QuinStreet Inc (QNST) 2011 Q1 法說會逐字稿

Thank you, and good afternoon, ladies and gentlemen.

Thank you for joining us today as we report QuinStreet's First Quarter 2011 Financial Results. This call is being simultaneously Webcast on the Investor Relations section of the Company's Website at www.quinstreet.com.

Joining me on the call today are Doug Valenti, CEO, and Ken Hahn, CFO of QuinStreet.

Before we get started, I would like to remind you that the following discussion contains forward-looking statements that involve risks and uncertainties, and that QuinStreet's actual results may vary materially from those discussed here.

These risks and uncertainties are discussed in our most recent SEC reports -- notably, the Company's 10K filing with the SEC on September 13, 2010.

Forward-looking statements are based on current expectations, and the Company does not intend to, and undertakes no duty to update this information to reflect future events or circumstances.

Planned conference attendance over the coming quarter include the JPMorgan Services Conference in New York City, the Credit Suisse Technology Conference in Phoenix, the JPMorgan SMid Conference in New York City, the UBS Global Media and Communications Conference in New York City, and the Citibank Internet Conference in January, in Phoenix. We look forward to seeing many of you at these conferences.

Now, I will turn the call over to Doug Valenti.

Doug, please go ahead.

Thank you, Erica.

Hello, everyone, and thank you for joining us today.

We are pleased to report that fiscal Q1 was another good quarter. It was our fourth consecutive quarter of revenue growth of 30% or more, and it kicked off our ninth consecutive year of strong growth and profitability.

Revenue for the quarter was $103.6 million, up 32% versus Q1 of last year. Revenue in each of our client verticals grew, and we made good progress across the Company, developing our media, technologies and client base for the future.

Adjusted EBITDA margin for the quarter was 24%, above our annual target of 20%, demonstrating the leverage in our model, and still inclusive of significant spending on initiatives that we believe will lead to continued strong growth, leverage and competitive advantage in coming months and years.

The 24% margin also reflects progress that came faster than our ability to reinvest the surplus generated productively and prudently on new opportunities, at least in the short term. We still have plenty of growth opportunities in which to invest, and we will continue to spend aggressively on them.

Organic revenue growth was 24% in the quarter. Acquisitions continue to be important to the development of our vertical businesses over the long term. Their early contribution is particularly impressive and promising, given that we are still quite early in our programs to develop most of those properties.

Now, by client vertical -- Education revenue increased 5% overall, and was up 20%, excluding the effects of the previously disclosed change in marketing spend from one of our largest clients.

We remain enthusiastic and confident about the Education-client vertical. It is a large and highly attractive market, and we have great and improving advantages in it. As a reminder, the total market size of currently applicable education marketing spend is estimated at over $3 billion per year in North America alone.

As with all of our markets, it is still early in the development of Digital Media Marketing and Education, and in the development of the best visitor experiences and client results. We are still small versus our potential in the Education vertical.

We are continuing to see record demand from Education clients. During the quarter, we worked hard to develop our media to meet unmet client budget in sustainable high-quality ways, and make good progress. Those efforts are, of course, ongoing.

The regulatory environment still appears to us to be driving a flight to quality, as clients seek to work with strong partners, capable of managing compliance and able to deliver, at scale, new-student inquiries that are well matched to their programs, and that convert and persist at high rates. Those requirements play right into our strengths, so we continue to benefit from these trends.

To meet excess demand throughout the quarter, we focus on expanding our media capacity; on increasing media yields and match rates by deploying new technologies and algorithms, and by broadening our client base. We continue to project double-digit growth in Education going forward; and, as a reminder, we finally lapped the large-client effect this month.

Revenue in our Financial Services client vertical grew 61% in the quarter versus a year ago. Financial Services was our largest client vertical for the third quarter in a row. We estimate the addressable financial-services market to be almost $15 billion per year, just in the markets or sub-verticals we currently serve, and just in North America.

Our efforts in Financial Services are, of course, much earlier than in Education. Digital Marketing and Media and Financial Services are also less well-penetrated and developed than in Education. We remain confident in our prospects and momentum in the Financial Services vertical.

In our other client verticals, including Home Services, Medical and B-to-B, revenue grew 57% year over year. These markets represent another $20 billion in annual market potential, again, just in our current footprint and just in North America. While these client verticals are still very early for us and a much smaller piece of our overall business, we are excited about their progress to date, early metrics, and scale; and, most of all, about their long-term potential.

As Ken is fond of saying, "We remind you that Financial Services, just a few years ago, was part of "Other."

In summary, we are pleased with our financial performance, execution and progress in the first quarter. We delivered our fourth consecutive quarter of revenue growth of 30% or more, and made good progress developing our client base, media and technology capabilities, and advantages for the future. There is still much to do. We are still very early. And this is an enormous opportunity.

Total applicable marketing spend, just in our current footprint and just in North America -- to do the math for you -- is over $40 billion per year. And, while we do not believe that we need to enter any new verticals or markets to meet our long-term growth objectives, we likely will.

