QuinStreet Inc (QNST) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to QuinStreet's second quarter fiscal 2011 earnings results conference call. At this time, I would now like to turn the conference over to your host, Ms. Erica Abrams. Ms. Abrams, you may begin.

Thank you, and good afternoon, ladies and gentlemen. Thank you for joining us today as we report QuinStreet's second quarter 2011 financial results. This call is being simultaneously webcast on the IR section of our 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. The risks and uncertainties are discussed in our most recent SEC reports, notably, our 10-Q filing with the SEC on November 10, 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 UBS European Technology Conference, Stifel Nicolaus Technology, Communications and Internet Conference in San Francisco, the Credit Suisse Media and Internet Conference in Miami, Raymond James 32nd Annual Institutional Investors Conference in Orlando, and the Credit Suisse Global Services Conference in Phoenix. We will also be arranging investor meetings in several cities during this quarter. Now, I will turn the call over to Doug Valenti, CEO of QuinStreet. Doug, please go ahead.

Thank you, Erica. Hello, everyone. Thank you for joining us today. We are pleased to report that fiscal Q2 was a good quarter. Revenue was $97.6 million, up 27% from a year ago. The seasonal drop in total revenue in the quarter was in line with historical norms and projections. Organic growth in the quarter was 20%.

Revenue in each of our client verticals grew, with particular notable strength in the education vertical, which returned to strong double digit growth ahead of forecast. Client demand in education increased, as previous forecast, and execution by our team in that vertical was outstanding. Growth in financial services remained strong, though we did see a greater than typical seasonal decline of 12% in that business.

Adjusted EBITDA margin for the quarter was 22%, above our annual target, and quite high for what is our seasonally weakest quarter. This is the first December quarter in Company history that we exceeded 20% EBITDA margin.

We continue to be relatively conservative with our spending, due to the current economic and regulatory environment and given our newness to the public market, but we are still investing aggressively in new growth capabilities and opportunities. Our growth outlook has not diminished.

Looking at capital deployment, acquisitions continue to be an important part of our long-term strategy. Recall we completed a CarInsurance.com deal in Q2, our largest ever, at almost $50 million. Going forward, we expect the near-term pace and amount spent on acquisitions to be lower than recent quarters, now that our strategy to identify and acquire the best of the big independent organic insurance media properties is largely complete.

Now, by client vertical. We had an outstanding quarter in education, continuing to reflect client moves to grow and consolidate with more compliant and effective marketing sources. Also, execution by our client, media, and technology teams in education has been outstanding, allowing us to grow our media capacity to meet increased demand, while also improving the quality of outcomes for clients. Our pipeline of initiatives to keep up the momentum in education is strong.

Education revenue increased 18% overall and 24%, excluding the one large client effect. We lapped the one client effect in November, so thankfully, we won't need to talk about that anymore. I would note that we returned to strong double digit growth in education, as we projected, and we did so a full quarter ahead of forecast.

Our review of the regulatory environment has not changed. Recent reports by clients indicate that they are adapting, and recent reports out of Washington indicate that gainful employment rules are likely to be more reasonable than initially proposed. In any event, we remain bullish on the education sector, certainly, including the for profit segment. Momentum in our education business is strong, and we expect it to continue to be so for the foreseeable future.

Revenue from our financial services client vertical increased 36% in the quarter, a good quarter overall in this very early and very large market. As I indicated before, we did see a greater seasonal decline than typical, due largely to the vertical's earlier stage of development, which will generally result in greater variability, and also due to a natural tempering of the extraordinary growth rates we have seen in recent quarters, which should be expected at current scale.

36% is closer to the growth range we would expect now, though there will certainly continue to be variability. Growth rates will be higher and lower than 36% in coming quarters. We expect to be able to meet and, more likely, exceed our average overall Company growth target of 15% to 20% for many years to come in financial services. It is an enormously large and attractive long-term opportunity for us, and our momentum, capabilities, and assets are exceptional.

