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Edited Transcript of QNST earnings conference call or presentation 8-Aug-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Quinstreet Inc Earnings Call

FOSTER CITY Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Quinstreet Inc earnings conference call or presentation Tuesday, August 8, 2017 at 1:00:00pm 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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* Hayden Blair

Stephens Inc., Research Division - Research Associate

* 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, everyone, and welcome to the QuinStreet Fourth Quarter of Fiscal Year 2017 Financial Results Conference Call. Please note that today's conference is being recorded. At this time, I'd 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. Good morning, ladies and gentlemen. Thank you for joining us today to report QuinStreet's fourth 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 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-Q filings on May 9, 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 over -- the call over to Doug, 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, and thank you all for joining us today. The fiscal fourth quarter came in as expected and guided. We delivered year-over-year and sequential revenue growth, increased adjusted EBITDA and generated strong cash flow. The results overcame typical seasonal trends, which usually include a revenue decline from Q3 to Q4. We expect the strong momentum in the business to continue and to accelerate in the current quarter and new fiscal year. Revenue in Q4 was our highest in 5 years. Adjusted EBITDA was the highest in 3 years. We expect the upward trend in our financial results to continue in the new fiscal year, where we expect to deliver double-digit year-over-year revenue growth and higher EBITDA margin.

Improved results are being driven by positive momentum from the products and media strategies and margin improvement efforts of the past couple of years and by our Financial Services and home services client verticals, which now account for over 70% of company revenue. That portion of our business continues to deliver double-digit revenue growth and expanding profitability.

For fiscal 2018, we expect full year revenue growth of at least 10% and adjusted EBITDA margin of about 8%, up from 4% in fiscal 2017. We announced today that the Board of Directors has approved a reauthorization of the company's stock repurchase program for the upcoming year, which will again be targeted to offset dilution from equity compensation. Our balance sheet is strong. We have $50 million of cash and no debt.

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

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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're pleased with the solid performance in the fourth quarter, reporting results that were in line with the outlook we provided last quarter and that are continuing to demonstrate the positive momentum from the product and media initiatives developed over the past few years. We delivered our highest revenue quarter in 5 years and for the second straight quarter, we have grown adjusted EBITDA and generated strong cash flow from the business. For the fourth quarter, total revenue was $81.5 million. Adjusted net income was $3 million or $0.06 per share and adjusted EBITDA was $6.1 million or 7.5% of revenue.

Moving to revenue by client vertical. Our Financial Services client vertical represented 63% of Q4 revenue and grew 15% year-over-year to $51.8 million. We had a particularly strong quarter in auto insurance where we saw our business strengthen throughout the quarter, delivering double-digit revenue growth both year-over-year and sequentially. We expect momentum to strengthen further in that business in fiscal 2018.

Combined the businesses in the Financial Services client vertical, other than the auto insurance, grew 22% year-over-year in the quarter demonstrating the broader effectiveness of our new product and media strategies. Our Education client vertical represented 23% of Q4 revenue and declined 4% year-over-year to $18.9 million. Trends in Education are improving as evidenced by a more moderated year-over-year decline in revenue for the third consecutive quarter. Our expanded product strategy, client diversification efforts and focus on client performance are driving improved results across what is still an evolving industry in U.S. education.

Strong growth in Brazil is also contributing to more positive trends. Our other client verticals represented the remaining 14% of Q4 revenue and declined 24% year-over-year to $10.8 million. Our home services business again delivered year-over-year revenue growth, which is offset by headwinds in our B2B technology business where we're in the midst of a new product cycle.

Moving on to adjusted EBITDA. We continue to be focused on expanding profitability. For the quarter, we reported $6.1 million of adjusted EBITDA or 7.5% of revenue, up from $5.2 million or 6.6% of revenue in the prior quarter. Moving to the balance sheet. Our balance sheet remains strong. We grew our cash balance by $7.8 million in the quarter. We began the quarter with $41.7 million in cash, generated $10.3 million in operating cash flow, used $2.4 million in investing and financing activities and closed the quarter with $49.6 million in cash and equivalents and no debt.

Normalized free cash flow was $5.4 million in the quarter or 7% of revenue. Most of our adjusted EBITDA to optimize free cash flow due to the low capital requirements of our business model.

In summary, we executed well against our priorities in the quarter, delivering our highest revenue quarter in 5 years, growing adjusted EBITDA to the highest level in 3 years, generating strong cash flow and maintaining a strong balance sheet.

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'll go first to John Campbell from Stephens Inc.

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Hayden Blair, Stephens Inc., Research Division - Research Associate [2]

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It's Hayden Blair, on for John. So it looks like most of the beat this quarter, and at least versus our model, was driven by gross margin. Can you talk us through kind of what drove that, that you had to continue with those levels? And then can you give us a little refresher about structurally how you expect gross margins to trend as you scale the business?