The exact rate at which marketing and media are digitized in our verticals, and at what pace we gain share of that digitized pool is uncertain. But digitization, led by the Internet, is surely and relentlessly coming, and models and spending will adapt. As they do, we expect to continue to gain share, just as we have for the past nine years.

We are, then, confident in our long-term guidance of 15% to 20% growth, or more, for as far as the eye can see.

With that, I'll turn it over to Ken, who will review the financials in more detail.

Ken?

Thanks, Doug.

Hello. Thanks again for joining us today.

As Doug said, and as you've seen, we've had an excellent quarter across the board, posting 32% top-line growth over the first quarter of fiscal 2010. We saw healthy growth in each of our client verticals. We also reported strong adjusted EBITDA margins. This quarter, we were well above our annual target of 20%, achieving 24% margin for the quarter. That's $24.6 million of EBITDA. In short, we had great performance, no matter how you measure it.

But before I get into the quarterly details, I wanted to review just how consistently we have delivered results over many years, with an amazing lack of exception. We are a relatively new public company, but we are certainly not a new company. It is important to understand our historical consistency to fully understand both our current results and our trajectory.

Over the past eight years, since our first year of profitability, our compound annual growth rate for revenue has been 38%. In our toughest year during that time period, fiscal 2008, we still grew 15%. Our context for that 38% compound growth rate over eight years is a huge market and great operating team that runs deep within the Company.

During that same period, our annual EBITDA margin ranged from 19% to 23%. And, again, we delivered without exception each and every year. Plus, I should also point out that those EBITDA margins included a lot of investment in initiatives for future growth. That's why we've grown as much as we have in absolute terms, and grown with such remarkable consistency.

So, while QuinStreet is still new to public investors, we have performed for our long-term investors with remarkable consistency. We have faced many challenges over time in our rapidly evolving market, and have performed and delivered throughout. We expect to continue to do so in today's environment and are, in fact, better positioned for ongoing performance success than we have been in the Company's history.

Going forward, our plans remain the same from a financial perspective. That is, we plan to, one, continue to deliver upon our operating results. We forecast that we will maintain our 20% annual EBITDA target and 15% to 20% top-line growth or better, for many years to come; two, generate significant cash from operations while doing so; three, continue to expand our leadership position and growth potential in a large, but still early stage growth market; and, four, thus continue to create shareholder value.

Moving on the quarter's results -- we surpassed $100 million quarterly revenue mark for the first time in our history, delivering $103.6 million top line. On a year-over-year basis, we grew our Financial Services client vertical 61%, our Education client vertical, 5%; and our other client verticals, 57%.

Now, more details on each of our client verticals -- the Financial Services client vertical represented 48% of Q1 revenue. And revenue in this vertical grew 61% to $49.8 million. This is the third consecutive quarter in which Financial Services was our largest client vertical. And we expect that to be the case for the foreseeable future.

We grew each of the markets we focus on in the Financial Services vertical, including insurance, mortgage, credit cards, and deposit accounts. We are encouraged by the progress we are making with some of our recently acquired media properties such as Insure.com and Insurance.com, which are driving new traffic and expanding our media reach.

Our Education client vertical, which represented 41% Q1 revenue, grew nicely, with revenue of $42.6 million, up 5% over the prior year's first quarter, and inclusive of the reduced year-over-year volume from one major client, as we've discussed in the past. Excluding that client, our Education client vertical grew 20% in the quarter. As a reminder, we lapped that particular client-decline this month, and expect to post higher growth in this vertical over time, as a result.

So we delivered healthy Education growth. Though skeptics -- mostly people who do not understand what we actually do for educational clients -- said that surely we could not. By the way, we'll grow Education again, new quarter, and project double-digit growth in our Education client vertical for the March quarter, after we have fully lapped the one client decline.

So I think we've covered, with our recent results, plus our outlook shared here, and as further described on our call a couple of Fridays ago, that QuinStreet will continue to do well in the Education client vertical for the foreseeable future.

For our other client verticals, which include B-to-B, Home Services and Medical, revenue represented 11% of our fiscal Q1 total. Revenue from these client verticals grew 57% during the quarter, to $11.2 million. We remain focused on investing in these other verticals, as we believe each represents an attractive growth market over the long term.

In the quarter, as in the last three quarters, we had no 10% customers.

Moving to the cost portion of the P&L, the cost of revenue and operating costs -- I will provide you the results, excluding stock-based compensation, amortization of intangibles, and depreciation, because that's how most of you model our company. Note that depreciation is less than $1 million per quarter.

For those of you who are interested, we also break out the stock-based-compensation charges, depreciation, and amortization by income-statement line item in the supplemental data sheets, available on the front page of the Investor Relations portion of our corporate Website. So you can evaluate our costs including or excluding these items as you desire.

Our cost of revenue was $66.9 million in the first fiscal quarter, representing a 35% gross margin. As a reminder, our cost of revenue represents all of the costs used to produce our measurable marketing results, including the media and personnel costs.

Moving on to operating costs -- product-development costs were $4.7 million in the first fiscal quarter, or 5% of revenue. We continue to invest in technology that expands our competitive advantage; and, as you might know, more than a third of our employees are engaged in technical and engineering roles. Sales-and-marketing costs were $3.5 million in the first fiscal quarter, or 3% of revenue. And general-and- administrative costs were $4 million in the first fiscal quarter, or 4% of revenue.