In our other client verticals, we grew 29% year over year. These developmental client verticals represented 11% of Company revenue. In total, they double our footprint of addressable market opportunity to some $40 billion in North America. We have been testing the media and client metrics and approaches in these client verticals for some time. We are confident that they represent big, attractive, long-term market opportunities. That said, we expect the vast majority of our growth in the next few years to come from education and financial services, where we already have scale, momentum, and a clearer path in which to execute.

In summary, we are pleased with our financial performance and strong execution across the business in the second quarter. We are particularly pleased with the results in education, where we returned to strong double digit growth well ahead of forecast. We continue to deliver growth in excess of our long-term target average of 15% to 20%, and we well exceeded our 20% annual EBITDA margin target in the weakest seasonal quarter of the year for the first time in QuinStreet history.

We are still very early in the pursuit of a very large market opportunity. We continue to invest in clients, media, and technology that should allow us to grow revenue by 15% to 20% on average for as far as the eye can see. We continue to adapt effectively in our ever-changing markets, while staying true to our mission of delivering the right experience to visitors and great measurable market results to our clients, just as we have for the past 11 years. We are more confident than ever in our progress, business model, and opportunity.

Now, before moving to Ken for more detailed discussion of the financials, I wanted to comment on two other announcements that we made today. The first is that Bronwyn Syiek, our President and Chief Operating Officer, was elected to the Board of Directors at our annual -- at our meeting -- Board meeting on January 27, as we increased the number of directors from seven to eight. Bronwyn is a member of our founding team, and her election to the board recognizes the breadth of her role and the importance of her contribution to the Company and our business. Bronwyn brings a detailed understanding of our operations and strategy to the board. We expect her contributions to be invaluable.

Second, we announced an increase in our total credit facility, excluding seller notes, from $175 million of original capacity to $225 million. In so doing, we also added two additional high quality lenders, US Bank and Bank of the West, to our already impressive syndicate that includes Comerica, Bank of America, Credit Suisse, JPMorgan, and Union Bank. We are excited about this increase in capital availability on such favorable terms and the low cost of capital and increased flexibility it represents. It is an important strategic and competitive advantage, one that we have gained due to our many years of strong, consistent business and financial performance. With that, I'll turn it over to Ken.

Thanks, Doug. Hello, and thanks again for joining us today. As Doug said, and as you've seen, we delivered a solid quarter. We posted 27% top line growth over the second quarter of fiscal 2010, delivered double digit growth in our education client vertical, a quarter ahead of forecast, and reported 22% EBITDA margins. We are quite pleased with our execution, especially our consistency in revenue growth and strong EBITDA in our most challenging seasonal quarter.

We also remain confident in achieving our long-term financial targets, which remain the same as they have for many years, that is, to maintain our 20% annual EBITDA margin and average 15% to 20% top line growth or better. From everything we see in our business and in our markets, we believe we can achieve these targets for many years to come. We deliver -- while delivering on these targets, we plan also to, one, generate significant cash from operations, two, continue to expand our leadership position and growth potential in a large, but still early, growth market, and three, continue to create shareholder value.

Moving on to our performance in the quarter, on a year over year basis, our financial services client vertical grew 36%. Our education client vertical grew 18%, and our other client verticals grew 29%. Now, more details on each of our client verticals.

The financial services client vertical represented 45% of Q2 revenue, or $44 million. This is the fourth consecutive quarter in which financial services was our largest client vertical. As Doug mentioned, our growth moderated this quarter, as we consolidated recent gains, though 36% year over year growth remained strong performance at this scale.

Our education client vertical, which represented 44% of Q2 revenue, grew nicely, with revenue of $43.2 million, up 18% over the prior year second quarter and inclusive of the reduced year over year volume from one major client, as we've discussed in the past. We have benefited from the increased client demand that we have been discussing for some time. We expect that benefit to continue as we work hard to produce high quality student inquiries that are well matched to our clients' offerings.

