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Edited Transcript of QNST earnings conference call or presentation 9-May-17 9:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Quinstreet Inc Earnings Call

FOSTER CITY Jun 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Quinstreet Inc earnings conference call or presentation Tuesday, May 9, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas Valenti

QuinStreet, Inc. - Chairman and CEO

* Erica Abrams

The Blueshirt Group, LLC - Co-Founder and MD

* Gregory Wong

QuinStreet, Inc. - CFO and SVP

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Conference Call Participants

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* John Robert Campbell

Stephens Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the QuinStreet Third Quarter Fiscal 2017 Financial Results Conference Call. As a reminder, today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Erica Abrams. Please go ahead.

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Erica Abrams, The Blueshirt Group, LLC - Co-Founder and MD [2]

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Thank you, Keith. Good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet's third quarter of fiscal year 2017 financial results.

Joining me on the call today are Doug Valenti, CEO; and Greg Wong, CFO of QuinStreet.

This call is being simultaneously webcast on the Investor Relations section of our website at www.quinstreet.com.

Before we get started, I would like to remind you that the following discussion contains forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Factors that could cause the results to differ from our forward-looking statements are discussed in our SEC filings including our most recent 10-Q filings with the SEC, which will be filed tomorrow. Forward-looking statements are based on assumptions as of today and the company undertakes no duty to update these statements as a result of new information.

Today, we will be discussing both GAAP and non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures are included in today's earnings press release, which is available on our Investor Relations website.

Now I will turn the call over to Doug Valenti, CEO of QuinStreet. Please go ahead.

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Douglas Valenti, QuinStreet, Inc. - Chairman and CEO [3]

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Thank you, Erica. Hello, everyone. Thank you for joining us today.

Fiscal Q3 results were in line with our expectations and with the outlook we provided last quarter. Revenue in all of our client verticals grew sequentially at double-digit rates. Financial Services grew 23%, Education grew 18% and other, which includes home services and B2B technology grew 17%. Profitability benefited from the increase in top line leverage and from the lower cost base that resulted from the restructuring we initiated in the December quarter. As a result, we delivered on our commitment to rapidly expand EBITDA margin and operating cash flow. Adjusted EBITDA margin was 7% and operating cash flow was $6.2 million. We closed the quarter with $42 million in cash and equivalents and no debt.

Momentum in our Financial Services client vertical continues to be strong. Revenue in auto insurance grew 45% sequentially, and revenue in all of our other Financial Services verticals grew at double- or triple-digit annual rates in the quarter. Year-over-year revenue growth in total for our Financial Services client vertical was muted somewhat by a tough Q3 '16 comparable in auto insurance. Last year's comp included a spike that was caused by our partner AWL's acquisition of Bankrate's insurance business. As previously discussed, AWL subsequently aggressively rationalized and reduced revenue from the acquired business. Without that effect, Financial Services client vertical revenue would have grown approximately 15% year-over-year in fiscal Q3.

Trends in the Education client vertical continued to improve in the quarter with year-over-year revenue decline getting less worse, and client engagement and interest increasing relative to what we have experienced the past few years. The turnaround efforts in our B2B technology business continued to make good progress. We are seeing signs and trends of stabilization there driven by those efforts. Our long-term outlook for the opportunity in that business remains positive.

Looking ahead to fiscal Q4. We expect revenue to grow in the low single-digit percentages both year-over-year and sequentially. We expect the sequential growth is considerably better than our typical historic pattern of a seasonal decline in the Q4, indicating the continued positive momentum we are seeing in the business. We expect adjusted EBITDA margin to be at least 7% for the quarter.

With that, I'll turn the call over to Greg for a more detailed review of the financial results.

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Gregory Wong, QuinStreet, Inc. - CFO and SVP [4]

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Thanks, Doug. Hello, and thanks to everyone for joining us today. We are pleased to report a solid third quarter with financial results that better reflect the long-term potential of our business.

