Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,
2007
|
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934 FOR THE TRANSITION PERIOD FROM _________ TO
________
|
Commission
File No. 0-25681
(Exact
name of registrant as specified in its charter)
Florida
(State
or other jurisdiction of incorporation or organization)
|
|
65-0423422
(I.R.S.
Employer Identification No.)
|
11760
U.S. Highway One, Suite 200
North
Palm Beach, Florida
(Address
of principal executive offices)
|
|
33408
(Zip
Code)
|
Registrant’s
telephone number, including area code: (561) 630-2400
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
Accelerated filer x
Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No x
The
number of outstanding shares of the issuer’s common stock as of April 30, 2007
was as follows: 18,270,969 shares of Common Stock, $.01 par value.
Bankrate,
Inc.
Quarterly
Report on Form 10-Q for the Quarter Ended March 31, 2007
Index
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|
PAGE
NO.
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PART
I.
|
FINANCIAL
INFORMATION
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|
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Item
1.
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Financial
Statements (Unaudited)
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|
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Condensed
Consolidated Balance Sheets at March 31, 2007 and December 31,
2006
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4
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|
|
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Condensed
Consolidated Statements of Income for the Three Months Ended
|
|
|
March
31, 2007 and 2006
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5
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Condensed
Consolidated Statements of Cash Flows for Three Months Ended
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|
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March
31, 2007 and 2006
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6
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|
|
|
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Notes
to Condensed Consolidated Financial Statements
|
7
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|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
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|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
23
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|
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Item
4.
|
Controls
and Procedures
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23
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PART
II.
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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Item
1A.
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Risk
Factors
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24
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Item
2.
|
Unregistered
Sales of Securities and Use of Proceeds
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24
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Item
3.
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Defaults
Upon Senior Securities
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24
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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24
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Item
5.
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Other
Information
|
24
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|
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Item
6.
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Exhibits
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24
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Signatures
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24
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Introductory
Note
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains “forward-looking statements,” within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, among others, statements about our beliefs,
plans, objectives, goals, expectations, estimates and intentions that are
subject to significant risks and uncertainties and are subject to change based
on various factors, many of which are beyond our control. The words “may,”
“could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,”
“intend,” “plan,” “target,” “goal,” and similar expressions are intended to
identify forward-looking statements. All forward-looking statements, by their
nature, are subject to risks and uncertainties. Our actual future results may
differ materially from those set forth in our forward-looking statements. Our
ability to achieve our financial objectives could be adversely affected by
the
factors discussed in detail in Part I, Item 2, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and Part II, Item 1A.
“Risk Factors” in this Quarterly Report on Form 10-Q, the following sections of
our Annual Report on Form 10-K for the year ended December 31, 2006 (the “2006
Form 10-K”): (a) “Introductory Note” in Part I, Item 1., “Business”; (b) “Risk
Factors” in Part I, Item 1A., “Business,” and (c) “Introduction” in Part II,
Item 7., “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” as well as:
|
·
|
the
willingness of our advertisers to advertise on our web
sites;
|
|
·
|
interest
rate volatility;
|
|
·
|
our
ability to establish and maintain distribution
arrangements;
|
|
·
|
our
ability to integrate the business and operations of companies that
we have
acquired, and those we may acquire in the
future;
|
|
·
|
our
ability to realize expected benefits, including synergies, of companies
that we have acquired, and those that we may acquire in the
future;
|
|
·
|
our
ability to maintain the confidence of our advertisers by detecting
click-through fraud and unscrupulous
advertisers;
|
|
·
|
our
need and our ability to incur additional debt or equity
financing;
|
|
·
|
the
effect of unexpected liabilities we assume from our
acquisitions;
|
|
·
|
the
impact of resolution of lawsuits to which we are a
party;
|
|
·
|
the
willingness of consumers to accept the Internet as a medium for
obtaining
financial product information;
|
|
·
|
the
ability of consumers to access our websites through non-PC
devices;
|
|
·
|
increased
competition and its effect on our web site traffic, advertising
rates,
margins, and market share;
|
|
·
|
our
ability to manage traffic on our web sites and service
interruptions;
|
|
·
|
our
ability to protect our intellectual
property;
|
|
·
|
the
effects of facing liability for content on our web
sites;
|
|
·
|
legislative
or regulatory changes;
|
|
·
|
the
concentration of ownership of our common
stock;
|
|
·
|
the
fluctuations of our results of operations from period to period;
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|
·
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the
strength of the United States economy in general;
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|
·
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the
accuracy of our financial statement estimates and assumptions;
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|
·
|
effect
of changes in the stock market and other capital markets;
|
|
·
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changes
in monetary and fiscal policies of the U.S.
Government;
|
|
·
|
changes
in consumer spending and saving habits;
|
|
·
|
changes
in accounting principles, policies, practices or
guidelines;
|
|
·
|
the
effect of provisions in our Articles of Incorporation, Bylaws and
certain
laws on change-in-control
transactions;
|
|
·
|
other
risks described from time to time in our filings with the Securities
and
Exchange Commission; and
|
|
·
|
our
ability to manage the risks involved in the foregoing.
|
However,
other factors besides those referenced could adversely affect our results,
and
you should not consider any such list of factors to be a complete set of all
potential risks or uncertainties. Any forward-looking statements made by us
herein speak as of the date of this Quarterly Report. We do not undertake to
update any forward-looking statement, except as required by law.
Part
I. FINANCIAL INFORMATION
Item
1. FINANCIAL
STATEMENTS
Bankrate,
Inc.
Condensed
Consolidated Balance Sheets
(Unaudited)
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
8,175,448
|
|
$
|
13,125,360
|
|
Short-term
investments
|
|
|
112,500,000
|
|
|
96,800,000
|
|
Accounts
and notes receivable, net of allowance for doubtful accounts of
approximately
|
|
|
|
|
|
|
|
$2,449,000
at March 31, 2007 and $2,155,000 at December 31, 2006
|
|
|
15,454,246
|
|
|
15,801,403
|
|
Deferred
income taxes, current portion
|
|
|
1,703,747
|
|
|
1,703,747
|
|
Prepaid
expenses and other current assets
|
|
|
798,875
|
|
|
1,032,423
|
|
Total
current assets
|
|
|
138,632,316
|
|
|
128,462,933
|
|
|
|
|
|
|
|
|
|
Furniture,
fixtures and equipment, net of accumulated depreciation and amortization
of approximately $4,043,000 at March 31, 2007 and $3,826,000
at December
31, 2006
|
|
|
1,663,102
|
|
|
1,703,680
|
|
Deferred
income taxes
|
|
|
1,262,279
|
|
|
1,262,279
|
|
Intangible
assets, net of accumulated amortization of approximately $2,783,000
at
March 31, 2007 and $2,355,000 at December 31, 2006
|
|
|
14,013,286
|
|
|
14,441,162
|
|
Goodwill
|
|
|
30,039,425
|
|
|
30,039,425
|
|
Other
assets
|
|
|
709,233
|
|
|
774,117
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
186,319,641
|
|
$
|
176,683,596
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
387,193
|
|
$
|
312,489
|
|
Accrued
expenses
|
|
|
7,258,537
|
|
|
5,237,222
|
|
Deferred
revenue
|
|
|
358,726
|
|
|
729,019
|
|
Other
current liabilities
|
|
|
78,590
|
|
|
27,427
|
|
Total
current liabilities
|
|
|
8,083,046
|
|
|
6,306,157
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
238,447
|
|
|
222,920
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
8,321,493
|
|
|
6,529,077
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, 10,000,000 shares authorized and undesignated
|
|
|
-
|
|
|
-
|
|
Common
stock, par value $.01 per share-- 100,000,000 shares authorized;
18,270,277 and 18,224,620 shares issued and outstanding at March
31, 2007
and December 31, 2006, respectively
|
|
|
182,703
|
|
|
182,246
|
|
Additional
paid in capital
|
|
|
180,725,814
|
|
|
178,255,314
|
|
Accumulated
deficit
|
|
|
(2,910,369
|
)
|
|
(8,283,041
|
)
|
Total
stockholders' equity
|
|
|
177,998,148
|
|
|
170,154,519
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
186,319,641
|
|
$
|
176,683,596
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
Bankrate,
Inc.