Our other client verticals', which include B2B, home services, and medical, revenue represented 11% of our total fiscal Q2 revenue. Revenue from other increased 29% in the quarter to $10.4 million. Over time, we believe these verticals have the right characteristics to perform well for us at scale. In the second quarter, as in the last three quarters, we had no 10% customers.

Moving to the cost portion of the P&L, for cost of revenue and operating costs, I will provide you the results excluding stock based compensation, amortization of intangibles, and depreciation, because that is how most of you model our Company. Note that depreciation is approximately $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 investor relations portion of our corporate website, so you can evaluate our costs, including or excluding those items as you desire.

Our cost of revenue was $63.2 million in the second fiscal quarter, representing a 35% gross margin, or more than 200 basis points higher than in the year ago quarter, though I will remind you that we focus on EBITDA margin, not gross margin, as we manage the business. Our cost of revenue represents all of the costs used to produce our measurable marketing results, including media and personnel costs.

Moving on to operating costs, product development costs were $5 million in the second fiscal quarter, or 5% of revenue, consistent with prior periods. 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 $3.6 million in the second fiscal quarter, or 4% of revenue, and general and administrative costs were $4.1 million in the second 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 declined in the second quarter of 2011 to 13% of revenue from 14% in the prior year. Our business model continues to scale.

On the EBITDA line, we invest to develop new media and also deploy investment expenses on early verticals and technology projects. We manage to an overall EBITDA margin target of 20% on an annual basis, and while do so, invest and expense items classified both in cost of revenue and operating costs. Our annual EBITDA target of 20% remains the same as it has for nine years now, supporting our growth initiatives while delivering consistent profit and cash flow. As I noted earlier, we exceeded that annual target margin for this past quarter, achieving 22% EBITDA margin for fiscal Q2. This is the first time in the Company's history in which we exceeded 20% EBITDA in our seasonally slower December quarter.

Moving to taxes, our GAAP effective tax rate for the quarter was 33%. We benefited this quarter from the reinstatement of the R&D tax credit, recognizing the benefit for the past six months retroactively. Without that discreet item, the GAAP effective tax rate would have been 38%. For your modeling purposes, we believe a sustainable adjusted effective tax rate is 42% or slightly lower. Note that for Q2, the actual adjusted effective tax rate was 37% and would have been 39% without the effect of the R&D tax credit reinstatement.

Regarding shares outstanding, as you see in our press release for the quarter, our fully diluted weighted average shares totaled 49.2 million, up somewhat from the prior quarter, due almost entirely to a higher average stock price, which reduces the offset under the treasury stock method for option dilution. For the next couple of quarters, I believe that 52 million diluted shares is a good figure to use in your models at similar stock price levels.

Our GAAP diluted EPS for the quarter was $0.14. Our adjusted EPS for the quarter was $0.25. Adjusted EPS adds back two items only, stock based compensation and amortization of intangibles, inclusive of tax effect. For our adjusted net income in EPS computations, we plan to continue to limit adjusting items to stock based compensation and amortization of intangibles.

On the balance sheet, our cash and marketable securities balance at quarter-end was $125.7 million, down in net $1.6 million from the prior quarter, which might surprise some people, given our large acquisition during the quarter. You can see the details in the cash flow statement in our earnings release.

At a summary level, though, the most material items affecting our cash position included, one, the purchase of CarInsurance.com for $49.7 million, paid half with cash and half with a draw on our credit line, two, the generation of $20.9 million in cash from operations, a QuinStreet record, and three, proceeds of $7.5 million from the exercise of stock options. So, inclusive of our cash outlay on CarInsurance.com, we concluded the quarter with cash related balances at essentially the same level as at the beginning of the quarter. That's nice. Total debt increased to $117 million, reflecting the portion of the CarInsurance.com acquisition, for which we drew debt, less some payments for historical seller notes.