Note that the large majority of the costs in each of these departments is personnel costs, with the exception of G&A, which also includes professional fees and insurance costs.

From a trended standpoint, total OpEx spending has remained the same, at 12% of revenue for the first quarter of both fiscal 2010 and fiscal 2011. Our business model continues to scale.

On the EBITDA line, we invested to develop new media, and also deploy investment expenses on nascent verticals and technology projects. We manage an EBITDA-margin target of 20% on an annual basis; and, while doing so, invest in expense items classified both in cost-of-revenue and operating costs.

It is important to note that we can incorporate in the additional public-company spending into our operating model; and our annual EBITDA target of 20% remains the same as it has for nine years now -- supporting our growth initiatives while delivering consistent profits and cash flow. As I noted earlier, we exceed that annual target for this past quarter, achieving 24% EBITDA margin for fiscal Q1.

We are still relatively new to the public market, so we want you to understand why we use our 20% annual EBITDA target. We believe that producing a healthy level of profitability while investing in multiple different growth opportunities to deepen both our competitive advantages and market opportunities is the right strategy for our shareholders. That strategy, we believe, maximizes shareholder value, given our position as a leader in a very, very large, but still early market of measurable marketing results on the Internet.

Moving to taxes, our GAAP effective tax rate for the quarter was 47.2%. For your modeling purposes, a sustainable adjusted effective tax rate is 42%, or slightly lower, after removing stock expense -- that is removing the effect of FAS 123r. Note that for Q1, the actual adjusted effective tax rate was 41.0%.

Regarding shares outstanding, as you see in our press release for the quarter, our fully diluted weighted-average shares totaled 47.1 million, down slightly from the prior quarter. The marginal decline in average stock price resulted in less option dilution during the quarter, under the Treasury Stock Method. For the near term, I believe that 49 million diluted shares is still a good figure to use in your models for the year.

Our GAAP diluted EPS for the quarter was $0.16. Our adjusted EPS for the quarter was $0.29. Adjusted EPS adds back two items only -- stock-based compensation and amortization of intangibles - inclusive of tax effect. For our adjusted net income and EPS computations, we plan to continue to limit adjusting items to stock-based compensation and amortization of intangibles. It was a very good quarter from an EPS standpoint, and we are quite pleased with the results.

On the balance sheet, our cash balance at quarter end was $127.3 million, down a net of $28.5 million, from the prior quarter. You can see all the details on the cash-flow statement in our earnings release. But at a summary level, we generated $8.8 million in cash from operations. We used $34.1 million for acquisition-related activities -- primarily the acquisition of Insurance.com. And we used $1.9 million for financing purposes, primarily related to payments on historical seller notes.

The total debt decreased slightly to $92.2 million, due primarily to payments on seller notes.

With regard to cash-flow metrics, fiscal Q1 normalized free-cash flow, which is free-cash flow, excluding working-capital changes -- was $15.1 million, or 15% of revenue. And, as always, we look to normalized free-cash flow as our primary cash-flow metric to remove the effects of current-quarter operating-account fluctuations and drive any underlying cash-flow characteristics of our model, after minimal CapEx.

Aside from taxes, the vast majority of our EBITDA drops down to free-cash flow. The business does not require large amounts of capital expenditures.

I encourage you to review the trended results and the detailed computations of historical operating cash flow, free-cash flow, and normalized free-cash flow, that we make available. We want you to understand the cash-generating capacity of our model. We've provided the detailed metrics and supplemental data on our Website. And we also include numerous other trended financial details beyond the various cash-flow measurements.

To summarize, before opening up for Q&A, our historical performance, for many years, has demonstrated strong and consistent revenue growth, exceeding growth rates for the vast majority of companies in our sector.

We have also demonstrated remarkable consistency in our EBITDA and cash-flow results over many years. These results were achieved inclusive of significant investments to create new growth opportunities and capabilities that have enhanced our leadership in online measurable marketing.

Our first quarter of fiscal 2011 was a very strong start to what we forecast to be a solid fiscal year 2011 for QuinStreet. We are positioned to continue to demonstrate strong and consistent revenue growth, deliver on our operating results, generate significant cash from operations, continue to expand our leadership position and, thus, continue to drive shareholder value.

In each of our three quarters, now, as a public company, we have extended these long-term performance successes by delivering what we said we would deliver, and then some. You just saw us do that once again, with this quarter's results.

With that, I'll turn the call to the operator, who will moderate Q&A.

Thank you.

(Operator Instructions)

Our first question comes from Imran Khan, from JPMorgan.

And your line is open.

Yes, hi. Thank you very much for taking my questions. Congratulations -- good quarter.

Two questions -- one, more of a philosophical level -- I think, Doug, you always talk about that you manage the business with 20% EBITDA margins; and, this quarter, it came in higher than that -- 400 basis-points-plus higher than that.

So the question is if you start managing the business for 25% for EBITDA margin, is that slowdown your revenue-growth [titles]? What's the rationale for managing the business for 20% EBITDA margins versus 25% EBITDA margins? So that's question number one.