Condensed
Consolidated Statements of Income
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
Online
publishing
|
|
$
|
19,052,024
|
|
$
|
15,615,999
|
|
Print
publishing and licensing
|
|
|
3,175,906
|
|
|
4,172,433
|
|
Total
revenue
|
|
|
22,227,930
|
|
|
19,788,432
|
|
Cost
of revenue:
|
|
|
|
|
|
|
|
Online
publishing
|
|
|
3,142,027
|
|
|
2,900,584
|
|
Print
publishing and licensing
|
|
|
2,827,667
|
|
|
3,542,110
|
|
Total
cost of revenue
|
|
|
5,969,694
|
|
|
6,442,694
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
16,258,236
|
|
|
13,345,738
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
Sales
|
|
|
1,286,773
|
|
|
1,088,275
|
|
Marketing
|
|
|
1,455,224
|
|
|
851,343
|
|
Product
development
|
|
|
952,881
|
|
|
1,024,503
|
|
General
and administrative
|
|
|
4,227,483
|
|
|
5,537,824
|
|
Depreciation
and amortization
|
|
|
644,715
|
|
|
557,762
|
|
|
|
|
8,567,076
|
|
|
9,059,707
|
|
Income
from operations
|
|
|
7,691,160
|
|
|
4,286,031
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,462,170
|
|
|
20,330
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
9,153,330
|
|
|
4,306,361
|
|
Income
tax expense
|
|
|
3,780,658
|
|
|
1,964,534
|
|
Net
income
|
|
$
|
5,372,672
|
|
$
|
2,341,827
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
$
|
0.15
|
|
Diluted
|
|
$
|
0.28
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
Shares
used in computing basic net income per share
|
|
|
18,250,836
|
|
|
15,874,946
|
|
Shares
used in computing diluted net income per share
|
|
|
18,880,646
|
|
|
16,771,044
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
Bankrate,
Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,372,672
|
|
$
|
2,341,827
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
644,715
|
|
|
557,762
|
|
Provision
for doubtful accounts receivable
|
|
|
342,066
|
|
|
325,000
|
|
Share-based
compensation
|
|
|
1,680,723
|
|
|
1,777,623
|
|
Excess
tax benefits from share-based compensation
|
|
|
-
|
|
|
(245,760
|
)
|
Deferred
income taxes
|
|
|
-
|
|
|
1,453,070
|
|
Changes
in operating assets and liabilities, net of effects from
|
|
|
|
|
|
|
|
business
acquisitions:
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts receivable
|
|
|
5,091
|
|
|
(2,343,069
|
)
|
Decrease
(increase) in prepaid expenses and other assets
|
|
|
296,976
|
|
|
(415,881
|
)
|
Increase
(decrease) in accounts payable
|
|
|
74,704
|
|
|
(1,683,954
|
)
|
Increase
(decrease) in accrued expenses
|
|
|
2,021,315
|
|
|
(962,823
|
)
|
Increase
in other liabilities
|
|
|
66,690
|
|
|
88,784
|
|
Decrease
in deferred revenue
|
|
|
(370,293
|
)
|
|
(40,359
|
)
|
Net
cash provided by operating activities
|
|
|
10,134,659
|
|
|
832,220
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of short-term investments
|
|
|
(15,700,000
|
)
|
|
-
|
|
Purchases
of furniture, fixtures and equipment
|
|
|
(176,261
|
)
|
|
(210,530
|
)
|
Cash
used in business acquisitions, net of cash acquired
|
|
|
-
|
|
|
(149,140
|
)
|
Proceeds
from sale of assets
|
|
|
-
|
|
|
6,750
|
|
Restricted
cash
|
|
|
1,456
|
|
|
(290,757
|
)
|
Net
cash used in investing activities
|
|
|
(15,874,805
|
)
|
|
(643,677
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from the exercise of stock options
|
|
|
790,234
|
|
|
497,584
|
|
Excess
tax benefit-stock options
|
|
|
-
|
|
|
245,760
|
|
Net
cash provided by financing activities
|
|
|
790,234
|
|
|
743,344
|
|
Net
(decrease) increase in cash
|
|
|
(4,949,912
|
)
|
|
951,887
|
|
Cash,
beginning of period
|
|
|
13,125,360
|
|
|
3,479,609
|
|
Cash,
end of period
|
|
$
|
8,175,448
|
|
$
|
4,431,496
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for taxes
|
|
$
|
63,605
|
|
$
|
437,993
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
BANKRATE,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2007
(Unaudited)
NOTE
1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The
Company
Bankrate,
Inc. and subsidiaries (the “Company”) own and operate an Internet-based consumer
banking marketplace. The Company’s flagship site, Bankrate.com is one of the
web’s leading aggregators of information on more than 300 financial products and
fees, including mortgages, credit cards, new and used automobile loans, money
market accounts, certificates of deposit, checking and ATM fees, home equity
loans and online banking fees. Additionally, the Company provides financial
applications and information to a network of distribution partners and through
national and state publications. The Company is organized under the laws of
the
state of Florida.
Acquisitions
On
November 30, 2005, the Company completed the acquisition of Wescoco LLC, a
Delaware limited liability company d/b/a “FastFind” (“FastFind”) for $10 million
in cash, plus a net working capital adjustment of $149,000 in the quarter ended
June 30, 2006, in accordance with the Agreement and Plan of Merger dated
November 20, 2005.
On
December 1, 2005, the Company completed the acquisition of Mortgage Market
Information Services, Inc., an Illinois corporation (“MMIS”), and Interest.com,
Inc., an Illinois corporation (“Interest.com”) for $30 million in
cash,
subject
to final Closing Date Equity adjustments under section 3.03 of the Agreement
and
Plan of Merger dated November 20, 2005.
On
August
4, 2006, the Company completed the acquisition of a group of assets that
consists of three web sites (Mortgage-calc.com, Mortgagecalc.com and
Mortgagemath.com, collectively “Mortgage-calc.com”) owned and operated by East
West Mortgage, Inc. for $4.4 million in cash. The operations of these web sites
were integrated into the online publishing segment.
Stock
Offering
In
May
2006, the Company closed a public offering of 2,697,776 shares of its common
stock, of which 2,005,991 shares were sold by the Company and 691,785 shares
were sold by certain of the Company’s existing stockholders, at a price of
$48.25 per share, resulting in net proceeds to the Company of approximately
$92.4 million, which included $1.7 million in proceeds from the exercise of
stock options by existing stockholders and employees.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements include
those
of the Company and its wholly-owned subsidiaries, FastFind, MMIS and
Interest.com, after elimination of all intercompany accounts and transactions.
The Company has prepared the accompanying financial statements in conformity
with accounting principles generally accepted in the United States of America
(“United States”) for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all
of the information and notes required by accounting principles generally
accepted in the United States for complete financial statements. The interim
financial information is unaudited but reflects all adjustments that are, in
the
opinion of management, necessary to provide fair statement of the results of
the
Company for the interim periods presented. Such adjustments are normal and
recurring except as otherwise noted. Operating results for the three months
ended March 31, 2007 are not necessarily indicative of the results that may
be
expected for the fiscal year ending December 31, 2007 (“fiscal
2007”).
The
unaudited condensed consolidated financial statements included herein should
be
read in conjunction with the financial statements and related footnotes included
in the Company’s 2006 Form 10-K.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make 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 reporting
period. The
Company believes that the judgments, estimates and assumptions involved in
the
accounting for income taxes, the allowance for doubtful accounts receivable,
stock-based compensation and legal contingencies have the greatest potential
impact on its financial statements, so it considers these to be its critical
accounting policies. Actual
results could differ from those estimates.
Basic
and Diluted Earnings Per Share
The
Company computes basic earnings per share by dividing net income for the period
by the weighted average number of shares outstanding for the period, excluding
outstanding stock options. Diluted earnings per share includes the effect of
common stock equivalents, consisting of outstanding stock options and
unrecognized compensation expense and tax benefits in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based
Payment,
to the
extent the effect is not anti-dilutive, using the treasury stock
method.
The
weighted average number of common shares outstanding used in computing diluted
earnings per share for the three months ended March 31, 2007 and 2006 includes
the shares resulting from the dilutive effect of outstanding stock options.
For
the three months ended March 31, 2007 and 2006, 154,000 and 22,000 shares,
respectively, attributable to the assumed exercise of outstanding stock options
were excluded from the calculation of diluted earnings per share because the
effect was anti-dilutive.
Reclassification
of Short-Term Investments
The
Company’s short-term investments consists primarily of Triple A rated investment
grade auction rate municipal, corporate, governmental and educational notes
and
bonds. The underlying security of our investments have maturities that range
from 16 to 40 years. Our investments are classified as short-term
investments since the securities are held for auction at pre-determined short
term intervals, generally ranging from 7 to 35 days, whereby the interest rates
are reset to current interest rates through a market based auction process.
At
the end of such period, the Company typically rolls over its holdings into
new
or reset auction rate securities or redeems the investments for cash. All
of these short-term investments were classified as available-for-sale and
reported at fair value. Due to the frequency and short term market based
auction process associated with the reset feature, the investments’ trade at par
which approximates fair value; therefore, there are no realized or unrealized
gains or losses associated with these investments.
As
of
December 31, 2006, the Company’s cash and cash equivalents included $96,800,000
of Triple A rated investment grade auction rate securities. These securities
were reclassified as short-term investments in the accompanying condensed
consolidated balance sheet as of December 31, 2006, and the statement of cash
flows for the three months ended March 31, 2006, to conform with the current
period presentation.
Allowance
for Doubtful Accounts
The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability or unwillingness of its customers to make required
payments. The Company looks at historical write-offs and sales growth when
determining the adequacy of the allowance. Should the financial condition of
the
Company’s customers deteriorate, resulting in an impairment of their ability to
make payments, or if the level of accounts receivable increases, the need for
possible additional allowances may be necessary. Any additions to the allowance
for doubtful accounts are recorded as bad debt expense and included in general
and administrative expenses. During
the three months ended March 31, 2007 and 2006, the Company charged
approximately $342,000 and $325,000, respectively, to bad debt expense, and
wrote off approximately $48,000 and $138,000, respectively, of accounts deemed
uncollectible.