With regard to cash flow metrics, cash flow from operations benefited from some improvement on an already fine DSO metric, which drove us to $20.9 million in operating cash flow, far surpassing any historical quarter's cash generation. Fiscal Q2 normalized free cash flow, which is free cash flow excluding working capital changes, was $14.8 million, or 15% of revenue. As always, we look to normalize free cash flow as our primary cash flow metric to remove the effects of current quarter operating count fluctuations and drive to the underlying cash flow characteristics of our model after minimal CapEx. Over the last five years, our annual free cash flow has ranged to 13% to 15% of revenue, with an average of 14%. We are at 15% for the first half of fiscal 2011.

Aside from taxes, the vast majority of our EBITDA drops to free cash flow. The business does not require large amounts of capital expenditures. For this past quarter, you will see $2.5 million of CapEx, which, while low for most companies of our size, is actually high for QuinStreet. This is not part of our normal operating CapEx, which has always been below $5 million per year, but instead relates to tenant improvements on our new office space. The new office space, I will add, with a lower cost per square foot than our previous space.

I encourage you to review the trended results and 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 provide the detailed metrics as 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, it was a solid quarter with good growth and strong EBITDA. With that, I'll turn the call to the operator, who will moderate Q&A.

Thank you, sir.

(Operator Instructions)

Our first question comes from John Blackledge with Credit Suisse.

Thanks very much. Thanks for the questions. So, education was, obviously, much better than we had anticipated. So just wondering if you can provide, maybe, a little bit more detail on kind of the key drivers. Was it both, kind of, higher volume and higher pricing? And if you could just talk to demand levels that you're seeing heading into your fiscal second half of the year, and then I have a follow-up.

Sure, John. The growth in education was driven by -- primarily by increased demand from clients in a better expansion of and yield of our media capacity, tied to a lot of initiatives that we've undertaken, for some -- some for years and some over the last six to 12 months. So it -- the pricing component was a factor, but not unlike last quarter, it was not -- it was significantly less than half of the factor in the growth rate. I think it was -- it would be somewhere in the mid to, I think, on average -- the average -- the price for increase in education was up between 5% and 7% of that 18% fundamental growth in the business. The rest of it was volume driven, again, seeing more volume demand from clients, seeing more clients, because we continue to sign and penetrate a larger client base in education. And again, being able to serve that demand to media -- initiatives to increase our media capacity and to better yield that media capacity.

And one of the things I'd add, John, is that, as you look at price, it's a couple of components. It's not just pricing for the same inquiry, but also, it's a shift in mix to higher value inquiries, so it's a little bit of both. It's not just a rise in price on the exact same inquiry, if that's helpful.

Yes, that's great. And then, just staying on education, do you think that the overall market is growing, or is there a share shift to QuinStreet, given the Company's ability to deliver high quality leads? Thank you.

Yes, and I missed your -- the second half of your question before, John. In terms of our outlook, we continue to have strong demand in education, and we feel quite good about our momentum there, going forward, which, I think, was second after your first question. I apologize for not hitting that the first time.

I think the overall market demand in education is probably relatively flat. I don't know that it's necessarily shrinking. It certainly may well be. We don't have enough coverage to be able to speak to the entire market. We do know that there has been a share shift to us, as clients have indicated their desire to shift spend to, as I said, more compliant and more effective marketing sources and channels, and we are told by clients, who we know from historic data -- from the data that we measure with them every day, that our marketing programs, particularly at our scale, are very, very effective for them. And again, they're measurable, so they know they're effective.

So in an environment where they'd like to be -- to make sure they're taking as much risk as possible out of the system, whether it be financial risk or attention risk, they would like to -- we're seeing them shift money to us, because they know that we are -- we manage in a very compliant way, and again, they can measure the fact that our results are quite good for them. So I think that's -- so I think the shift is more to kind of away from sources online and otherwise that might not have those compliance and measurability -- or successful measurability characteristics.

That's great. Thank you.

Yes, sir.

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

Thank you. First, start off with -- and I don't know if you said it in your prepared remarks. I might have missed it. Acquisition contribution to growth. And then, how are you layering in the CarInsurance acquisition, and how do you see that impacting growth as you look out over the next year?