And question number two -- on the Education vertical -- and, obviously, there's a lot of discussions for for-profit education -- could you -- and I don't know if you talked -- I joined the call a little late -- but if you -- please, could you give us some color on what kind of opportunities you are seeing on the not-for-profit education side and -- or schools like Kaplan and things like that? So that would be helpful. Thank you.

Sure, Imran.

Let's talk, first, of course, about the EBITDA-margin question. And let me answer in two ways. One, let me answer your kind of philosophical question. There's nothing magical about 20%, except that it met the kind of criteria we were looking for back when we established it many years ago, which was we wanted to be able to generate a good return on revenue; we wanted to generate enough operating cash flow to serve our needs -- to more than serve our capital needs; and we wanted to have plenty of room to invest aggressively throughout the income statement and future growth and capabilities, and to invest surplus.

So we could have chosen 25% as well as 20%. I like to think that, by choosing 20%, we were able to take that extra 5% and invest productively enough to grow more quickly or develop more quickly. I think we do. But there's certainly nothing more magical about it than that. And I know you know that.

We have the capacity -- if we needed to generate, in the short term, dramatically higher EBITDA margins, we would have no issue doing that. And it could be many, many -- several tens of points higher than we do. So I think that's important for everybody to understand -- in our current mix of business. And whether we -- even if our mix of business changes, even dramatically, we can do that.

In terms of the overshoot this quarter -- let me talk a little bit, philosophically, about how we think about that, because I think it's important. First of all, we have not changed our long-term target of 20%. We believe, as Ken said, shareholders are best served by our investing aggressively in growth in this very big and very early market, much better than they are by margin expansion at this stage. That doesn't mean we won't expand margin in time and over time and, certainly, in the long term.

In terms of specific reasons for overshooting this past quarter -- mainly, it was progress on the revenue line and on the margin -- and on margin and yield initiatives. They really came faster than our ability to re-deploy that surplus in ways that we felt would be productive and prudent enough to meet our standards. So it's kind of a short-term phenomenon. And we're working hard to find opportunities and develop opportunities, because we have many that will meet those standards. It's just that we didn't -- we're not going to throw the money away.

Second point about the overshoot, I think, is that it doesn't mean we don't have plenty of opportunities in which to invest. We do. It does mean that we're going to continue to be selective and deliberate about where we invest. And, then, I guess the third point I would make is, on the margin, in this economic and regulatory environment, we are a little bit more cautious than we might be otherwise. So our standards for investment are higher than they would be in a more normal environment, as you would expect. And that accounts for a bit of the lag.

But, to be clear, we didn't reduce expenses. We didn't do layoffs. We just overshot. And we're just reinvesting that surplus.

Does that answer your question?

Yes.

And, then, the question regarding the education space (inaudible)?

Oh, Education. I'm sorry -- sure.

Yes, we have -- non-profits are representing an increasing fraction of percentage of our Education business. We are rapidly expanding our education footprint. And non-profits are coming in at a pretty high rate, largely because many of the non-profits, with some real leadership schools, now have the ability to do online education, because the technologies in curriculum-management systems are available to them. And so we're seeing a fairly large number of non-profit schools offer online degree programs that could not do so just a few years ago. And, in doing so, they're leveraging their kind of fixed-cost base and replacing fee income and loan income that they are no longer getting from the government.

So we are seeing an acceleration of that. We are signing them at a rapid rate. They are becoming quite meaningful in our Education mix. And we are continuing to expand into that portion of the education market, as well as others, while continuing to serve and build our traditional for-profit post-secondary group. We are seeing it coming much more quickly than usual. It is a priority for us to make sure we get them signed, because it is a continuing hedge against disruptions in the for-profit sector. So it is something that we're working on and something that we're making good progress on.

Great. Thank you very much.

Thank you.

Thank you.

Our next question comes from John Blackledge of Credit Suisse.

Your line is open.

Thank you. Nice quarter, guys.

A couple questions -- first thing, on Education, which was better than I had -- just wondering, maybe, what the key drivers were. Was it increasing demand from new and/or existing clients? And, then, if you could, just talk about the pricing environment and the dynamic between pricing and lead volumes in the quarter and as we head on throughout the year. And, then, I have some follow-up.

Sure, John. Thanks for that.

The key drivers of the Education growth were -- it was primarily more volume from existing clients. All of our large clients are asking for more volume. They did last quarter. They are this quarter. And they're projecting to do so for the next few quarters. And we talked about that flight-to-quality phenomenon before. But we are seeing that in significant ways. Even with clients who are announcing, more broadly to the market, reductions in their overall expectations, we're seeing increases in their requests from us as they consolidate. And we have been only beneficiary of consolidations from the large clients to this point.

We are seeing continued good rates of signings of new clients -- both non-profits that Imran asked about, as well as better, deeper penetration of the medium-sized and small-client universe, where we really are way underrepresented and under-penetrated , and where we're having a lot of success. So, on the demand side, that's where it's coming from.

