest rate or insurance table listings) on our online network on a cost-per-click 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 provider/carrier listing 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. Lead Generation Revenue We also generate revenue by delivering measurable online marketing results to our clients in the credit card and personal insurance vertical categories. These results are typically in the form of qualified leads or clicks, the outcomes of customers submitting an application for a credit card, or customers being contacted regarding a quote for a personal insurance product. These qualified leads are generated from our marketing activities on our websites or on third party websites with whom we have relationships. 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. Operating Expenses Sales Sales costs represent direct selling expenses, principally for online advertising, and include compensation and benefits, sales commissions, allocated overhead, 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 Product development 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. 27-------------------------------------------------------------------------------- Table of Contents General and Administrative General and administrative expenses represent compensation and benefits for executive, finance and administrative personnel, professional fees, stock-based compensation expense, allocated overhead and other general corporate expenses. Acquisition, Offering and Related Expenses and Related Party Fees Acquisition, offering and related expenses and related party fees represent direct expenses incurred as a result of the acquisition of Bankrate by an affiliate of Apax Partners L.P., expenses related to our acquisitions, fees associated with our various offerings (the June 2011 Initial Public Offering, the Senior Secured Notes Exchange Offer, the December 2011 Secondary Offering, etc.) and advisory fees to our shareholders. 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 network 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 on acquisition-related payments, interest income earned on cash and cash equivalents and other income. 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 March 31, 2013 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 March 1, 2013 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 March 1, 2013 and filed with the SEC on Form 10-K. 28-------------------------------------------------------------------------------- Table of Contents The following table displays our results for the respective periods expressed as a percentage of total revenue. Three months ended March 31, March 31, 2013 2012 Statement of Operations Data: Revenue 100 % 100 % Cost of revenue (excludes depreciation and amortization) 33 % 32 % Gross margin 67 % 68 % Operating expenses: Sales 4 % 3 % Marketing 24 % 25 % Product development 4 % 4 % General and administrative 11 % 8 % Legal settlements 0 % 0 %Acquisition, offering and related expenses and related party fees 0 % 0 % Depreciation and amortization 13 % 10 % 56 % 50 % Income from operations 11 % 18 % Interest and other expenses, net 6 % 5 % Change in fair value of contingent acquisition consideration 1 % 0 % Income before income taxes 4 % 13 % Income tax expense 2 % 5 % Net income 2 % 8 % Revenue Three months ended March 31, March 31, (In thousands) 2013 2012 Online (1) $ 106,465 $ 123,007 Print publishing 1,983 2,013 Total revenue $ 108,448 $ 125,020 (1) Consists of display advertising, hyperlink and lead generation. Cost of Revenue (excludes depreciation and amortization) and Gross Margin Three months ended March 31, March 31, (In thousands) 2013 2012 Revenue $ 108,448 $ 125,020 Cost of revenue 36,039 40,278 Gross margin $ 72,409 $ 84,742 Gross margin as a percentage of revenue 67 % 68 % 29 -------------------------------------------------------------------------------- Table of Contents Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012 Revenue Total revenue was $108.4 million and $125.0 million for the three months ended March 31, 2013 and 2012, respectively, representing a decrease of 13%, due to the reasons set forth below. Display advertising revenue increased by $961,000 for the three months ended March 31, 2013 compared to the same period in 2012, which was driven by the increase in page views ($1.4 million impact), offset by a decrease in cost per impressions yield per page ($474,000 impact). Hyperlink revenue decreased by $1.3 million for the three months ended March 31, 2013 compared to the same period in 2012, due to a decrease in the number of clicks ($1.9 million impact) and an increase in the overall rate ($611,000 impact). The decline in click volume was primarily in the insurance vertical which offset increases in mortgage and deposits. The increase in the overall rate is driven by increased rates in mortgage and deposit products. Per approved lead and per application lead generation revenue combined decreased by $16.3 million for the three months ended March 31, 2013 compared to the same period in 2012. The overall decrease consisted of a blend of insurance lead revenue decreasing by approximately 44% due to our strategic quality initiative while card product revenue increased by approximately 15%, as a result of an increase in marketing activities and purchasing on the part of the credit card issuers. Cost of Revenue (excludes depreciation and amortization) and Gross Margin Cost of revenue for the three months ended March 31, 2013 of $36.0 