Sure. Of the 27% growth, Justin, 20% was organic. So we would say 7% of that -- 7% growth from acquisitions, year over year. The vast majority of that associated with Internet.com and our B2B business, which has been driving the majority of the inorganic growth for the last year, and again, we lapped that in December, so you'll see that component of inorganic growth dropping off here in the coming quarters.

The CarInsurance.com acquisition is right on schedule, in terms of our plans and our investment model, but it was not much of a contributor to growth in the quarter, both because of the timing of the close of the acquisition and because, recall we are completely changing the revenue model on that asset, and we're still fairly early in that integration and execution on that strategy. I would say, in the next year, I would -- I still would not expect CarInsurance.com to be a significant, even material, contributor to growth. We think -- in coming years, we think it will be a very significant contributor as we add that component of the market to our model. So, that's what I would look for.

Okay. And within the other category, any of the verticals starting to break out or really get some traction, and how do you view your internal management of those verticals and any kind of reason for optimism as you looked out a year or two from now?

Yes, I think there's a lot of reason for optimism. We are enthusiastic about the potential there. In terms of whether or not we're going to see -- we've got $40 million of traction today, so we consider that pretty good by almost any internet company's standards, except for some of the bigger guys.

In terms of growth, though, I don't think they're going to be big contributors to growth for a couple of years, not because we're not working hard and not because they don't have the eventual potential to be, but because, again, they're much earlier stage, and they're not that big yet, so it's going to take them a while -- going to take us a while to get them to the point where they'll -- we'll be able to aggressively grow them and where that growth will be material to our overall results. So I think we're quite enthusiastic about the -- we seem to be enthusiastic about B2B technology and the potential there, but we're also quite buried in the -- and, as we've indicated before, in rebuilding that asset to be able to execute against the strategy that we want to pursue on the measurable marketing side from where it was before.

We're quite enthusiastic about medical, because it's so early, and we're making great progress there, but it is extraordinarily early. I don't see a lot of headwinds there as I do in some of the other ones, because of the economy. So it's -- we're excited about that, but again, it's just encumbered by its early stage and relatively small size at this point, but it's growing nicely.

And then, I would say home services is still going to be a challenge for a while, though we -- we're doing some things now, and we've been working on some strategies that took us -- we were focusing just on contribution, because of the economy. We've now begun to rethink growth there. We think there are reasons for hope, and we recently assigned -- changed our organization to assign a very senior general manager to that vertical and also put a very new senior general manager over the B2B vertical.

So we're investing in them. We think now is the time to go for it, and we think they're all going to be big. I just would not -- again, given their stage and scale, wouldn't expect them to be breakouts in the foreseeable future. And again, they'll be flatter more than they will be way up at times, as we continue to work our way through the -- through figuring out how to scale them. But we wouldn't be focused on them, we would not have them staffed, and we wouldn't talk about them if we didn't think they were very big opportunities in the longer term.

Anything that can kind of help them break through or, I mean, you saw finance just kind of take off. Is it just a bigger category, or what the -- what is it going to take, do you think?

Yes, it's -- and financial services was like these for a long time. It's a matter of getting to the point where we've gotten enough critical mass and a -- and coverage of clients in certain segments and where we can take that critical mass and coverage and align it with a good segmentation and identification of targeted media and then finding places where we can really hit the gas pedal on those.

And it -- the good news is that it's really hard to do that, because that gives us great defensibility as we ramp them. The bad news is it's really hard to that, and it sometimes takes a while. So it's just a matter of doing what we do. We're putting a -- we're having to put one brick in place at a time, but I am extraordinarily optimistic and confident that those are going to be very big businesses for us. I just -- I don't see that they're going to be material to our growth for a while.

Okay. And last question. Looks like margins are coming up a little bit. Do you envision them going back to kind of the 20% target, and what verticals are you seeing the most margin leverage on?

We're getting a lot of margin leverage in the business in both education and financial services, which are the only two that really matter from a margin standpoint. Both have increased margins pretty significantly just over the past year, and they've done so because we've worked specifically on programs to achieve that.