Of course, in our business, as you know, the demand side is a small part of the equation. It's more about our delivery capacity and our media capacity. A lot of the growth continues to come from initiatives that we've had underway for, in some cases, several years, to continue to develop more traffic on our targeted sites, and to continue -- as importantly, to increase the yield of the max rates from those sites so that we get more matches or inquiries out of the same traffic and -- and this is the -- is a double-positive -- as we get those better matches, better results for the clients.

So that's the -- that has been ongoing. It continues to be ongoing. I would say, right now, we have more momentum from those initiatives, and more of those initiatives underway than we have in Company history. So we are very excited about the combination of media yield and technology initiatives to continue that progression.

In terms of pricing, we are seeing some increases in pricing, as clients in our network, which is our owned-and-operated [ad-]publisher network, is more and more dynamic, so that if a visitor matches a school, then that school shows up higher if it pays us more, essentially. That's a relatively new characteristic of our network. It's one of several of those type initiatives we have underway. That is resulting in some increases in pricing -- more than we've seen in the past three years -- over the past quarter.

We continue to see that coming. I think it's natural as schools, again, choose to stop doing -- or they're -- as they choose or are forced to do less-effective or efficient marketing spend or programs, and want to consolidate around ones that are more compliant and get better results, with better matches with students, that better persist. They keep coming to us. And so as that demand increases rapidly, our supply does not increase as rapidly. And so, quite naturally, there is some upward pricing pressure.

We have not, and we will not have kind of across-the-board price increases, but we are seeing price increases as clients come and ask for a lot more volume. And we feedback we can't deliver it to them at that price either because of where they show up in our mix, or because we can't afford enough media. And then they negotiate to us to give us pricing that allows us to get the volumes they need, as long as is makes sense for them. So we are seeing a positive dynamic on pricing.

Volumes, also, though, continue to increase as well. In terms of the mix for the growth in, say, Education, I don't really know what -- of the 20%, I don't know what the breakout would be. It was more volume than price, certainly.

Right, Ken?

Of the 20%, yes. Yes.

So that was -- and I think that's going to be a dynamic we're going to continue to see because the -- what schools are doing is they're having -- they're going to have to get more efficient; they're going to have to get more effective as the Department of Education seeks to discipline but not destroy this industry -- and schools, therefore, do have to get better -- we're going to get more and more of the spend, because our marketing works better.

We get a better cost of acquisition of students that convert at higher rates and persist at higher rates. And so I think we're going to continue to see that. And it's actually being -- interestingly, it's being created, largely, by the regulatory environment.

But let me say again -- all of our large clients are asking for significantly more volumes, and are projecting that that demand is going to continue in future months and quarters.

That's great. That's really helpful.

And, then, just one follow-up on financial services, which was, again, much better than I had expected. I am assuming insurance drove much of the upside. I'm just wondering if you can give us a little detail on the insurance segment and, also, just give us what the organic growth was in Financial Services in the first quarter of 2009. And thank you very much.

Sure, John.

All of the verticals in Financial Services actually grew year over year. And, while Insurance is our largest Financial Services vertical, the others are relatively big as well. So I would say the answer is yes on an absolute basis. Certainly, more of the growth came from Insurance because of its size. But all of those verticals did grow. The dynamics in Insurance are good. We continue to advance our offerings there to continue -- we continue to offer clients better and better access to more targeted traffic that they can bid on, and make sure that those bids result in high-quality application and customer signings and good costs.

So that is a strong business. It's still quite early, really, in terms of the overall market potential. And we're just making very good progress because we continue to refine and add capacity both on the media, as well as on the match rate and on the segmentations for a more successful bidding side of that equation. I think our strengths, technologically, from a media standpoint, and our owned-and-operated properties, as well as our client base and relationships are accelerating; and we're very pleased with that.

So we're excited about Insurance -- about the progress in Auto, Life, Health, and about the progress, frankly, in Credit Cards, Deposit Accounts, and Mortgages, where I think we're doing well despite -- in a more difficult macro environment.

In terms of organic growth in Financial Services -- about the same as the Company overall; we looked at that, and that [24% to 32%] ratio, plus or minus a point, literally, would apply to Financial Services in terms of organic and inorganic growth.

Very good. Thank you, guys.

Thank you, John.

Thank you.

Our next question comes from Justin Post of Bank of America Merrill Lynch.

Your line is open.

Thanks.

I think people are pretty comfortable that the -- your clients will buy high-quality leads. Could you comment a little bit more on the traffic side to your Education sites -- what you're seeing there? Do you think there will be any regulatory impact, as far as people's ability to get loans on traffic? And, then, what you're seeing in the markets -- your ability to acquire good traffic right now -- either a few partners, or just buying Web properties? How do you see that now?

Sure, Justin.

And, clearly, the -- we're seeing it today -- the more important driver of our growth rate is going to be that kind of media development and traffic, as you're pointing out.

We have a lot of initiatives and a lot of activities underway to continue to grow our media for traffic base and to continue, again, to increase the yields of the traffic we have. As I said before, we have more of those initiatives making more good progress than we have in the Company's history. It's being led by our increasing capabilities in our owned-and-operated sites, which has been an initiative we've been focused on in a much greater way for about the last year or so -- a little over a year. But we're seeing very good results there.