Goodwill
In
accordance with SFAS No. 142,
Goodwill and Other Intangible Assets,
the
Company reviews its goodwill for impairment annually, or more frequently, if
facts and circumstances warrant a review, at the reporting unit level. The
Company has determined that it has two reporting units, online publishing and
print publishing and licensing, under SFAS No. 142, as these are the components
of the business for which discrete financial information is available and for
which segment management regularly reviews the operating results. The provisions
of SFAS No. 142 require that a two-step test be performed to assess goodwill
for
impairment. First, the fair value of the reporting unit is compared to its
carrying value. If the fair value exceeds the carrying value, goodwill is not
impaired and no further testing is performed. The second step is performed
if
the carrying value exceeds the fair value. The implied fair value of the
reporting unit's goodwill must be determined and compared to the carrying value
of the goodwill. If the carrying value of a reporting unit's goodwill exceeds
its implied value, an impairment loss equal to the difference will be recorded.
In determining the fair value of our reporting units, we relied on the Income
Approach and the Market Approach. Under the Income Approach, the fair value
of a
business unit is based on the cash flows it can be expected to generate over
its
remaining life. The estimated cash flows are converted to their present value
equivalent using an appropriate rate of return. The Market Approach utilizes
a
market comparable method whereby similar publicly traded companies are valued
using Market Values of Invested Capital (“MVIC”) multiples (i.e., MVIC to
revenue, MVIC to earnings before interest and taxes, MVIC to cash flow, etc.)
and then these MVIC multiples are applied to a company’s operating results to
arrive at an estimate of value.
The
Company completed its annual goodwill impairment test during the fourth quarter
of 2006 and determined that the carrying amount of goodwill was not
impaired.
SFAS
No.
142 also requires that intangible assets with definite lives be amortized over
their estimated useful life and reviewed for impairment in accordance with
SFAS
No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
The
Agreement and Plan of Merger for the acquisition of MMIS and Interest.com dated
December 1, 2005 contains a provision in Section 3.03 for the potential
adjustment to Closing Date Equity, as defined. To date, no such adjustment
has
been agreed upon. Goodwill was adjusted, however, in the three months ended
September 30, 2006, for approximately $190,000 related to accounts receivable
and $78,000 related to deferred revenue.
Share-Based
Compensation
During
the first quarter of 2006, the Company adopted the provisions of, and accounts
for share-based compensation in accordance with, SFAS No. 123R,
Share-Based Payment,
which
replaced SFAS No. 123,
Accounting for Stock-Based Compensation
and
supersedes Accounting Principles Board (“APB”) Opinion No. 25,
Accounting for Stock Issued to Employees.
Under
the fair value recognition provisions of SFAS No. 123R, share-based compensation
cost is measured at the grant date based on the fair value of the award and
is
recognized as an expense on a straight-line basis over the requisite service
period, which is generally the vesting period. The Company elected the
modified prospective method, pursuant to which prior periods are not revised
for
comparative purposes. The valuation provisions of SFAS No. 123R apply to new
grants and to grants that were outstanding as of the effective date of SFAS
No.
123R and are subsequently modified. Estimated compensation for grants that
were
outstanding as of the effective date will be recognized over the remaining
service period using the compensation cost estimated for the SFAS No. 123 pro
forma disclosures. The adoption of SFAS No. 123R had a material impact on the
Company's consolidated financial position, results of operations and cash flows.
See Note 3 for further information regarding the Company's share-based
compensation assumptions and expense.
Stockholders’
Equity
The
activity in stockholders’ equity for the three months ended March 31, 2007 is
shown below.
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
|
Balances,
December 31, 2006
|
|
|
18,224,620
|
|
$
|
182,246
|
|
$
|
178,255,314
|
|
$
|
(8,283,041
|
)
|
$
|
170,154,519
|
|
Stock
options exercised
|
|
|
45,657
|
|
|
457
|
|
|
789,777
|
|
|
-
|
|
|
790,234
|
|
Share-based
compensation
|
|
|
-
|
|
|
-
|
|
|
1,680,723
|
|
|
-
|
|
|
1,680,723
|
|
Net
income for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,372,672
|
|
|
5,372,672
|
|
Balances,
March 31, 2007
|
|
|
18,270,277
|
|
$
|
182,703
|
|
$
|
180,725,814
|
|
$
|
(2,910,369
|
)
|
$
|
177,998,148
|
|
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities and their respective tax bases and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in
income in the period that includes the enactment date. If it is more likely
than
not that some portion or all of a deferred tax asset will not be realized,
a
valuation allowance is recorded. The valuation allowance is based on
management’s judgment as to future taxable income in light of historical
results, the current environment, forecasted performance and other
factors.
Comprehensive
Income
Comprehensive
income is the same as net income for the three months ended March 31, 2007
and
2006.
Recent
Accounting Pronouncements
Effective
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (“FASB”) Interpretation (“FIN”) No. 48, Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109.
FIN No.
48 contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109. The first step is
to evaluate the tax position for recognition by determining if the weight of
available evidence indicates it is more likely than not that the position will
be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon ultimate
settlement. The Company considers many factors when evaluating and
estimating its tax positions and tax benefits, which may require periodic
adjustments and which may not accurately anticipate actual outcomes. See Note
4
for a further discussion.
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities.
SFAS
No. 159 permits companies to choose to measure certain financial instruments
and
certain other items at fair value, and requires that unrealized gains and losses
on items for which the fair value option has been elected be reported in
earnings. SFAS No. 159 is effective for the Company beginning in the first
fiscal quarter of 2008 although earlier adoption is permitted. The Company
is
currently evaluating what impact, if any, SFAS No. 159 will have on its
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157,
Fair
Value Measurements,
which
defines fair value, establishes guidelines for measuring fair value and expands
disclosures regarding fair value measurements. SFAS No. 157 does not require
any
new fair value measurements but rather eliminates inconsistencies in guidance
found in various prior accounting pronouncements. SFAS No. 157 is effective
for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact of SFAS No. 157 but does not expect the adoption of SFAS
No. 157 to have a material impact on its consolidated financial position,
results of operations or cash flows.
NOTE
2 - SEGMENT INFORMATION
The
Company currently operates in two reportable business segments: online
publishing and print publishing and licensing. The online publishing segment
is
primarily engaged in the sale of advertising, sponsorships, and hyperlinks
in
connection with the Company’s web sites, Bankrate.com, Interest.com, Bankrate
Select
and
Mortgage-calc.com, and its network of online distribution partners. The print
publishing and licensing segment is primarily engaged in the sale of advertising
in the Mortgage
Guide
and
Deposit
Guide
rate
tables, newsletter subscriptions, and licensing of research information. The
acquired operations of FastFind, Interest.com, and Mortgage-calc.com are
included in the online publishing segment. The acquired operations of Mortgage
Market Information Services, Inc. are included in the print publishing and
licensing segment. The Company evaluates the performance of its operating
segments based on segment revenue,
margins and other financial metrics.
No
single
customer accounted for more than 10% of total revenue for the three months
ended
March 31, 2007. The Company had one online customer that accounted for
approximately 11% of total revenue for the three months ended March 31, 2006.
No
material revenues were generated outside of the United States.
Summarized
segment information as of, and for, the three months ended March 31, 2007 and
2006 is presented below.
|
|
|
|
Print
|
|
|
|
|
|
|
|
Online
|
|
Publishing
|
|
|
|
|
|
|
|
Publishing
|
|
and
Licensing
|
|
Other
|
|
Total
|
|
Three
Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
19,052,024
|
|
$
|
3,175,906
|
|
$
|
-
|
|
$
|
22,227,930
|
|
Cost
of revenue
|
|
|
3,142,027
|
|
|
2,827,667
|
|
|
-
|
|
|
5,969,694
|
|
Gross
margin
|
|
|
15,909,997
|
|
|
348,239
|
|
|
-
|
|
|
16,258,236
|
|
Sales
|
|
|
1,286,773
|
|
|
-
|
|
|
-
|
|
|
1,286,773
|
|
Marketing
|
|
|
1,455,224
|
|
|
-
|
|
|
-
|
|
|
1,455,224
|
|
Product
development
|
|
|
828,615
|
|
|
124,266
|
|
|
-
|
|
|
952,881
|
|
General
and administrative expenses
|
|
|
3,514,811
|
|
|
712,672
|
|
|
-
|
|
|
4,227,483
|
|
Depreciation
and amortization
|
|
|
590,608
|
|
|
54,107
|
|
|
|
|
|
644,715
|
|
Interest
income
|
|
|
-
|
|
|
-
|
|
|
1,462,170
|
|
|
1,462,170
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
(3,780,658
|
)
|
|
(3,780,658
|
)
|
Segment
profit (loss)
|
|
$
|
8,233,966
|
|
$
|
(542,806
|
)
|
$
|
(2,318,488
|
)
|
$
|
5,372,672
|
|
Goodwill
|
|
$
|
26,129,688
|
|
$
|
3,909,737
|
|
$
|
-
|
|
$
|
30,039,425
|
|
Total
assets
|
|
$
|
53,570,224
|
|
$
|
7,599,835
|
|
$
|
125,149,582
|
|
$
|
186,319,641
|
|
|
|
|
|
Print
|
|
|
|
|
|
|
|
Online
|
|
Publishing
|
|
|
|
|
|
|
|
Publishing
|
|
and
Licensing
|
|
Other
|
|
Total
|
|
Three
Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
15,615,999
|
|
$
|
4,172,433
|
|
$
|
-
|
|
$
|
19,788,432
|
|
Cost
of revenue
|
|
|
2,900,584
|
|
|
3,542,110
|
|
|
-
|
|
|
6,442,694
|
|
Gross
margin
|
|
|
12,715,415
|
|
|
630,323
|
|
|
-
|
|
|
13,345,738
|
|
Sales
|
|
|
1,088,275
|
|
|
-
|
|
|
-
|
|
|
1,088,275
|
|
Marketing
|
|
|
851,343
|
|
|
-
|
|
|
-
|
|
|
851,343
|
|
Product
development
|
|
|
927,385
|
|
|
97,118
|
|
|
-
|
|
|
1,024,503
|
|
General
and administrative expenses
|
|
|
4,506,010
|
|
|
1,031,814
|
|
|
-
|
|
|
5,537,824
|
|
Depreciation
and amortization
|
|
|
510,990
|
|
|
46,772
|
|
|
-
|
|
|
557,762
|
|
Interest
income
|
|
|
-
|
|
|
-
|
|
|
20,330
|
|
|
20,330
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
(1,964,534
|
)
|
|
(1,964,534
|
)
|
Segment
profit (loss)
|
|
$
|
4,831,412
|
|
$
|
(545,381
|
)
|
$
|
(1,944,204
|
)
|
$
|
2,341,827
|
|
Goodwill
|
|
$
|
26,088,711
|
|
$
|
3,941,522
|
|
$
|
-
|
|
$
|
30,030,233
|
|
Total
assets
|
|
$
|
45,524,429
|
|
$
|
9,542,517
|
|
$
|
9,504,959
|
|
$
|
64,571,905
|
|
NOTE
3 - SHARE-BASED COMPENSATION
Stock
Options
The
Company’s stock option program is a long-term retention program that is intended
to attract, retain and provide incentives for directors, officers and employees
in the form of incentive and non-qualified stock options and restricted stock.