million was $4.2 million lower than the same period in 2012. The Company incurred $4.9 million less in distribution payments to our online partners and affiliates as a result of lower online revenue on affiliate sites partially offset by $430,000 in higher outside labor costs and $268,000 in higher compensation. The Company also incurred $128,000 for stock-based compensation expense for the three months ended March 31, 2013 and $209,000 for the same period in 2012. Our gross margin for the three months ended March 31, 2013 was 67%, compared to 68% for the same period in 2012, decreasing primarily due to higher share of direct traffic to insurance lead business and growth in margin in cost per click and display business. Operating Expenses Sales Sales expenses for the three months ended March 31, 2013 of $3.8 million were approximately $152,000 lower than the same period in 2012, primarily due to $162,000 in lower compensation costs due to decreased commissions on lower sales. Marketing Marketing expenses for the three months ended March 31, 2013 of $26.2 million were $5.0 million lower than the same period in 2012. The decrease is primarily due to the Company incurring $5.2 million in lower search engine marketing ("SEM") expense partially offset by $194,000 higher agency marketing expense. Product Development Product development costs for the three months ended March 31, 2013 of $4.5 million were approximately $68,000 higher than the comparable period in 2012, primarily due to $123,000 in higher outside labor costs and $74,000 in higher internet data transmission costs, offset by $163,000 in lower stock compensation expense. General and Administrative General and administrative expenses for the three months ended March 31, 2013 of $11.7 million were $1.7 million higher than the same period in 2012, due primarily to increases of $1.2 million in professional fees and $241,000 in employee costs due to increased head count. Acquisition, Offering and Related Expenses and Related Party Fees Acquisition, offering and related expenses and related party fees for the three months ended March 31, 2013 was $0 as compared to $197,000 for the same period in 2012. The acquisition, offering and related expenses and related party fees for the three months ended March 31, 2012 were primarily related to costs associated with the IRS audit stemming from the Bankrate Acquisition. 30-------------------------------------------------------------------------------- Table of Contents Depreciation and Amortization Depreciation and amortization expense for the three months ended March 31, 2013 of $14.5 million was $2.7 million higher than the same period in 2012 due to $2.4 million increase in amortization expense resulting from various intangibles acquired. Interest and Other Expenses, net Interest and other expenses, net for the three months ended March 31, 2013 primarily consists of expenses associated with the Senior Secured 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 March 31, 2013 was $6.5 million, which primarily consisted of $5.7 million for the Senior Secured Notes and $671,000 for amortization of deferred financing costs and original issue discount. Interest and other expenses, net for the three months ended March 31, 2012 was $6.5 million, which primarily consisted of $5.7 million for the Senior Secured Notes, and $596,000 of amortization of deferred financing costs and original issue discount partially offset by de minimis interest earned on cash and cash equivalents. Changes in Fair Value of Contingent Acquisition Consideration Changes in fair value of contingent acquisition consideration for the three months ended March 31, 2013 was $1.1 million and consisted of increases of $2.5 million in fair value of contingent amounts and a decrease of $1.4 million in fair value of other contingent amounts. Changes in fair value of contingent acquisition consideration for the three months ended March 31, 2012 was $43,000 and consisted of increased to the fair value of one contingent amount. Income Tax Expense Our income tax expense for the three months ended March 31, 2013 of $1.8 million was $4.7 million lower than our income tax expense of $6.5 million for the three months ended March 31, 2012. Our effective tax rate changed from approximately 39% during the three months ended March 31, 2012 to approximately 46% in the same period in 2013 due to foreign losses and interest incurred during the three months ended March 31, 2013 on liabilities related to unrecognized tax benefits. Liquidity and Capital Resources December 31, (In thousands) March 31, 2013 2012 Change Cash and cash equivalents $ 89,240 $ 83,590 $ 5,650 Working capital $ 105,143 $ 102,534 $ 2,609 Stockholders' equity $ 832,279 $ 828,151 $ 4,128 Our principal ongoing source of operating liquidity is the cash generated by our business operations. We consider all highly liquid debt investments purchased with an original maturity of less than three months to be cash equivalents. Our primary uses of cash have been to fund our working capital and capital expenditure needs, fund acquisitions, and service our debt obligations. We believe that we can generate sufficient cash flows from operations to fund our operating and capital expenditure requirements, as well as to service our debt obligations, for the next 12 months. In the event we experience a significant adverse change in our business operations, we would likely need to secure additional sources of financing. As of March 31, 2013, we had working capital of $105.1 million and our primary commitments were normal working capital requirements and $4.9 million in accrued interest for the Senior Secured Notes. In addition, we have commitments for potential earn out obligations related to past acquisitions totaling $27.0 million as of March 31, 2013. As of December 31, 2012, we had working capital of $102.5 million and our primary commitments were normal working capital requirements and $10.6 million in accrued interest for the Senior Secured Notes. We assess acquisition opportunities as they arise. Financing may be required if we decide to make additional acquisitions or if we are required to make any earn-out payments to which the former owners of our acquired businesses may be entitled. There can be no assurance, however, that any such opportunities may arise, or that any such acquisitions may be consummated. Additional financing may not be available on satisfactory terms or at all when required. 31-------------------------------------------------------------------------------- Table of Contents Debt Financing Revolving Credit Facilities We have certain Revolving Credit Facilities in an aggregate amount of $100.0 million, consisting of two tranches, tranche A for $30.0 million which matures on July 15, 2015 and tranche B for $70.0 million which matures on April 15, 2015 ("Revolving Credit Facilities"). Our obligations under the Revolving Credit Facilities are guaranteed by each direct and indirect, existing and future, domestic restricted subsidiary that guarantees our obligations under the Senior Secured Notes. As of March 31, 2013, we had no amount outstanding under the Revolving Credit facilities and we were in compliance with all required covenants. Senior Secured Notes As of March 31, 2013, we had approximately $194.0 million in Senior Secured Notes outstanding for which interest is accrued daily on the outstanding principal amount at 11 3/4 % and is payable semi-annually, in arrears, on July 15th and January 15th in cash. The Senior Secured Notes are due July 15, 2015. Accrued interest on the Senior Secured Notes as of March 31, 2013 is approximately $4.9 million. Refer to Note 10 in the Notes to Consolidated Financial Statements for a further description of the Senior Secured Notes. Operating Activities During the three months ended March 31, 2013, operating activities provided cash of $12.4 million. Our net income of $2.2 million was adjusted for depreciation and amortization of $14.5 million, bad debt expense of $96,000, amortization of deferred financing costs and original issue discount of $671,000 million, stock-based compensation expense of $2.2 million and a net negative change in the components of operating assets and liabilities of $8.4 million. This negative change in operating assets and liabilities resulted from a $6.7 million increase in accounts receivable, $2.6 million decrease in prepaid expenses and other assets, a $2.0 million increase in accrued expenses, $5.6 million decrease in other liabilities, and a $703,000 decrease in accounts payable. During the three months ended March 31, 2012, we generated $12.8 million of cash in operating activities. Our net income of $10.2 million was adjusted for depreciation and amortization of $11.8 million, bad debt expense of $180,000, amortization of deferred financing costs and original issue discount of $596,000, stock based compensation expense of $2.7 million and a net negative change in the components of operating assets and liabilities of $12.6 million. This negative change in operating assets and liabilities resulted in part from decreases of $5.4 million in accrued expenses, $2.2 million in deferred revenue and customer deposits, and $5.6 million in other liabilities primarily due to interest accrued less interest paid on the Notes, partially offset by increases of $578,000 in accounts receivable, and $1.1 million in accounts payable. Investing Activities For the three months ended March 31, 2013, cash flows used in investing activities was $6.7 million and includes $3.0 million of cash used for business acquisitions and $3.7 million for purchases of furniture, fixtures, equipment and capitalized website development costs. For the three months ended March 31, 2012, cash flows used in investing activities was $3.8 million and includes $1.7 million of cash used for business acquisitions and $2.1 million for purchases of furniture, fixtures, equipment and capitalized website development costs. Financing Activities For the three months ended March 31, 2013, no cash was used in or provided by financing activities. For the three months ended March 31, 2012, cash used in financing activities was $1.0 million and includes $1.0 million of cash used for acquisition earn outs and contingent liabilities. OFF-BALANCE SHEET ARRANGEMENTS Off-balance sheet arrangements include the following four categories: obligations under certain guarantees or contracts; retained or contingent interests in assets transferred to an unconsolidated entity or similar arrangements; obligations under certain derivative arrangements; and obligations under material variable interests. Besides the offering of the Senior Secured Notes, we have not entered into any material arrangements which would fall under any of these four categories and which would be reasonably likely to have a current or future material effect on our results of operations, liquidity or financial condition. 32-------------------------------------------------------------------------------- Table of Contents |