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Edited Transcript of QNST earnings conference call or presentation 30-Oct-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 Quinstreet Inc Earnings Call

FOSTER CITY Oct 31, 2017 (Thomson StreetEvents) -- Edited Transcript of Quinstreet Inc earnings conference call or presentation Monday, October 30, 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 & CEO

* Erica Abrams

The Blueshirt Group, LLC - Co-Founder and MD

* Gregory Wong

QuinStreet, Inc. - CFO & Senior VP

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Conference Call Participants

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* John Robert Campbell

Stephens Inc., Research Division - VP and Research Analyst

* Stephen D. Ju

Crédit Suisse AG, Research Division - Director

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the QuinStreet First Quarter Fiscal 2018 Financial Results Conference Call. Today's conference is being recorded.

I would now like to turn the conference over to Ms. Erica Abrams. Please go ahead, ma'am.

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

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Thank you, Kathryn. Good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet's first quarter of fiscal year 2018 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 discussions contain forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those projected by such statements and are not guarantees of future performance. Factors that may cause the results to differ from our forward-looking statements are discussed in our recent SEC filings, including our most recent 10-K filing made on September 8, 2017. Forward-looking statements are based on assumptions as of today, and the company undertakes no obligation to update these statements.

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, CEO of QuinStreet. Please go ahead.

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

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Thank you, Erica, and thank you all for joining us today.

Results were strong in the fiscal first quarter. Revenue was up 19% year-over-year and adjusted EBITDA margin was about 8%. Improved performance continues to be driven by our new product and media strategies and by the long-term trend of clients shifting more spending to digital media and to performance marketing.

Our marketplaces allow consumers that are in research-and-compare mode to quickly and effectively find solution providers. And our model and technologies make digital performance media measurably more effective and affordable for clients in these high-consideration market verticals.

We are still relatively early in the implementation of our new products and media strategies across the business. We are also still relatively early in the shifting of client budgets to digital and in the digital channel to our model of best-in-class performance marketing.

In addition to the strong year-over-year growth, this was the highest-revenue quarter since March of 2012 and the highest-EBITDA quarter since September of 2013. Strong momentum in our Financial Services and Home Services businesses, which combined now represent about 75% of company revenue, continues to be the primary driver of improved performance. Those businesses grew 28% year-over-year in the quarter.

Trends in our Education client vertical continued to improve, and revenue there grew year-over-year for the first time in 2 years. A small decline in U.S. Education revenue was offset by strong growth in our international business. About 30% of our Education revenue is now either with not-for-profit or international clients.

Given our strong performance in the first quarter and the momentum we are carrying into Q2, we now expect full fiscal year revenue growth to be in the range of 10% to 15% and that adjusted EBITDA margin will be about 8%. We'll update our full-year outlook again after reporting fiscal Q2 results.

With that, I'll turn the call over to Greg.

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Gregory Wong, QuinStreet, Inc. - CFO & Senior VP [4]

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Thanks, Doug.

Hello. Thanks to everyone for joining us today.

We had a strong first quarter overall and are pleased with our momentum and continued improvements and performance, driven by our new product and media strategies. We delivered our best revenue in 5.5 years; record revenues from our Financial Services client vertical; and, for the third straight quarter, increased adjusted EBITDA and generated strong cash flow from the business.

For the first quarter, total revenue grew 19% year-over-year to $87.4 million. Adjusted net income was $3.5 million or $0.08 per share, and adjusted EBITDA was $6.6 million or 8% of revenue. We generated $5.6 million of normalized free cash flow and closed the quarter with $50.4 million in cash equivalents.

Moving to revenue by client vertical. Our Financial Services client vertical represented 67% of Q1 revenue and grew 31% year-over-year to $58.6 million. We had another strong quarter in insurance, which grew 35% year-over-year and 15% sequentially.

Our Other businesses in our Financial Services client vertical, which include mortgage, credit cards, deposits and personal loans, grew a combined 24% year-over-year in the quarter, further demonstrating the effectiveness of our new product and media strategies.

Our Education client vertical represented 21% of Q1 revenue and grew 3% year-over-year to $18.1 million. The trends in Education have continued to improve, as evidenced by our return to modest year-over-year revenue growth in the quarter. Our U.S. Education business was down slightly, offset by strong growth in Brazil. We now have about 30% of our Education revenue with not-for-profit or international clients.

Our Other client verticals represented the remaining 12% of Q1 revenue and declined 5% year-over-year to $10.7 million.