During the first quarter of 2007, the Company granted stock options from the
1999 Equity Compensation Plan, as amended, subject to stockholder
approval of the Board of Director’s recommendation to increase the number of
shares authorized to be issued pursuant to such plan. The Board of Directors
has
the sole authority to determine who receives such grants, the type, size and
timing of such grants, and to specify the terms of any non-competition
agreements relating to the grants. The
Company has submitted a Second Amended and Restated 1999 Equity Compensation
Plan to its stockholders for approval at the 2007 Annual
Meeting.
Beginning
with the first quarter of fiscal 2006, the Company adopted SFAS No. 123R. See
Note 1 for a description of the Company’s adoption of SFAS No. 123R. The Company
currently uses the Black-Scholes option pricing model to determine the fair
value of its stock options. The determination of the fair value of the awards
on
the date of grant using an option-pricing model is affected by the price of
the
Company’s common stock, as well as assumptions regarding a number of complex and
subjective variables. These variables include expected stock price volatility
over the term of the awards, actual and projected employee stock option exercise
behaviors, risk-free interest rates and expected dividends.
The
Company estimated the expected term of outstanding stock options by taking
the
average of the vesting term and the contractual term of the option, as
illustrated in the Staff Accounting Bulletin (“SAB”) 107. The Company estimated
the volatility of its common stock by using a weighted average of historical
stock price volatility and implied volatility in market traded options in
accordance with SAB 107. The decision to use a weighted average volatility
factor was based upon the relatively short period of availability of data on
actively traded options on its common stock, and its assessment that implied
volatility is more representative of future stock price trends than historical
volatility. The Company based the risk-free interest rate that it uses in the
option pricing model on U.S. Treasury constant maturity issues having remaining
terms similar to the expected terms on the options. The Company does not
anticipate paying any cash dividends in the foreseeable future and therefore
used an expected dividend yield of zero in the option pricing model. The Company
is required to estimate forfeitures at the time of grant and revise those
estimates in subsequent periods if actual forfeitures differ from those
estimates. The Company uses historical data to estimate pre-vesting option
forfeitures and records stock-based compensation expense only for those awards
that are expected to vest. All share-based payment awards are amortized on
a
straight-line basis over the requisite service periods, which is generally
the
vesting period.
If
factors change and the Company employs different assumptions for estimating
share-based compensation expense in future periods or if it decides to use
a
different valuation model, the future periods may differ significantly from
what
it has recorded in the current period and could materially affect its operating
income, net income and net income per share.
The
following table provides the fair value of the stock options granted during
the
three-month periods ended March 31, 2007 and 2006 using the Black-Scholes option
pricing model together with a description of the assumptions used to calculate
the fair value. No options that were not subject to stockholder
approval were granted during the three month-period ended March 31,
2007 and options exercisable into 293,000 shares were granted during the
three-month period ended March 31, 2006.
|
|
Three
Months Ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
Weighted
average fair value
|
|
|
-
|
|
$
|
34.73
|
|
Expected
volatility
|
|
|
-
|
|
|
70
|
%
|
Weighted
average risk free rate
|
|
|
-
|
|
|
4.5
|
%
|
Expected
lives
|
|
|
-
|
|
|
4.75
years
|
|
Expected
dividend yield
|
|
|
-
|
|
|
0
|
%
|
The
share-based compensation expense recognized in the Company’s condensed
consolidated statements of income for the three months ended March 31, 2007
and
2006 is as follows:
|
|
Three
Months Ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
Income
Statement Classifications
|
|
|
|
|
|
Cost
of revenue:
|
|
|
|
|
|
Online
publishing
|
|
$
|
369,142
|
|
$
|
208,496
|
|
Print
publishing and licensing
|
|
|
41,583
|
|
|
10,131
|
|
Other
expenses:
|
|
|
|
|
|
|
|
Sales
|
|
|
60,204
|
|
|
156,885
|
|
Marketing
|
|
|
82,685
|
|
|
-
|
|
Product
development
|
|
|
114,042
|
|
|
113,532
|
|
General
and administrative
|
|
|
1,013,067
|
|
|
1,288,579
|
|
Total
|
|
$
|
1,680,723
|
|
$
|
1,777,623
|
|
Pursuant
to the income tax provisions of SFAS No. 123R, the Company follows the
“long-haul method” of computing its hypothetical additional paid-in capital, or
APIC, pool. As of March 31, 2007, there was approximately $14.6 million of
unrecognized compensation costs, adjusted for estimated forfeitures, related
to
non-vested stock options, which
will be recognized over a weighted average period of approximately 2.70
years. Total
unrecognized compensation cost will be adjusted for future changes in estimated
forfeitures.
General
Stock Option Information
The
following table sets forth the summary of option activity under the Company’s
stock option plans for the three months ended March 31, 2007:
|
|
Number
of
|
|
Price
Per
|
|
Weighted
Average Exercise
|
|
|
|
Shares
|
|
Share
|
|
Price
|
|
Balance,
December 31, 2006
|
|
|
2,749,590
|
|
$
|
0.85
to $47.47
|
|
$
|
17.08
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(45,656
|
)
|
$
|
0.85
to $35.75
|
|
$
|
26.23
|
|
Forfeited
|
|
|
(84,065
|
)
|
$
|
12.63
to $35.75
|
|
$
|
30.93
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance,
March 31, 2007
|
|
|
2,619,869
|
|
$
|
0.85
to $47.47
|
|
$
|
16.64
|
|
The
total
intrinsic value of stock options exercised during the three months ended March
31, 2007, was approximately $1,189,000. The intrinsic value is calculated as
the
difference between the market value on the date of exercise and the exercise
price of the stock options.
Additional
information with respect to outstanding stock options as of March 31, 2007,
was
as follows:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
|
|
|
|
Weighted
Average Remaining
|
|
|
|
Average
|
|
|
|
Number
|
|
Contractual
|
|
Number
|
|
Exercise
|
|
Prices
|
|
of
Shares
|
|
Life
(Years)
|
|
of
Shares
|
|
Price
|
|
$0.85
|
|
|
39,250
|
|
|
2.69
|
|
|
39,250
|
|
$
|
0.85
|
|
$1.75
to $8.46
|
|
|
831,647
|
|
|
4.41
|
|
|
714,980
|
|
|
7.57
|
|
$10.01
to $12.63
|
|
|
675,343
|
|
|
4.43
|
|
|
525,656
|
|
|
10.47
|
|
$13.00
to $18.44
|
|
|
397,057
|
|
|
4.49
|
|
|
219,599
|
|
|
15.61
|
|
$26.98
to $32.75
|
|
|
325,157
|
|
|
6.29
|
|
|
55,470
|
|
|
29.19
|
|
$35.75
to $47.47
|
|
|
351,415
|
|
|
5.93
|
|
|
49,478
|
|
|
35.98
|
|
|
|
|
2,619,869
|
|
|
4.84
|
|
|
1,604,433
|
|
$
|
11.08
|
|
NOTE
4 - INCOME TAXES
The
change in the Company’s effective tax rate in the three months ended March 31,
2007 compared to the three months ended March 31, 2006 was due primarily to
the
tax effects of incentive stock option grants and disqualifying dispositions
of
incentive stock options.
The
Company adopted the provisions of FIN No. 48, Accounting
for Uncertainty in Income Taxes- an interpretation of FASB Statement
No. 109,
on
January 1, 2007. Previously, the Company had accounted for tax contingencies
in
accordance with Statement of Financial Accounting Standards 5, Accounting for
Contingencies. As required by FIN No. 48, which clarifies Statement 109,
Accounting for Income Taxes, the Company recognizes the financial statement
benefit of a tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit. For tax
positions meeting the more-likely-than-not threshold, the amount recognized
in
the financial statements is the largest benefit that has a greater than 50
percent likelihood of being realized upon ultimate settlement with the relevant
tax authority. At the adoption date, the Company applied Interpretation 48
to
all tax positions for which the statute of limitations remained open. As a
result of the implementation of Interpretation 48, the Company did not recognize
a change in the liability for unrecognized tax benefits.