I think our -- the average growth rate in the last report I saw, for our owned-and-operated properties, year over year, was between 15% and 20%. That's enormous leverage for the business, obviously. And that's just the growth in traffic.

In terms of the -- the other side, as I said, is the increase in match rates and yields. And, again, that's been a technology, as well as merchandising, initiative we've had underway for quite some time. And we're seeing extraordinarily good results there; and, partly, from our expanding client base, so that when we do have a visitor, we're giving them more options -- or we have more options for them to match, including some of the non-profits, which increases our yield.

And we have -- we just launched about our third generation of matching technologies, and we're about to launch our fourth, which is going to continue to refine the parameters we use to make sure that as a visitor comes through, we put the right school in front of them at the right time in the flow. And that is, as we've -- in our pilots and testing, the increases in yields on that can be anywhere from 20% to 40%. So we are very excited about those initiatives -- about what that's going to give us.

We are not seeing it more difficult to get traffic. I guess the only place where I would say it can -- so, on the publisher's side we continue to have a good rate of signings for publishers, and good access to those publishers. And we're seeing a lot of publishers sign up with us. We actually have initiatives, as well, to expand our publisher base to a broader segment of the media, to content syndication. Now that we do have great media capabilities, that's opening up a lot of traffic to us that we didn't have before -- in other words, large sites where we can provide content to them to help them develop a section, say, on education. And, then, revenue share from that is a big initiative here, and it opens up a lot of new traffic for us that we haven't been able to access before. So that's an exciting part of what we're doing.

I'd say the only place where it continues to be a little bit more difficult, just because of pricing -- but we are making good progress, because we've had a project and particular hire to help us with this for over the past -- for about the last year and a half -- is in PPC. Clicks continue to be more and more expensive. Interestingly, though, over the past couple of quarters, we've increased margin there, but it's because we've put a lot of effort into development of our techniques -- into the refinement of our technologies, and into -- and the increasing match rates give us that -- that I talked about before -- giving us a lot more leverage there.

But, in general, we certainly -- we expect we're going to continue to make good progress on the media side and more than enough to meet, certainly, our projected growth and may be able to exceed that. I do not see that being in the way of us continuing to be able to meet the growth rates we've projected.

Okay, great.

And, then, on the other revenues, you mentioned a comment about, "eventually breaking out something out of there." Just what is your largest driver right now, as far as vertical, and any timeframe on when we might see another vertical?

That's a good question.

The ones that are most promising -- and, again, I think that we should -- we don't know when those are going to inflect in a way that's going to be really big. But, again, they're about $50 million in total now. So they're not small.

But in terms of ones that are going to be truly meaningful when we break out, I think the most promising ones over the next couple of years -- so not in the next couple of quarters, but the next couple of years -- are probably Medical and B-to-B Technology.

We have a lot of great traffic and media in B-to-B Technology. We just reorganized in a way that I think is going to allow us to make better progress, faster, there; and those markets are robust. And it's really just a matter of execution. And I think we have reorganized to execute better, faster, than we have been for the last couple of years -- and that, of course, is the Internet.com portfolio. We have a lot of great traffic there. But it was -- but there's a lot of work to be done to get that traffic into our condition to be able to monetize. But we are investing a lot of effort there. And, again, that market is good.

The other would be Medical and Health, where it's pretty green field. There just isn't a lot of measurable or vertical marketing media, other than display, going on there. Of course, WebMD does a phenomenal job on the display side. And there's a company called QualityHealth, which is the largest on the measurable side. But they're not that big, so not a -- no big players there. We expect to be the big player. And it's very promising. But we're early. And so I think it's a matter of us getting our feet under us and continuing to execute there.

So, again, I think those two, over the next couple of years -- and neither are challenged by the economy, really -- are the most promising. The others that I think, in the long run, will be quite big, but are more challenged in the near term, are Home Services, where we have good contribution, but relatively low growth rates, but a very promising market, and then small to medium-sized business services. And those two are quite challenged by the credit markets and by the economy.

So I would say we like them a lot. The metrics are good. Those metrics show us a path to scale. But in the near term, I wouldn't expect high growth rates out of those two. So, again, most promising is continuing to be, from my perspective -- either be Tech and Medical. But I think the growth, over the next couple of years, will be driven, primarily, by Education and Financial Services.

I appreciate it. Thank you.

Thank you, Justin.

Thank you.

Our next question comes from Bill Warmington of Raymond James.

Your line is open.

Good afternoon, guys. Congratulations on a nice quarter.

Thank you, Bill.

Thanks, Bill.

I wanted to ask, first off, whether you guys are seeing any benefit from Google Instant -- whether that's been a contributor to higher volumes.

Not perceptively. We haven't perceived it. It doesn't mean it's not there. We just haven't been able to put our finger on it as of yet, Bill.

Okay.

And, then, you've talked about how you're seeing very strong demand for Education-related leads. I wanted to ask you whether you've actually seen an improved ability to convert those leads in this quarter, because it sounds like you're building up the media. Are you starting to see better traction on that already, or is that still to come?

We are seeing improvements in our ability to convert those, because we continue -- we have made good progress this quarter, although it's still early in the progress we believe we're going to make in our matching -- in our latest version of matching techniques and technologies.