For the third quarter, total revenue was $79.2 million. GAAP net income was $579,000, or $0.01 per share. Adjusted net income was $2.6 million or $0.06 per share, and adjusted EBITDA was $5.2 million or 7% of revenue. Revenue was in line with our expectation for the quarter as insurance carriers began to re-expand budgets as it recovered from last year's severe industry loss ratios.

On a sequential basis, all of our client verticals grew nicely, well outpacing what we typically see Q2 to Q3. Moving to revenue by client vertical, our Financial Services client vertical represented 62% of Q3 revenue, growing 7% year-over-year and 23% sequentially to $48.8 million. We had a strong quarter in Financial Services. Our auto insurance business grew 45% sequentially. Our other Financial Services businesses including life and health insurance, mortgage, credit cards, deposit accounts and personal loans all grew strongly at double- or triple-digit rates year-over-year as we continue the rollout of our enhanced products and technologies in these large and promising markets. Our Education client vertical represented 24% of Q3 revenue, a decline of 15% year-over-year, but an increase of 18% sequentially to $19.2 million. We believe that trends in Education are improving, as demonstrated by sequential growth that outpace what we typically see Q2 to Q3.

Our other client verticals represented the remaining 14% of Q3 revenue. While these declined 14% year-over-year, they increased 17% sequentially to $11.2 million. We again saw strong year-over-year growth in home services, while B2B technology continued to face challenges. Our turnaround efforts in B2B are progressing well and we believe we are establishing a solid foundation to return us to year-over-year revenue growth over time.

Moving on to adjusted EBITDA. We made significant progress in the quarter, delivering on our commitment to rapidly expand EBITDA margin. For the quarter, we reported $5.2 million, which is our best quarter for adjusted EBITDA since Q3 of 2014. EBITDA expansion was driven by the benefits of our corporate restructuring as well as increase in top line leverage.

Turning to the balance sheet. It was also a good quarter. We began the quarter with $37.5 million in cash, generated $6.2 million in operating cash flow, spent about $1 million on CapEx and repurchased $720,000 of common stock. Net, we grew our cash balance by $4.2 million and closed the quarter with $41.7 million in cash and equivalents and no debt.

In summary, we executed well against our priorities in the quarter, continuing to grow our Financial Services and home services business, expanding margins, generating cash flow and continuing to strengthen our balance sheet. We look forward to reporting our progress to you in the coming quarters and seeing many of you at the upcoming conferences where we will present. Notably, Needham in May and both Cowen and Stephens in June.

With that, I'll turn the call over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we could take our first question from John Campbell.

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John Robert Campbell, Stephens Inc., Research Division - Research Analyst [2]

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So I know we're a few months away from just getting into your next fiscal year. But just looking at it a little bit. So I mean you guys -- it sounds like you'll get most of your cost saves that you're targeting next year. You're going to lap some, what look to be from a revenue standpoint, some pretty easier comps, out of other revenue, out of Education and it sounds like you're going to lap some of that AWL rationalized rev. So it does look like top line growth kind of shaping up to accelerate a little bit. But I'm just curious to hear your kind of high-level thoughts as -- just around the pace of revenue growth, EBITDA growth next year, any kind of thoughts on margin, I know it's a little early, but just kind of directionally?

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Douglas Valenti, QuinStreet, Inc. - Chairman and CEO [3]

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Sure. I think you hit on some key points. We are -- we certainly lap a lot of things like the loss ratio issues in insurance, the AWL Bankrate rationalization, the big drop in B2B, the big drop in Education. So it certainly sets up for some comps that would be helpful. I guess, I'd also point out that about 70% of our revenue now is coming from Financial Services and home services. Both of those businesses have been growing at strong double-digit rates now for quite some time, and we're seeing good sustained momentum there as we finish the year and get to work going into next year.

I'd also point out that we did do the restructuring and we began to -- from an EBITDA standpoint, we'll be getting the benefits of the restructuring into next year. We do not expect -- we do expect to grow revenue but we haven't completed the plan and so we -- I can't give you any indications of what we think the rate of that growth will be. But again, it sets up pretty nicely from a comparable standpoint and we do not expect to meaningfully grow expenses or costs. So that should set us up pretty well for EBITDA margin and EBITDA margin expansion next year.