There
are
no unrecognized tax benefits as of January 1, 2007 and there have been no
material changes in unrecognized tax benefits through March 31,
2007.
The
Company is subject to income taxes in the U.S. federal jurisdiction, various
states and foreign jurisdictions. Tax regulations within each jurisdiction
are
subject to the interpretation of the related tax laws and regulations and
require significant judgment to apply. With few exceptions, the Company is
no
longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations by tax authorities for the years before 2003.
There
are
no accruals for the payment of interest and penalties at January 1, 2007. The
Company would recognize interest accrued related to unrecognized tax benefits
in
interest expense and penalties in operating expenses.
Item
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Management's
discussion and analysis (“MD&A”) provides supplemental information, which
sets forth the major factors that have affected our financial condition and
results of operation and should be read in conjunction with our condensed
consolidated financial statements and notes thereto included in this Quarterly
Report. The MD&A is divided into subsections entitled "Business
Overview," "Critical Accounting Estimates," "Significant Developments," "Results
of Operations and Critical Accounting Policies," "Liquidity and Capital
Resources," and "Off-Balance Sheet Arrangements."
The
following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto included in this Quarterly
Report on Form 10-Q.
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
In
addition to historical information, this Quarterly Report on Form 10-Q contains
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, among
others, statements about our beliefs, plans, objectives, goals, expectations,
estimates and intentions that are subject to significant risks and uncertainties
and are subject to change based on various factors, many of which are beyond
our
control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,”
“estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar
expressions are intended to identify forward-looking statements.
All
forward-looking statements, by their nature, are subject to risks and
uncertainties. Our actual future results may differ materially from those set
forth in our forward-looking statements. Please see the “Introductory Note” and
Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2006, and as updated in the Company’s subsequent quarterly reports
filed on Form 10-Q, and Part II Item 1A. “Risk Factors” in this Quarterly Report
on Form 10-Q, and in our other filings made from time to time with the SEC
after
the date of this Quarterly Report.
However,
other factors besides those referenced could adversely affect our results,
and
you should not consider any such list of factors to be a complete set of all
potential risks or uncertainties. Any forward-looking statements made by us
herein speak as of the date of this Quarterly Report. We do not undertake to
update any forward-looking statement, except as required by law.
Business
Overview
Bankrate,
Inc. and subsidiaries (the "Company,” “Bankrate,” “we,” “us,” or “our”) own and
operate an Internet-based consumer banking marketplace. Our flagship site,
Bankrate.com, is one of the web's leading aggregators of information on more
than 300 financial products and fees, including mortgages, credit cards, new
and
used automobile loans, money market accounts, certificates of deposit, checking
and ATM fees, home equity loans and online banking fees. Additionally, we
provide financial applications and information to a network of online
distribution partners and national, regional and local publications. Through
our
online network (“Online Network”) which includes Bankrate.com, Interest.com,
Mortgage-calc.com and bankrateselect.com, as well as co-branded web sites hosted
by our network of online distribution partners, we provide the tools and
information that can help consumers make better financial
decisions.
We
also
produce traditional print publications, including the Mortgage Guide
and the Deposit Guide, as well as three newsletters. We also
syndicate our original editorial content.
We
believe we have a high quality, in-market audience that is valuable to our
advertisers. Bankrate.com is one of the top sites for financial information
and
advice according to comScore Media Metrix. We sell graphic advertisements and
hyperlinks on our Online Network, publish rates and sell advertisements in
metropolitan newspapers, and we license our rates and editorial
content.
We
regularly survey approximately 4,800 financial institutions in more than 575
markets in all 50 states in order to provide the most current objective,
unbiased information. Hundreds of print and online partner publications depend
on us as the trusted source for financial rates and information.
We
believe that the recognition of our research as a leading source of independent,
objective information on financial products is essential to our success. As
a
result, we have sought to maximize distribution of our research to gain brand
recognition as a research authority. We are seeking to build greater brand
awareness of our Online Network and to reach a greater number of online users.
Bankrate.com had approximately 53 million unique visitors for the year ended
December 31, 2006, and 16 million for the quarter ended March 31, 2007,
according to Omniture, a web analytics tool.
We
believe our potential market is enormous and is still in the early growth stages
of consumer awareness of the Internet as a personal finance tool. Financial
institutions are still in the early stages of adopting the Internet for
advertising products and customer acquisition. Their online advertising spending
is still a very small percentage of their overall advertising
budgets.
We
market
to advertisers targeting a specific audience in a city or state and also
to
national advertisers targeting the entire country. The key drivers to our
business are advertiser demand and consumer traffic to our Online Network
of
personal finance web sites. Our consumer traffic has continued to grow with
487.4 million page views in 2006 compared to 430.2 in 2005, and 143.2 in
the
first quarter of 2007, compared to 124.2 in the first quarter of 2006. In
addition, our advertiser demand has continued to increase in 2006 and the
first
quarter of 2007 both from increases in the demand from existing advertisers
as
well as new advertisers launching advertising campaigns on our Online
Network.
Our
gross
margin averaged 75% from 2002 to 2005. Our gross margin decreased for the year
ended December 31, 2006 to 69%, due to the inclusion of the results of FastFind,
MMIS and Interest.com, which we acquired in the fourth quarter of 2005. The
newspaper rate table business has typically generated margins in the 11% to
16%
range and we expect margins for this business to remain near the lower end
of
that range for fiscal 2007. As online publishing revenue grows as a
percentage of total revenue, we expect our overall gross margin to expand as
well. This expectation was realized in the first quarter of 2007 as online
revenue represented 86% of total revenue and 98% of gross margin dollars,
compared to 80% of total revenue and 97% of gross margin dollars for the
year ended December 31, 2006. As
a
result our gross margin increased to 73% for the three months ended March 31,
2007.
We
have
steadily reduced operating expenses as a percentage of total revenue from 58%
in
2002 to 39% in the quarter ended March 31, 2007. Operating expenses in the
three months ended September 30, 2006 includes a legal settlement charge and
related fees of $3,675,000. Our
cash
and short-term investments have increased approximately $117.2 million since
December 31, 2005 after closing a public offering of our common stock with
net
proceeds of approximately $92.4 million in May 2006.
Operating
Expenses as a Percentage of Total Revenue
($
in 000's)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
07
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Total
revenue
|
|
$
|
22,228
|
|
$
|
79,650
|
|
$
|
49,049
|
|
$
|
39,204
|
|
$
|
36,621
|
|
$
|
26,571
|
|
Operating
expenses
|
|
|
8,567
|
|
|
40,749
|
|
|
21,993
|
|
|
21,130
|
|
|
19,301
|
|
|
15,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses as a percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
total revenue
|
|
|
39
|
%
|
|
51
|
%
|
|
45
|
%
|
|
54
|
%
|
|
53
|
%
|
|
58
|
%
|
Critical
Accounting Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States 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. We evaluate our judgments, estimates and
assumptions on a regular basis and make changes accordingly. We believe that
the
judgments, estimates and assumptions involved in the accounting for income
taxes, the allowance for doubtful accounts receivable, stock-based compensation
and legal contingencies have the greatest potential impact on our financial
statements, so we consider these to be our critical accounting policies. Below
we discuss the critical accounting estimates associated with these policies.
For
further information on our critical accounting policies, see the discussion
in
the section titled “Results of Operations and Critical Accounting Policies”
below, and Note 2 in Notes to Consolidated Financial Statements in our 2006
Form
10-K.
Income
Taxes
As
required by SFAS No. 109,
Accounting for Income Taxes,
we use
the asset and liability method of accounting for income taxes. Under this
method, income tax expense is recognized for the amount of taxes payable or
refundable for the current year. Tax laws are complex and subject to different
interpretations by the taxpayer and the respective governmental taxing
authorities. Significant judgment is required in determining our tax expense.
Deferred tax assets and liabilities are recognized for the expected future
tax
consequences of temporary differences between the financial reporting and the
tax bases of assets and liabilities, and for operating losses and tax credit
carryforwards. Management must make assumptions, judgments and estimates to
determine our current provision for income taxes and our deferred tax assets
and
liabilities, and any valuation allowance to be recorded against a deferred
tax
asset. Our assumptions, judgments and estimates relative to the current
provision for income taxes take into account current tax laws and our
interpretation of current tax laws. Although we believe our assumptions,
judgments and estimates are reasonable, changes in tax laws or our
interpretation of tax laws could significantly impact the amounts provided
for
income taxes in our consolidated financial statements. Our assumptions,
judgments and estimates relative to the value of deferred tax assets take into
account predictions of the amount and category of future taxable income. Actual
operating results and the underlying amount and category of income in future
years could render our current assumptions, judgments and estimates relative
to
the value of recoverable deferred tax assets inaccurate. Any of the assumptions,
judgments and estimates could cause our actual income tax obligations to differ
from our
estimates and could materially impact our financial position and results of
operations.
Effective
January 1, 2007, we adopted the provisions of FIN No. 48, Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109.
FIN No.