Our Home Services business again delivered year-over-year revenue growth. The growth was offset by headwinds in our B2B technology business as we worked through our new product cycle.

Moving on to adjusted EBITDA. We remain focused on profitability. For the quarter, adjusted EBITDA increased to $6.6 million or 8% of revenue, up from $6.1 million in the prior quarter, delivering our highest quarter of adjusted EBITDA in 4 years.

Turning to the balance sheet. Our balance sheet remained strong, closing the quarter with $50.4 million in cash and equivalents and no debt.

In the quarter, we generated $2.3 million in operating cash flow. Normalized free cash flow was $5.6 million or 6% of revenue. Most of our adjusted EBITDA drops to normalized free cash flow due to the low capital requirements of our business model.

In summary, we executed well against our priorities in the quarter, returning the business to double-digit year-over-year growth, delivering our highest-revenue quarter in over 5 years, growing adjusted EBITDA to the highest level in 4 years and maintaining a strong balance sheet. There's a lot of positive momentum in the business. We look forward to reporting more progress to you over time.

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) Your first question will come from John Campbell with Stephens Inc.

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

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I just want to dig in on the expense base for a second. So I guess first, are you guys largely done with the cost saves?

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Gregory Wong, QuinStreet, Inc. - CFO & Senior VP [3]

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We are. The cost saves are fully implemented. That said, we're constantly looking always to improve that cost base.

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

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Okay, that's helpful. And then any kind of just broad sense for percent variable versus fixed within -- I guess within COGS and then maybe within just other operating expense?

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Gregory Wong, QuinStreet, Inc. - CFO & Senior VP [5]

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The bulk of our operating expenses, John, are -- outside of our media costs and COGS are headcount. And so I would say -- let me think about this.

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Douglas Valenti, QuinStreet, Inc. - Chairman & CEO [6]

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The majority of COGS have -- is really media costs. As you know, John, media margin is the first line we always manage in the income statement. In terms of the exact percentages, we'd have to look at it. But notionally, call it, 2/3 media, 1/3 other operating expenses, which is dominantly headcount. But of course, there are some other things in there like rent and facilities and those kinds of things. So -- but Greg can get you that when you guys have the after-call and modeling, we can get you the -- much more precision there.

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John Robert Campbell, Stephens Inc., Research Division - VP and Research Analyst [7]

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Okay, that's helpful. And then, I mean, I guess, just directionally, it sounds like that a lot of expense base is largely fixed, and so you would expect pretty good margin expansion just to -- as long as you get the revenue growth.

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Douglas Valenti, QuinStreet, Inc. - Chairman & CEO [8]

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Yes, no, we fully expect that top line leverage is going to be a big part of the story to continue to expand the EBITDA margin. Notionally, approximately 30% of a dollar revenue ought to drop down pretty much to the EBITDA line.

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John Robert Campbell, Stephens Inc., Research Division - VP and Research Analyst [9]

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Okay, that's what I was looking for. So, I mean, if I look at the incremental margins from the past 2 quarters relative to the year-ago past 2 quarters, I think it was like 100% incremental margins. So everything was falling through. But I guess we're lapping those cost saves. And then going forward, once we lap that, you're thinking closer to 30%-or-so incrementals?

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Douglas Valenti, QuinStreet, Inc. - Chairman & CEO [10]

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Yes, yes. Really it's the incremental, and it's in the 30s but probably the low 30s. But it's really the media margin dollars dropping into pretty fixed cost base is kind of how we think about it. And that'll be the case now through the next at least $40 million to $50 million of revenue, we think.

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John Robert Campbell, Stephens Inc., Research Division - VP and Research Analyst [11]

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Okay, that's helpful. And then last one for me. I mean, the Education business, that was, I mean, fantastic results. I know you guys have been battling pretty hard over the years there. I mean, for-profit is still 70% of that, I guess, of that vertical. But getting the modest growth, I mean, I guess you're starting to see the for-profit kind of decline to start to flatten out? Is that fair to say? Or is it -- or are we jumping the gun on that?

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Douglas Valenti, QuinStreet, Inc. - Chairman & CEO [12]

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It certainly has been a lot more stable lately, and that would be expected. It's been an awfully long time. This -- there's -- the worst -- the schools that are in their worst shape have largely been shaken out. The -- those that are left are a lot further along in their evolution and their adaptation to the new environment. But I think between 80% and 90% of our revenue with the for-profits now is on the new product set, and that product set was designed explicitly to work for them in the new environment. And then you have, of course, what we talked about, the blending in of the not-for-profits international where they're not exposed to that. So there are just a lot of factors that are coming together to hopefully continue to make that a more stable place, and we are seeing signs of better performance for the schools themselves, including those that report publicly for the most part are doing better. So I think there's -- there are a lot of good signs out there. It's still a place that's a little bit spooky for us because there's been such a difficult environment. But I think when you combine all of those factors, we certainly feel like it's a place that is unlikely to get -- it's going to be hard for it to get as bad as it was. And given the size of it relative to everything else, it's going to be hard then for it to have a big impact on us.