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

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Yes. I would say that, we are continuing to focus on margin at the media margin level, Hayden, which is what is the biggest driver of gross margin, and we have a lot of initiatives in place to continue to improve that as we come out of period where we're investing heavily in media strategies that depress gross margin in order to get some of the new strategies in place. But we are now very focused on continuing that growth, but also on initiatives to continue to get a better media margin, which again -- is again the highest cost component of cost of services. The other effect, of course, was the RIF that we did back in the last part of the calendar year and the reduction in expenses on the personnel level, which are components also of gross margin. You'll continue to see that impact as we scale revenue, and we'll get greater leverage out of the top line because we'll be dropping that through a lower cost structure on the fixed cost side. So those are really the main 2 factors.

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Hayden Blair, Stephens Inc., Research Division - Research Associate [4]

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Got it. And then any other color you can you give us about your guidance assumptions, either on kind of revenue growth by segment? Or any kind of seasonality impacts, just given the revenue mix shift that you guys have had here over the past couple of years?

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

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Yes. I think you're going to continue to see Financial Services and home services being our primary revenue drivers. Those businesses have been growing now for several years at strong double-digit rates, and our outlook is for that to actually accelerate this year, not just continue, but to accelerate this year. So I think from a mix standpoint, you'll continue to see a higher proportion of our revenue from those client verticals, which I think is very healthy for the business. In terms of the pattern for the year, you should expect to see pretty typical seasonal -- quarterly seasonality, though it'll probably be more like '17, fiscal '17 than historic and that -- recall this year we had growth going from fiscal Q3 to Q4 and historic seasonality would imply that, that would be a downtrend. This coming year, we expect revenue to build throughout the year. So while we expect relatively typical seasonal patterns, we do expect Q3 to Q4 -- for Q3 to Q4 to grow again and again, for the year to look more similar to fiscal '17 than maybe more historic patterns. And again, as I said, the revenue momentum is going to likely build through the year. EBITDA margin through the quarters is likely to be pretty proportionate to revenue with that average at about 8% as we indicated in the guide. And just one reminder, our fiscal Q2, the December quarter, is always pretty soft from a seasonal standpoint.

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Hayden Blair, Stephens Inc., Research Division - Research Associate [6]

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Got it. That's really helpful color. One last one from me. Can you just remind us about the share repurchase authorization? What kind of level that is? And if you guys expect to be a little bit more opportunistic with that? Or is that just going to kind of be a steady offset of the share-based compensation?

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

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It will be pretty steady. We'll spread it out through the year. We'll seek to fully offset actual dilution that we've seen over the past year and -- but we'll also seek to do it in a way that's not disruptive or doesn't drive stock price. So that's why we'll spread it out. And of course, it'll be driven to a 10b5-1 Plan that's got levels based on volume levels subject to normal volume constraints, but driven largely by price.

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Operator [8]

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And we'll go next to Stephen Ju from Crédit Suisse.

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Stephen D. Ju, Crédit Suisse AG, Research Division - Director [9]

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Doug, I think you touched on this in answer to the last question, but looking at your guidance parameters for fiscal '18, it looks like the incremental EBITDA margins at around 37%, if we're doing our math correctly, which is the highest step up in almost a decade. So can you talk about how maybe the changing vertical exposure to, I guess, see a greater contribution from Financial Services and insurance and thus, from Education maybe affecting your margins? Or is this just purely, I should call out, just optimization of your media cost?

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

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Yes. Stephen, it's -- again, it's a couple of things. It certainly is the lower fixed cost base is having a pretty good effect, so like -- but it's also the fact that if you look at Financial Services client vertical, in particular -- particularly insurance, where we invested, as you call, pretty heavily for a couple of years to get that business back on a good ramp. That media margin -- and that's our largest business now, of course it's 60-something percent of total Financial Services, which is 60-something percent of the total company revenue. That media margin in insurance is up multiples of where it was just a couple of years ago. So I think a big part of what we're -- you're seeing is a continued expansion of media margin to healthier levels, particularly in insurance, which is now our largest business. On, again, a reduced fixed cost base both in the broader company, but another point I think that you may be picking up on I should mention is, our insurance business is also our most efficient business in the company now. Our Financial Services more broadly, I would say. In that we require a lot less expenses below the media margin line to run the business on the new product model. So there's -- well, in insurance we have both been growing revenue at an average of 15% to 25% per year for the last several years, while doubling and tripling our media margins in that business to healthier levels. We've also had been able to take the headcount expenses because of the new products in that business down by I think half. So the new product profile, which is much more technology-driven, even than in the past gives us a lot of efficiencies in the business, and we're also recovering media margins where we had invested to turn that business and which we're able to now to come back from and on a lower fixed cost base. You're seeing the effects of all of those factors.

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Operator [11]

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(Operator Instructions) Ladies and gentlemen, that does conclude our question-and-answer session, and that will conclude our QuinStreet Fourth Quarter of Fiscal Year 2017 Financial Results Conference Call. If you would like to listen to a replay of today's conference, please dial 1 (888) 203-1112 and enter access code 2038071. And thank you all for your participation. You may now disconnect.