So I think that we'll continue to do those things that will continue to create surplus in the business. Then the question will be will -- how much of that will we be able to prudently invest in new growth initiatives, either in those verticals or in some of the new ones, going forward, and if we can find enough opportunities where we think that investment is warranted, we'll invest it down to 20%. If we can't or if -- or given the fact that we're a little bit more conservative in this environment, then you'll continue to see margins higher than 20%. So I would expect the margins to be between 20% and 25% on the EBITDA line for a number of quarters, because it would be hard for us to ramp the spend fast enough to keep up with growth and margin expansion that we're seeing in our core verticals.

Great. I appreciate it. Thank you.

Sure.

Our next question comes from Bill Warmington with Raymond James.

Good evening, and congratulations on a strong quarter.

Thank you, Bill.

Thanks, Bill.

And I'll say I don't recall you guys ever having a December quarter where the revenue was actually up sequentially from September. So that must --

That's accurate. We never have [here in] the Company's history.

We have not, and so, the fact that education did that was, I think, a first time in Company history.

Yes. So I wanted to ask, on a year over year basis, the -- what the -- if we look at the run rate on what the education business is doing now, whether that would be a good run rate off of which to grow that double digits. Is that a right way to look at that, if you will?

Yes. Yes, absolutely. We think so. Yes.

Okay.

I don't know that sequentially, but from a year over year basis. We -- this -- the -- said another way, the December quarter was not an outlier. We didn't have a windfall, and we certainly don't have the ability to pull revenue forward, given our business model. So, yes, you should not expect that we've stolen from the March quarter, for example, to get the December quarter, and we fully expect that we'll be able to grow double digits -- strong double digits off of the December quarter on a year over year basis.

Okay.

Which is what we've been saying now, for a couple quarters, that we'd return to that.

Yes.

So, we're seeing it live now, in fact, a quarter ahead of time.

Well, the EBITDA margins were strong, especially for a December quarter, and we normally see the slowdown --

That's right.

See the slowdown in the education piece and higher media prices. Did the strength in the volumes offset the typically higher media prices, or did the media prices not lift up as much this year?

It was -- we really -- we didn't really see a big difference in terms of the softening in demand and increase in media prices across the board, but I think what we saw was the effect of some great work on the part of the education team to better deliver capacity in media and to better yield that capacity and to deliver better results to clients. And we had -- we saw clients that would -- will always take more from us if we could deliver good quality take that volume. I think the other thing is that we are a little less now than in previous years exposed to kind of media that is as affected by fourth quarter pricing.

Said another way, we used to do more display buying a number of years ago, which always got crowded out by the holiday marketers, and we really don't do much of that anymore. We're trying to do more now, but only on a more targeted basis, with Google as a partner, using some of the new targeting and measurement technologies they've put in place, which really are helpful to everybody. So that -- so we're just start doing that again, but I think the days of our being more exposed to fourth quarter media pricing are over. And what -- the effect we'll continue to see in the fourth quarter is going to be one more of clients not having as much capacity to convert leads, inquiries, or clicks, because of vacation schedules of their own staff, and I think that is going to be more the driver.

And that is a significant driver, by the way, but it was -- we were able to overcome that in the fourth quarter only because -- in the second fiscal quarter, of course -- only because of great work on the part of our education team on a whole bunch of initiatives that we think are very sustainable and take us to a whole new level of execution in that business. So I'm very excited about the increased capabilities, and again, this is -- this was not a one-time quarter. These are sustainable institutional capabilities that we have gone to the next level on that are going to pay dividends for quite some time.

Well, it also looks like it's your third quarter in a row where you've come in a couple hundred basis points or more above the official 20% EBITDA guidance. So it seems like a prudent way to model it going forward would be a 22% to 23%, at least, on the EBITDA margin line. Does that --?

I'd be careful, because we're -- if we find

Is it -- am I roping you in too tight there?

Well, I just don't want you to go out on a limb. We're -- we will be -- we will not be hesitant to pull that margin down to 20% if we think we have great growth opportunities against which to invest.

Yes.