Okay.

And, then, I wanted to ask about what properties you -- a sampling of some of the properties you guys acquired this quarter.

Oh, that we acquired this quarter?

Yes.

The largest, of course, is Insurance.com.

Right.

And I don't -- do you have the lists?

Ken might have the list in front of him.

I do. Let me find it. The rest were much smaller.

The rest were smaller, as you can see from the numbers.

As he's pulling that out, do you have another question while -- we're digging that out, but we'll get it for you.

Okay.

Yes, I wanted to just touch base on the M&A pipeline and see how that was in terms of opportunities that you guys are looking at, and then also in terms of pricing that you might be seeing, of the acquisitions.

Sure.

We continue to be very active in looking at potential acquisitions. The pipeline is quite robust. It's big. It's moving at about the rate it typically moves.

In terms of pricing, we're not seeing any particular dynamic one way or another. It's a pretty inefficient market. There are only so many buyers for a lot of these assets. And, every now and then, something will go for a big price. I thought, for example, that NetQuote and CreditCards.com went for big prices, at least versus what we were willing to pay. And, then, every now and then, we'll pick something up that we think is at a really good price for the asset value, short and long-term. I think Insurance.com is an absolute case of that.

But I would say that there's no big trend lines one way or the other that we're perceiving. And we still are actively looking. We're going to continue to do what we always do, which is we build a cash-flow model and we won't drop the discount rate below 20%, and we won't pay more than -- more than about, I guess, the upper end of the exit multiple range is about eight times on an EBITDA exit. But we're pretty disciplined about it.

We'll continue to do it that way, so it's hard for us to -- sometimes we get asked about multiples. And multiples are kind of meaningless to us because we run our own cash-flow model and sometimes that's a low multiple and sometimes that's a high multiple, depending on what we can do with the asset.

Ken, did you see the sites? Do you have the --?

I'm doing a computer reboot. I have it with me, but I (inaudible) --

So we may have to -- we will try to get to that before the call is over.

But the larger was Insurance.com.

Yes.

Okay.

Now, I wanted to ask about how the integration of Insurance.com has been going. I know that you're using the site in a very different way than the previous owners had been using it.

Yes.

And you would -- if you just look at the performance within Financial Services, it would probably support that you guys have made a pretty seamless integration there. But I just wanted to confirm that that was the case. And has it -- or has it started to contribute in the quarter, or is it still just ramping?

Yes, the integration has gone very well; much better than we projected. We picked up business that we assumed we would lose. And it is contributing. And it's well ahead of our investment model. And, by the way, kind of all of -- we could say all those same things about Insure.com.

Yes.

So, we have a very strong operating team in Financial Services, generally, under Scott Mackley, as well as in Insurance. And Tim Stevens, who is our Head of Corporate Development, just does a phenomenal of preplanning.

By the time we sign a deal, we have a full integration-and-transition plan in place that's been completely vetted with the operating folks. And so I think it's a combination of good planning and great execution. But, yes, those two have gone very well. Insurance.com is doing very well for us.

Now, we expect it to ramp considerably from here. But versus our first-year expectations, we're doing quite well and, again, are ahead of what we projected -- of where we thought we would be.

That's true for Insurance and Insure.com both.

And I think, an incremental point -- and you said it -- but to say it directly -- that's in comparison to our first-year model. One of the big things that's important to understand about the media sites that we buy is that performance tends to get much better over time. So, really, some of our most successful acquisitions from a financial-models standpoint, than the ones that we've had the longest -- not each and every time, but by and large, the longer we own something, the more yield we get out of it. So early returns on those are great -- I mean, very, very successful acquisitions.

Yes, it's been good. And that was the bulk of it, again, last quarter, was Insurance.com -- but still a good pipeline. We'll continue to hold our standards quite high, but we're always looking. We're looking at [media] acquisitions to strengthen our owned-and-operated portfolios we've always talked about. We're looking for acquisitions that'll allow us to accelerate the development of existing verticals, and to help some of those existing verticals break out, if that's something that's kind of -- can be facilitated, just like SureHits helped us as we were developing Insurance. And we're looking for broadening our footprint. That is the third priority, but it's still something we look at.

I probably see myself -- I mean I'd say one to two acquisition opportunities every couple weeks that are associated with the broadening of the footprint. So those, of course, we have the highest standards for because they are, by definition, the most risky. But we think it's important to keep our head up and to not miss anything as it comes through.

I appreciate the insight. Thanks.

Thanks, Bill. We'll get those names to you in a second.

Pulling up right now.

And thank you.

(Operator Instructions)

And our next question comes from Mark May of Needham & Company.

Your line is open.

Thank you; I had two, please.

First, last quarter, I believe you indicated that there were supply constraints in the EDU Vertical. I wonder if maybe that's a dynamic that you continued to see in the third quarter. And, then, secondly, will the new year also result in a change in the way that you worked with your Education clients, such as a need to change aspects of the contract terms and/or -- on the consumer side, the type of information that you collect from users? Thanks.

The last part of that, again, Mark, you said -- the second part of that question was, "Do you expect the ranks to change the way we work with clients?" And what else did you ask, there? I'm sorry.