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John Robert Campbell, Stephens Inc., Research Division - Research Analyst [4]

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Okay, that's very helpful. So the $17 million you guys originally called out, are you still on target to hit that? Is that something you're still planning for, for next year, I guess all-in run rate?

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Douglas Valenti, QuinStreet, Inc. - Chairman and CEO [5]

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Yes. Well on target and have added some other cost reductions to that recently and ongoing. So we feel quite good about our ability to get that full effect plus some.

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John Robert Campbell, Stephens Inc., Research Division - Research Analyst [6]

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Okay, that's helpful. And then last one for me. As I think about the AWL deal you guys structured a few months ago, you recently announced the InsuraMatch strategic alliance. So those are kind of 2 new strategies, or I wouldn't call them pivots, but kind of like new strategies for the insurance business over the last year. So just curious about what are those actions telling us about the future of the insurance offering for QuinStreet?

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Douglas Valenti, QuinStreet, Inc. - Chairman and CEO [7]

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I think the InsuraMatch deal really got us out of the call center agency operating business, which is not something that really either differentiated us or was very lucrative for us. InsuraMatch is much better at running those agent call centers than we are. They'll still utilize our technologies and our products, which is core to our -- us and is something we are very good at and is highly differentiated for us.

I think -- so I think there's a very specific case there, but I think if you step back to the broader case, John, we continue in insurance to focus on our technology for both differentiating clients and for being able to be deeply integrated with clients so that we can best present and best match consumers to them in what other -- in whatever format they want to engage and whatever format consumers want to engage on a performance basis, whether it be policies through the rating platform, which of course is a big part of that, or clicks, which of course, is the biggest part of the business, or calls or leads or other formats.

But we want to continue to be able to best engage consumers and match them to the best client in the way that client wants to and the consumer wants to match. So that is continuing to be the core focus of our business across the board and it's furthest along and you are seeing the results of that strategy being executed for the longest and best in insurance, but we're rolling that through all of our businesses.

The other piece is our partnerships. There's a big emphasis on partnerships, which there kind of has always been at QuinStreet because we'd never -- although we went through a brief period where we had a little bit more owned and operated media, most of our media has always been with partners and -- where they have the audience or the high-intent consumers but they don't have our technology platform for best engaging, matching and monetizing those consumers and generating the media economics.

And so that continues to be the drumbeat of emphasis here across the board. And we've had to remix that media quite a bit because of the Google algorithm changes, because of changes to the industry. But our progress in that remix, again you're seeing it in the results both in the revenue, in particular again, in Financial Services where we're further still along, but also in the margin expansion. You're seeing us able to bring that -- those businesses back with a remix that's very lucrative on the partnership side whether it be running, high-quality, high deliverability email campaigns for ourselves and for others and AWL for that matter, or being able to engage the AWL traffic with our click products so they get a lot more yield on that media as they also generate and match leads to their agent clients in particular, or running marketplaces Financial Services product marketplaces and others. But mainly Financial Services marketplaces or folks who have large audiences that are engaged with Financial Services content, some of which we've named in the past but big, big Financial Services content in media companies.

Those businesses, all of what I just listed are growing at very strong double-digit rates for us and the margins on all of those businesses are expanding rapidly as we have put in place the new product -- the new generation of our product and technology to do the matching qualification and yielding that I've described in the past. So I think it's an example of us either getting out of businesses that aren't consistent with what I've described and/or emphasizing the partnership aspects of our business where we can help others make a lot more money on their media mainly or clients get a lot better buying power in media, in the high intent but unbranded or high -- or research and compare consumer on media flows on the Internet. So those will continue to be fanatically what we do. Partnerships where we can make the media yield better or partnerships with our clients where we can get them better buying power in what has become the largest shopping channel on earth.

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Operator [8]

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(Operator Instructions) And it does appear we have no further questions.

And this will conclude the QuinStreet Third Quarter Fiscal 2017 Financial Results Conference Call. Thank you for your participation. You may now disconnect, and have a great day.