48 contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109. The first step is
to evaluate the tax position for recognition by determining if the weight of
available evidence indicates it is more likely than not that the position will
be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon ultimate
settlement. We consider many factors when evaluating and estimating our tax
positions and tax benefits, which may require periodic adjustments and which
may
not accurately anticipate actual outcomes.
Allowance
for Doubtful Accounts Receivable
We
maintain an allowance for doubtful accounts for estimated losses resulting
from
the inability or unwillingness of our customers to make required payments.
We
look at historical write-offs and sales growth when determining the adequacy
of
the allowance. This estimate is inherently subjective because our estimates
may
be revised as more information becomes available. Should the financial condition
of our customers deteriorate, resulting in an impairment of their ability to
make payments, or if the level of accounts receivable increases, the need for
possible additional allowances may be necessary. Any additions to the allowance
for doubtful accounts are recorded as bad debt expense and included in general
and administrative expenses.
During
the three months ended March 31, 2007 and 2006, we charged approximately
$342,000 and $325,000, respectively, to bad debt expense, and wrote off
approximately $48,000 and $219,000, respectively, of accounts deemed
uncollectible.
Share-Based
Compensation
We
adopted the provisions of, and account for stock-based compensation in
accordance with, SFAS 123R effective January 1, 2006. We elected the
modified-prospective method, pursuant to which prior periods are not revised
for
comparative purposes. Under the fair value recognition provisions of this
statement, stock-based compensation is measured at the grant date based on
the
fair value of the award and is recognized as expense on a straight-line basis
over the requisite service period, which is the vesting period.
We
currently use the Black-Scholes option pricing model to determine the fair
value
of our stock options. As discussed in the notes to our consolidated financial
statements, the determination of the fair value of the awards on the date of
grant using an option-pricing model is affected by the price of our common
stock
as well as assumptions regarding a number of complex and subjective variables.
These variables include our expected stock price volatility over the term of
the
awards, actual and projected employee stock option exercise behaviors, risk-free
interest rate and expected dividends.
If
factors change and we employ different assumptions for estimating stock-based
compensation expense in future periods or if we decide to use a different
valuation model, the future periods may differ significantly from what we have
recorded in the current period and could materially affect our operating income,
net income and net income per share.
The
Black-Scholes option-pricing model was developed for use in estimating the
fair
value of traded options that have no vesting restrictions and are fully
transferable; characteristics not present in our option grants. Existing
valuation models, including the Black-Scholes and lattice binomial models,
may
not provide reliable measures of the fair values of our stock-based
compensation. Consequently, there is a risk that our estimates of the fair
values of our share-based compensation awards on the grant dates may bear
little
resemblance to the actual values realized upon the exercise, expiration,
early
termination or forfeiture of those share-based payments in the future. Certain
stock-based payments, such as employee stock options, may expire worthless
or
otherwise result in zero intrinsic value as compared to the fair values
originally estimated on the grant date and reported in our financial statements.
Alternatively, value may be realized from these instruments that are
significantly higher than the fair values originally estimated on the grant
date
and reported in our financial statements. There currently is no market-based
mechanism or other practical application to verify the reliability and accuracy
of the estimates stemming from these valuation models, nor is there a means
to
compare and adjust the estimates to actual values.
Stock-based
compensation expense recognized in our condensed consolidated statements of
income for the three months ended March 31, 2007 and 2006 is as
follows:
|
|
Three
Months Ended March 31,
|
|
Income
Statement Classifications
|
|
2007
|
|
2006
|
|
Cost
of revenue:
|
|
|
|
|
|
Online
publishing
|
|
$
|
369,142
|
|
$
|
208,496
|
|
Print
publishing and licensing
|
|
|
41,583
|
|
|
10,131
|
|
Other
expenses:
|
|
|
|
|
|
|
|
Sales
|
|
|
60,204
|
|
|
156,885
|
|
Marketing
|
|
|
82,685
|
|
|
-
|
|
Product
development
|
|
|
114,042
|
|
|
113,532
|
|
General
and administrative
|
|
|
1,013,067
|
|
|
1,288,579
|
|
Total
|
|
$
|
1,680,723
|
|
$
|
1,777,623
|
|
Goodwill
Impairment
We
perform goodwill impairment tests on an annual basis during the fourth quarter
of our fiscal year, or more frequently, if facts and circumstances warrant
a
review. We make judgments about goodwill whenever events or changes in
circumstances indicate that an impairment in the value of goodwill recorded
on
our balance sheet may exist. The timing of an impairment test may result in
charges to our statement of income in our current reporting period that could
not have reasonably been foreseen in prior periods. In order to estimate the
fair value of goodwill, we typically make various assumptions about the future
prospects the asset relates to, consider market factors and estimate our future
cash flows. Based on these assumptions and estimates, we determine whether
we
need to record an impairment charge to reduce the value of the asset carried
on
our balance sheet to its estimated fair value. Assumptions and estimates about
future values are complex and often subjective. They can be affected by a
variety of factors, including external factors such as industry and economic
trends, and internal factors such as changes in our business strategy and our
internal forecasts. Although we believe the assumptions and estimates we have
made in the past have been reasonable and appropriate, different assumptions
and
estimates could materially affect our reported financial results. More
conservative assumptions of the anticipated future benefits could result in
impairment charges, which would decrease net income and result in lower asset
values on our balance sheet. Conversely, less conservative assumptions could
result in smaller or no impairment charges, higher net income and higher asset
values.
Results
of Operations and Critical Accounting Policies
The
following is
our
analysis
of the
results
of operations for the periods
covered by our financial statements that we believe are critical
to an
understanding of our business
performance and to making the estimates and judgments underlying our
financial statements, including a discussion of the accounting policies and
practices (revenue recognition, allowance for doubtful accounts, share-based
compensation, and income taxes) that we believe are critical to an understanding
of our results of operations and to making estimates and judgments underlying
our financial statements. This
analysis should be read in conjunction with our interim condensed consolidated
financial statements, including the related notes. See “Results of Operations
and Critical Accounting Policies” in Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” in our 2006 Form
10-K for additional information concerning the revenue and expense components
of
our online and print publishing operations.
Results
of Operations
Three
Months Ended March 31, 2007 Compared to the Three Months Ended March 31,
2006
|
|
Q1
07
|
|
Q4
06
|
|
Q3
06
|
|
Q2
06
|
|
Q1
06
|
|
Online
publishing
|
|
$
|
19,052,024
|
|
$
|
17,112,733
|
|
$
|
15,777,141
|
|
$
|
15,464,987
|
|
$
|
15,615,999
|
|
Print
publishing and licensing
|
|
|
3,175,906
|
|
|
3,596,022
|
|
|
3,709,277
|
|
|
4,201,383
|
|
|
4,172,433
|
|
|
|
$
|
22,227,930
|
|
$
|
20,708,755
|
|
$
|
19,486,418
|
|
$
|
19,666,370
|
|
$
|
19,788,432
|
|
Revenue
Online
Publishing Revenue
We
sell
graphic advertisements on our Online Network consisting of banner, badge,
billboard, poster and skyscraper advertisements. These advertisements are sold
to advertisers according to the cost-per-thousand impressions (“CPM”) the
advertiser receives. The amount of advertising we sell is a function of (1)
the
number of visitors to our Online Network, (2) the number of ad pages we serve
to
those visitors, (3) the number of advertisements per page, and (4) advertiser
demand. Advertising sales are invoiced monthly at amounts based on
specific contract terms. When the number of impressions over the contract term
is guaranteed, the monthly invoiced amount is based on the monthly contractual
number of impressions delivered at the contractual price or CPM. Revenue is
recognized monthly based on the actual number of impressions delivered, and
the
revenue corresponding to any under-delivery is deferred as unearned income
on
the balance sheet and is recognized later when the under-delivery is served.
When the number of impressions over the contract term is not guaranteed, the
monthly invoiced amount is determined and revenue is recognized based on the
actual number of impressions delivered at the contractual price or CPM.
Additionally, we generate revenue on a “per action” basis (i.e., a purchase or
completion of an application) when a visitor to our Online Network transacts
with one of our advertisers after viewing an advertisement. Revenue is
recognized monthly based on the number of actions reported by the advertiser,
subject to our verification. We are also involved in revenue sharing
arrangements with our online partners where the consumer uses co-branded sites
hosted by us. Revenue is effectively allocated to each partner based on the
percentage of advertisement views at each site. The allocated revenue is shared
according to distribution agreements. Revenue is recorded at gross amounts
and
partnership payments are recorded in cost of revenue, pursuant to the provisions
of Emerging Issues Task Force (“EITF”) 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent.
We also
sell hyperlinks (interest rate table listings) on various third-party Internet
sites on a cost-per-click (“CPC”) basis. Advertisers pay us each time a
visitor to our Online Network clicks on a rate table listing. Prior to October
1, 2005, advertisers paid a flat monthly fee for a hyperlink on our rate
tables. We also sell text links on our rate pages to advertisers on a CPC basis.
Advertisers enter an auction bidding process on a third-party web site for
placement of their text link based on the amount they are willing to pay for
each click though to their web site. We recognize revenue monthly for each
text
link based on the number of clicks at the CPC contracted for during the auction
bidding process.