Change the way -- such as the need to change aspects of the contract terms with some of your EDU clients and/or, on the consumer side, maybe the need to collect different types of information from your users?

Okay -- good question. I got you.

In terms of supply constraint, yes -- I mean, we are always primarily media-constrained. I think 85% to 90% of the Company's history, we have been -- our growth has been constrained by media, not by clients. And that's because of what we do. We deliver inquiries at a price that we know, and the clients know, generally -- converts at a rate that gives them a good marketing effect. So it's a channel that they will spend more on, as long as we can put more in it and get -- and so we tend to be supply constrained all the time.

So most of our history and most of our effort day-to-day is developing supply; and that's not that that supply is constrained to the people on out there. The supply is constrained because we have to get access to the media, and then sort and sift and segment that media, and put the right offerings in front of them so that they match. And so we don't think it's constrained by way of people looking for schools. We do think it's constrained in terms of how much the digital media is available to us; how much of it is targeted enough; how much of it we put enough effort into testing, sorting, segmenting, sifting. And that's an ongoing process.

So we think there's plenty of supply out there. I would say that the supply constraint is more one of execution than it is of kind of pure supply.

In terms of the DOE -- we have had those conversations with clients and, generally, the answer is it does not appear that the regulations are going to change the way we're working with these clients materially. There are kind bits and bytes of change. For example, there are some clients who have interpreted the regs -- or they're interpreted that certain -- leads from certain sources, particularly kind of external call centers that help you with -- that help folks fill in lead forms -- are too risky under the new regs. And, then, other clients have said that they don't read them that way, and technically and legally, they factor it to not read in that way. And that is a source we have. And so some clients are not wanting leads from that source, but we're more than able -- it's not a huge portion of what we do -- and we're more than able to do it -- replace that demand for those clients with other sources.

In terms of other contract terms other than that, no. I mean, the regs clearly state that clicks and contact information and, therefore, leads, are allowed. And, in fact, the Department wants students to be better matched. And so content-driven matching with clients, I would say, not only is not not-allowed, but I would say is completely within the spirit -- I mean, it's not -- it's not not-allowed, but it's also completely within the spirit of what the Department is trying to achieve in the schools. The leading schools perceive it that way as well.

In terms of consumer side, it probably will have an impact there, in a couple of ways. Let me give you some examples of how it's impacting us. Clients are willing to pay more for programs that are stronger from a gainful-employment or other regulatory standpoint, and pay less and/or decrease demand for programs that they have that don't have those characteristics. They are looking to change the qualification criteria somewhat to allow them, in certain programs, to make sure that they get the right matches so that they can get the right persistence on the back end.

We haven't yet seen a huge wave of changes to the criteria that might help them indicate likelihood of default or not, but I expect that will be the case. As long as we can do that and stay well under the middle of the fairway and white space from a privacy standpoint, we'll be happy to accommodate. So I expect those types of changes will be part of the schools adapting. We haven't seen any major rush with that yet, but I think we'll continue to see incremental changes there.

And, quickly, to emphasize one thing -- you said it Doug, but you mentioned it as an aside. I think it's very important. I want to make sure it's not lost on anybody. That's just not -- that's not just our opinion, as it relates to both leads or really -- "inquiries" is what the schools call them -- or clicks working under the DOE rules. We've heard that directly from the senior-most executives at a couple of our largest clients.

And it's very important to understand that it's not just our point of view. However, I'll also remind you that Education is where QuinStreet started. So if there's an expert in the space aside from the schools themselves, it's us. It's Doug, sitting right next to me. And we've predicted all of this correctly before. So, not to be lost -- it's not just our opinion. But our opinion has been pretty good, over time.

We're just trying to tell you guys what we know -- I think is a good point.

Bill, by the way, let me get you some names in the group, more broadly -- let me give you the names of the other -- some of the other properties that we bought last quarter. I'm not going to give them all to you, because some of them -- there is some confidentiality around some of them, but -- AutoMechanicSchools.com. AutoMechanicSchools is a great vertical. We like that vertical a lot. We acquired that media property. AffordableHealthInsurance.com -- continue to build our owned-and-operated portfolio with Insurance, more broadly -- it was an acquisition. WoodFloorsOnline -- I know you guys all go there. WoodFloorsOnline.com was another one of the acquisitions in the quarter, as was a Website called FloorFacts.com -- both of those, of course, in our Home Services vertical. Those are one, two, three, four, five of the six, including Insurance.com. I'm only not giving you one because it's -- there's some confidentiality around that one. But five of the six URLs are -- these are not just URLs -- these are all small to medium properties.

Be advised, of course, we have not yet redone all of those. So if you go and look at them, don't think that that's necessarily representative of what they'll look like when we get done with them.

And then, interesting from a financial standpoint, Insurance.com was, of course, about 95% of the purchase consideration. So just to give you --

Yes.

-- give you a sense of sizing, from a cash-outlay standpoint, Insurance.com was the large bulk of it.

Operator, we can take the next question, I think, right?

Actually, I show no further questions from the phone lines.

Oh, good.

Okay.

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