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Operator [13]

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(Operator Instructions) We'll go next to Stephen Ju with Crédit Suisse.

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Stephen D. Ju, Crédit Suisse AG, Research Division - Director [14]

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So I want to put you on the spot a little bit here, Greg. So you just reported a plus 19% on the revenue growth on this latest quarter that you just reported, and you're guiding for 10% to 15% growth for the balance of the year with the comps that don't get measurably all that much tougher for the balance of the year. So I'm just wondering if this is a bit of conservatism given that -- all those things that you guys have been through the last couple of years.

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Gregory Wong, QuinStreet, Inc. - CFO & Senior VP [15]

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Yes, Stephen, as you move into the -- just as a reminder, as -- the back half of the year, the March and June quarters, we do deal with a lot of the more difficult comps in those quarters. But that said, we're carrying a lot of momentum right now into the second quarter, and we expect, again, pretty good growth in the second quarter. But I would also caution that we're very early in the year. We're 1 quarter in right now, and so we're trying not to get too far ahead of ourselves right now.

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Operator [16]

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Thank you. And at this time, ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation. You may -- (Operator Instructions) We have a follow-up from John Campbell.

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John Robert Campbell, Stephens Inc., Research Division - VP and Research Analyst [17]

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A similar question on the comps in the back half of the year with the revenue growth rates. Just curious about any kind of impact from the hurricanes. I don't know if that's -- it was enough to alter the marketing spend of carriers. Anything you're hearing out there?

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Douglas Valenti, QuinStreet, Inc. - Chairman & CEO [18]

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Yes. Good question, John. And we -- it looked like we lost somewhere between $2.5 million and $3 million last quarter due to hurricane-related issues, both in insurance but also in some of our verticals. We had -- it affected our Home Services business and affected our Education business. We had a number of clients with, for example, enrollment centers down in Florida that got shut down. So there was an effect. It wasn't that large. We would expect a similarly small effect, if any. This quarter is a little residual, but it looks very little impact. And so at this point, based on what we're hearing from clients, based on we're seeing, we don't think it's having a meaningful or material impact on our outlook.

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John Robert Campbell, Stephens Inc., Research Division - VP and Research Analyst [19]

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Okay. But it sounds like you've maybe left yourself a little bit of room in case it does?

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Douglas Valenti, QuinStreet, Inc. - Chairman & CEO [20]

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We -- I think the -- as Greg said, the back half comps are a lot tougher. Because remember, last year, the first 2 quarters of the fiscal year, we were facing the loss ratio issues in insurance, and then we popped up pretty big in the second half. So I think if you assume we take -- we carried pretty good momentum into Q2 and even grow in the teens, and then in the back half we still grow at about 10%, that's well within about the middle of the range we've given you, 10% to 15%. So we're trying to be realistic. We're certainly not trying to get way over our skis, but I wouldn't accuse us of sandbagging either.

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John Robert Campbell, Stephens Inc., Research Division - VP and Research Analyst [21]

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Okay, that's helpful. And then last one for me. On the balance sheet, I mean, obviously, cash balance is growing, you're not carrying any debt. Just maybe if you can just provide us an update with kind of where your heads are at as far as capital allocation.

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Douglas Valenti, QuinStreet, Inc. - Chairman & CEO [22]

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Yes, we are -- our first priority would be to use it to invest in anything that's going to help us to continue the momentum and grow the footprint for the future and then strengthen our competitive advantages. We're optimistic about that. We're always looking at either partnership opportunities or acquisition opportunities. We have a number of big partnership opportunities in play right now at -- any number of which, if and when they close, could be super helpful and meaningful. So that's always the first priority. We do -- as you know, we did approve a buyback. Depending on where the stock is under the 10b5-1 Plan, stock and timing and volumes. There will be some use of that. There won't be a huge use, but it'll be enough of a use to have a little bit of an impact. But I'd say those are the only 2 things right now we're looking at.

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Operator [23]

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And then again, with no additional questions in the queue, that will wrap up today's conference. Once again, thank you for your participation. You may now disconnect.