Quarterly
Online Publishing Revenue
|
|
Q1
07
|
|
Q4
06
|
|
Q3
06
|
|
Q2
06
|
|
Q1
06
|
|
Graphic
ads
|
|
$
|
10,472,180
|
|
$
|
9,695,738
|
|
$
|
9,184,412
|
|
$
|
9,216,914
|
|
$
|
9,159,104
|
|
Hyperlinks
|
|
|
8,579,844
|
|
|
7,416,995
|
|
|
6,592,729
|
|
|
6,248,073
|
|
|
6,456,895
|
|
|
|
$
|
19,052,024
|
|
$
|
17,112,733
|
|
$
|
15,777,141
|
|
$
|
15,464,987
|
|
$
|
15,615,999
|
|
Online
publishing revenue of $19,052,000 for the three months ended March 31, 2007
was
approximately $3,436,000, or 22%, higher than the $15,616,000 reported for
the
same period in 2006. This increase was due to a $1,313,000, or 14%, increase
in
graphic ad sales, and a $2,123,000, or 33%, increase in hyperlink sales.
Page
views for the quarter ended March 31, 2007 were 143.2 million and were 19.0
million, or 15%, higher than the 124.2 million reported in the same period
in
2006.
The
14%
increase in graphic ad revenue during the quarter ended March 31, 2007 was
driven by an increase in advertiser demand partially offset by a decrease
in
revenue generated by our FastFind/Bankrate Select
lead
generation business. Graphic ad revenue increased by 32% excluding the effect
of
the decrease in lead aggregation revenue. We expect Bankrate Select,
our new
lead aggregation platform launched at the end of the first quarter of 2007,
to
begin making more significant revenue contribution in the third and fourth
quarters of 2007.
The
increase in hyperlink sales of 33% for the quarter ended March 31, 2007 compared
to the same period in 2006 was driven by an increase in revenue per click
as
well as an increase in the total amount of clicks processed.
A
majority of our advertising customers purchase advertising under short-term
contracts. Customers have the ability to stop, and on occasion have stopped,
advertising on relatively short notice. Online publishing revenue would be
adversely impacted if we experienced contract terminations, or if we were not
able to renew contracts with existing customers or obtain new customers. The
market for Internet advertising is intensely competitive and has, in the past,
experienced significant downturns in demand that could adversely impact
advertising rates. Future revenue could be adversely affected if we were forced
to reduce our advertising rates or if we were to experience lower CPMs. To
date,
however, our CPM’s have continually increased.
In
terms
of page views, we believe our online publishing segment is not generally
susceptible to seasonality other than a possible decline in the fourth quarter
due to the holiday season.
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Q1
|
|
|
143.2
|
|
|
124.2
|
|
|
111.0
|
|
|
117.2
|
|
|
106.7
|
|
|
58.4
|
|
Q2
|
|
|
-
|
|
|
116.0
|
|
|
113.8
|
|
|
92.6
|
|
|
121.8
|
|
|
48.0
|
|
Q3
|
|
|
-
|
|
|
126.6
|
|
|
107.8
|
|
|
92.0
|
|
|
100.3
|
|
|
82.1
|
|
Q4
|
|
|
-
|
|
|
120.6
|
|
|
97.6
|
|
|
91.3
|
|
|
75.8
|
|
|
79.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
-
|
|
|
487.4
|
|
|
430.2
|
|
|
393.1
|
|
|
404.6
|
|
|
267.8
|
|
Print
Publishing and Licensing Revenue
Print
publishing and licensing revenue represents advertising revenue from the sale
of
advertising in the
Mortgage and Deposit Guide
(formerly called
Consumer Mortgage Guide
) rate
tables, newsletter subscriptions, and licensing of research information. We
charge a commission for placement of the
Mortgage and Deposit Guide
in a
print publication. Advertising revenue and commission income is recognized
when
the
Mortgage and Deposit Guide
runs in
the publication. Revenue from our newsletters is recognized ratably over the
period of the subscription, which is generally up to one year. Revenue from
the
sale of research information is recognized ratably over the contract
period.
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 web site promotions. Revenue for these
products is recognized ratably over the contract/subscription
periods.
Quarterly
Print Publishing and Licensing Revenue
|
|
Q1
07
|
|
Q4
06
|
|
Q3
06
|
|
Q2
06
|
|
Q1
06
|
|
Mortgage
Guide
|
|
$
|
2,864,276
|
|
$
|
3,437,935
|
|
$
|
3,336,562
|
|
$
|
4,011,368
|
|
$
|
3,927,385
|
|
Editorial
|
|
|
311,630
|
|
|
158,087
|
|
|
372,715
|
|
|
190,015
|
|
|
245,048
|
|
|
|
$
|
3,175,906
|
|
$
|
3,596,022
|
|
$
|
3,709,277
|
|
$
|
4,201,383
|
|
$
|
4,172,433
|
|
Print
publishing and licensing revenue for the quarter ended March 31, 2007 was down
$997,000, or 24%, compared to the same period in 2006, primarily due to a
$1,100,000, or 27%, decline in Mortgage
and Deposit Guide
revenue
as advertising units were approximately 19% lower in 2007 compared to
2006. Editorial
sales were up 27%, due to the sale of an editorial free-standing insert (“FSI”)
in USA
Today.
An FSI
is a preprinted advertising booklet that is loosely inserted between the pages
of a newspaper or magazine. In our case, we develop FSIs with our editorial
content, and then sell the sponsorship of the FSI to one or more advertisers.
Cost
of Revenue
Online
Publishing Costs
Online
publishing costs represent expenses directly associated with the creation of
online publishing revenue. These costs include contractual revenue sharing
obligations resulting from our distribution arrangements (distribution
payments), salaries, editorial costs, market analysis and research costs,
share-based compensation expense and allocated overhead, and exclude
depreciation and amortization. Distribution payments are made to web site
operators for visitors directed to our online network; these costs increase
proportionately with gains in related revenue to our Online Network. 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 sites 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 and allocated
overhead.
Online
Publishing Gross Margin
|
|
Q1
07
|
|
Q4
06
|
|
Q3
06
|
|
Q2
06
|
|
Q1
06
|
|
Online
publishing revenue
|
|
$
|
19,052,024
|
|
$
|
17,112,733
|
|
$
|
15,777,141
|
|
$
|
15,464,987
|
|
$
|
15,615,999
|
|
Cost
of online publishing revenue
|
|
|
3,142,027
|
|
|
2,745,029
|
|
|
2,648,944
|
|
|
2,806,868
|
|
|
2,900,584
|
|
Gross
margin
|
|
$
|
15,909,997
|
|
$
|
14,367,704
|
|
$
|
13,128,197
|
|
$
|
12,658,119
|
|
$
|
12,715,415
|
|
Gross
margin as a percentage of revenue
|
|
|
84
|
%
|
|
84
|
%
|
|
83
|
%
|
|
82
|
%
|
|
81
|
%
|
Online
publishing costs for the three months ended March 31, 2007 were $241,000, or
8%,
higher than in the same period in 2006. This
increase was due primarily to higher revenue sharing payments of $57,000 due
to
higher associated revenue, and $161,000 higher share-based compensation expense.
Our gross margin for the three months ended March 31, 2007 was 84% compared
to
82% for the same period in 2006. Online publishing revenue was 86% of total
revenue and represented 98% of gross margin dollars during the quarter ended
March 31, 2007. As online publishing revenue grows as a percentage of total
revenue, we expect overall gross margin expansion as well.
Print
Publishing and Licensing Costs
Print
publishing and licensing costs
represent expenses associated with print publishing revenue. These costs include
contractual revenue sharing obligations with newspapers related to
the
Mortgage and Deposit Guide,
compensation and benefits, printing and allocated overhead, and exclude
depreciation and amortization. These costs typically vary proportionately with
the related revenues.
Print
Publishing and Licensing Gross Margin
|
|
Q1
07
|
|
Q4
06
|
|
Q3
06
|
|
Q2
06
|
|
Q1
06
|
|
Print
publishing & licensing revenue
|
|
$
|
3,175,906
|
|
$
|
3,596,022
|
|
$
|
3,709,277
|
|
$
|
4,201,383
|
|
$
|
4,172,433
|
|
Cost
of print publishing & licensing revenue
|
|
|
2,827,667
|
|
|
3,171,945
|
|
|
3,358,281
|
|
|
3,773,258
|
|
|
3,542,110
|
|
Gross
margin
|
|
$
|
348,239
|
|
$
|
424,077
|
|
$
|
350,996
|
|
$
|
428,125
|
|
$
|
630,323
|
|
Gross
margin as a percentage of revenue
|
|
|
11
|
%
|
|
12
|
%
|
|
9
|
%
|
|
10
|
%
|
|
15
|
%
|
Print
publishing and licensing costs for the quarter ended March 31, 2007 of
$2,828,000 decreased by approximately $714,000, or 20%, from the comparable
amount reported in the first quarter of 2006 due to a decline in revenue sharing
payments in line with the decrease in revenue. The gross margin was down 1%
sequentially from the fourth quarter of 2006 due to higher share-based
compensation expense and the costs associated with the first quarter 2007 FSI
described above.
Operating
Expenses
Sales
Sales
costs represent direct selling expenses, principally for online advertising,
and
include compensation and benefits, sales commissions, and allocated
overhead.
Sales
costs for the three months ended March 31, 2007 were $1,287,000, and were
approximately $198,000, or 18%, higher than the comparable amount reported
in
the first quarter of 2006. The increase is due primarily to higher human
resource costs from additional hires, higher commissions, and higher training
and travel expenses, offset by lower share-based compensation expense.
Marketing
Marketing
costs represent expenses associated with expanding brand awareness of our
products and services to consumers and include key word (pay-per-performance)
campaigns on Internet search engines, print and Internet advertising, marketing
and promotion costs.
Marketing
costs for the three months ended March 31, 2007 were $1,455,000 and were
$604,000, or 71%, higher than the comparable amount reported in the same period
in 2006. We spent approximately $329,000 more to drive traffic to our Online
Network in the first quarter of 2007 compared to the same period in 2006. We
also hired an executive in the fourth quarter of 2006 to focus on our consumer
marketing needs and purchased software to more efficiently manage the key word
campaigns. Share-based compensation expense was also $83,000 higher in first
quarter of 2007 compared to the same period in 2006.
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, and other technology costs.
Product
development costs for the three months ended March 31, 2007 were $72,000, or
7%,
lower than the comparable amount reported in the first quarter of 2006 due
primarily to lower infrastructure costs offset by higher human resource and
contract labor costs supporting the growth in our business.
General
and Administrative
General
and administrative expenses represent compensation and benefits for executive,
finance and administrative personnel, professional fees, non-allocated overhead
and other general corporate expenses.
In the
first quarter of 2007, these costs were $1,310,000, or 24% lower than the
comparable amount reported in the first quarter of 2006 due primarily to a
decline in legal and accounting fees of $729,000; lower human resource and
consulting costs of $245,000; lower share-based compensation expense of
$276,000; and net lower other infrastructure costs of approximately
$61,000.
Depreciation
and Amortization
Depreciation
and amortization expense for the three months ended March 31, 2007 was $87,000,
or 16%, higher than the amount reported in the same period in 2006 due to the
additions to furniture, fixtures and equipment over the last four
quarters.
Interest
Income
Interest
income consists of income generated from invested cash and short-term
investments. Interest income for the three months ended March 31, 2007 was
higher than the amounts reported in the same period in 2006 due to the $92.4
million net proceeds received in May 2006 from our secondary offering, and
our
cash generated from operations.
Income
Taxes
The
change in our effective tax rate in the three months ended March 31, 2007
compared to the same period in 2006 was primarily due primarily to the tax
effects of incentive stock option grants and disqualifying dispositions of
incentive stock options.
Liquidity
and Capital Resources
|
|
March
31,
|
|
December
31,
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
Cash
and short-term investments
|
|
$
|
120,675,448
|
|
$
|
109,925,360
|
|
$
|
10,750,088
|
|
Working
capital
|
|
|
130,549,270
|
|
|
122,156,776
|
|
|
8,392,494
|
|
Stockholders'
equity
|
|
|
177,998,148
|
|
|
170,154,519
|
|
|
7,843,629
|
|
Our
principal ongoing source of operating liquidity is the cash generated by
our
product revenue. In addition, we remain highly liquid due to our secondary
offering in May 2006 whereby we completed the sale of 2,697,776 shares
of our
common stock, of which 2,005,991 shares were sold by us and 691,785 shares
were
sold by certain of our existing stockholders, at a price of $48.25 per
share
resulting in net proceeds to us of approximately $92.4 million.
We
assess
acquisition opportunities as they arise. Financing in excess of the $92.4
million proceeds from our May 2006 offering may be required if we decide
to make
additional acquisitions. There can be no assurance, however, that any such
opportunities will arise, that any such acquisitions will be consummated,
or
that any needed additional financing will be available on satisfactory
terms
when required.
As
of
March 31, 2007, we had working capital of approximately $130,549,000, and
our
primary commitments were approximately $9,579,000 in operating lease
payments over the next ten years, and capital expenditures and recurring
payables and accruals arising during the course of operating our business,
estimated at approximately $8,725,000 through March 31, 2008. We generally
establish payment terms with our vendors that extend beyond the amount
of time
required to collect from our customers.
Contractual
Obligations
The
following table represents the amounts due under the specified types of
contractual obligations as of March 31, 2007.
|
|
Total
|
|
|
|
|
|
|
|
|
|
Long-term
debt obligations
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Capital
lease obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating
lease obligations (1)
|
|
|
9,578,963
|
|
|
1,153,100
|
|
|
1,985,071
|
|
|
1,929,826
|
|
|
4,510,966
|
|
Purchase
obligations (2)
|
|
|
496,900
|
|
|
466,047
|
|
|
30,853
|
|
|
-
|
|
|
-
|
|
Other
long-term obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$
|
10,075,863
|
|
$
|
1,619,147
|
|
$
|
2,015,924
|
|
$
|
1,929,826
|
|
$
|
4,510,966
|
|
(1)
Includes our obligations under existing operating leases.
|
|
(2)
Represents base contract amounts for Internet hosting, co-location,
content distribution and other infrastructure
costs.
|
During
the three months ended March 31, 2007, we generated $10,135,000 of net cash
from
operating activities. Our
net
income of $5,373,000 was adjusted for the impact of share-based compensation
expense of $1,681,000; depreciation and amortization of $645,000; bad debt
expense of $342,000; and a net positive change in the components of operating
assets and liabilities of $2,094,000. Of this positive change in operating
assets and liabilities, $2,021,000 resulted from an increase in accrued
expenses; $297,000 resulted from a decrease in prepaid expenses and other
current assets; $75,000 resulted from an increase in accounts payable; and
$370,000 resulted from a decrease in deferred revenue.
The
increase in accrued expenses was due primarily to an increase in income taxes
payable of approximately $3,000,000.
Cash
flows from investing activities include $15,700,000 in purchases of short-term
investments (see Note 1 of Notes to Condensed Consolidated Financial
Statements), and $176,000 in purchases of furniture, fixtures and
equipment.
Cash
flows from financing activities include the proceeds from the exercise of
director and employee stock options.
Our
existing cash and short-term investments may decline in the event of weakening
of the economy or changes in our planned cash outlay. However, based on our
current business plan and revenue prospects, we believe that our existing
balances together with our anticipated cash flows from operations will be
sufficient to meet our working capital and operating resource expenditure
requirements for the next twelve months. Also, while we currently have no
committed lines of credit, we believe that our banking relationships and good
credit should afford us the opportunity to raise sufficient debt in the banking
or public markets, if required.
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.
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.
Item
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Risk
The
primary objective of our investment strategy is to preserve principal while
maximizing the income we receive from investments without significantly
increasing risk. To minimize this risk, to date we have maintained our portfolio
of cash and short-term investments in short-term and overnight investments,
and
Triple A rated investment grade auction rate securities, which are not subject
to market risk, as the interest paid on such investments fluctuates with the
prevailing interest rates.
Exchange
Rate Sensitivity
Our
exposure to foreign currency exchange rate fluctuations is minimal to none
as we
do not have any revenues denominated in foreign currencies. Additionally, we
have not engaged in any derivative or hedging transactions to date.
Item
4. CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
As
of
March 31, 2007, the Company's management, including its Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934). Based on that evaluation, the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
have concluded that the Company's disclosure controls and procedures were
effective.
Management,
including the Company's Chief Executive Officer and Chief Financial Officer,
does not expect that the Company's disclosure controls and procedures will
prevent all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of
the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud,
if
any, within the Company have been detected.
Changes
in Internal Control over Financial Reporting
The
Company's management, including its Chief Executive Officer and Chief Financial
Officer, has reviewed our internal control. There has been no significant
changes in the Company's internal control over financial reporting during the
quarter ended March 31, 2007, nor subsequent to the date of their evaluation,
that have materially affected, or are reasonably likely to materially affect
its
internal control over financial reporting.
Part
II - OTHER INFORMATION
Item
1. LEGAL
PROCEEDINGS
From
time
to time, we are party to lawsuits arising out of the normal course of business.
In management’s opinion, there are no known pending claims or litigation, the
outcome of which would, individually or in the aggregate, have a material effect
on our consolidated financial position, results of operations or our cash flows.
Item
1A. Risk Factors
In
addition to the other information set forth in this Quarterly Report, you should
carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in
our 2006 Form 10-K, as updated in our subsequent quarterly reports. There have
been no material changes in our risk factors from those disclosed in our 2006
Form 10-K.
Item
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item
3. DEFAULTS
UPON SENIOR SECURITIES
None.
Item
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item
5. OTHER
INFORMATION
None.
Item
6. EXHIBITS
31.1
Certification
of Thomas R. Evans, Chief Executive Officer and President of Bankrate, Inc.,
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
|
31.2
|
Certification
of Edward J. DiMaria, Senior Vice President and Chief Financial Officer
of
Bankrate, Inc., Pursuant to Rule 13a-14(a) of the Securities Exchange
Act
of 1934.
|
32.1
Certification
of Thomas R. Evans, Chief Executive Officer and President of Bankrate, Inc.,
Pursuant to 18 U.S.C. Section 1350.
32.2
Certification
of Edward J. DiMaria, Senior Vice President and Chief Financial Officer of
Bankrate, Inc., Pursuant to 18 U.S.C. Section 1350.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
Bankrate,
Inc.
|
|
|
|
Dated:
May 10, 2007 |
By: |
/s/
EDWARD J. DIMARIA |
|
Edward
J. DiMaria
Senior
Vice President and Chief Financial Officer
(Principal
Financial and Accounting
Officer)
|