So, I would -- for prudence -- and I know it affects us, because it affects the model, and it affects pricing, but we're -- we don't care much about short-term pricing. We're trying to build a big, valuable, long-term Company, so if we have the opportunity to do that, we will. So I would be cautious.

Okay. And last question for you is just if you could comment on the acquisition pipeline.

Yes, it's light, relative speaking. We've shifted so much of our efforts now to some other -- that team also works on other broad based corporate growth initiatives, including large business development deals and some other areas, and most of their efforts are against those activities now, not acquisitions, so they -- the near-term acquisition pipeline is quite light. Again, we're through what was the largest of our M&A objectives in the car insurance -- on the insurance side of organic. Doesn't mean we won't do any, but I would expect it to be pretty light for the next couple quarters.

Got you. All right. Well, thank you very much.

Thank you, Bill.

Thanks, Bill.

Our next question comes from Jordan Rohan with Stifel Nicolaus.

Hey, guys. Great quarter. And I'm not trying to distract people from the excellent performance of the education division, but I did notice the deceleration, that I think you said was greater than seasonal, in the auto insurance/financial services side. And I was hoping you could put a little more color around that, specifically, competitors have started to buy additional insurance agent networks and stuff. Is there some competitive dynamic there? Also, I've noticed a couple more entrants into the [CPCI] network business for auto insurance. Are you seeing any changes in your publisher mix that's driving lower volume through sure hits? Thanks so much.

Sure. No, we appreciate that, Jordan. The largest factor in the deceleration in the fourth quarter was -- and this is going to sound kind of funny to those of you that aren't in the business -- was clients running out of budget. Our business with our insurance clients, in particular, this past couple -- the past couple of years has grown extraordinarily quickly, and clients spent very aggressively with us this past year, and it's still a relatively new spend for them. So, many of them ran out of the budget that they had allocated for the year before we got to November, and so, we had to scramble to pick up more budget, and we were able to get a lot more allocated on that basis. So that was the single largest factor.

And we talk about early stage variability, that's exactly what is going on. It gives you a sense for just how early this is. Most of these folks -- clients in the insurance side are still not spending much at all online, relative to their overall budgets, and they're very new to spending, at any kind of scale, online. And so, that's the kind of dynamic we saw there. Now, that said, we too, and we have for the past year or so, seen a lot more competitive activity, not from anybody that large, but there are a couple of small guys out there, that have been in and out of the market, largely trying to buy share. Most of the time, when they pick up distribution from us or publishers from us, we have regained those publishers, but that said, it's -- certainly, there is a -- there are folks -- we're not going to be the only ones in this market. And so, I think there will be and will continue to be a competitive effect.

The third effect has been and continues to be Google's offerings in any financial services vertical, and we don't see those having a material impact on our market opportunity, because we've complementary, being vertical to their being horizontal. That said, when you're early, sometimes clients will shift spend around, because they only have so much spend and test other things. We've seen them test with competitors. We've seen them test with Google.

So I would say all of those are factors, but none of them, we believe, diminish our opportunity as the biggest vertical player in this -- in those markets for the long run, and I would -- so I would -- and the most material effect last quarter was clients spent so hot with us through most of the year that they frankly ran out of budgets getting near the end of the year. That is a -- we'll see how that remedies itself or not. We'll continue to have issues of -- and this is something that we talk about here all the time. It hasn't been evident in insurance, but these markets don't go straight up and to the right. We went through a big surge over the past couple of years, and I'm not -- I think the clients and we are going to go through a period of absorption and consolidation as we flatten out a little bit. I'm not saying flatten out literally, but we don't do 60%.

1% or 262%.

Yes, as we kind of consolidate our gains, fill in, backfill the media, sort out the spend, sort out the budgets. I mean, these kind of things are going to happen. We still think the up and to the right in the insurance business and all of our financial verticals business is extraordinarily attractive and steep for many years to come, on average, but I wouldn't expect that it'll be -- as I said, it's not going to be 60% forever, and I think it could well be 60% again, in some future quarters. But I think at this scale and given a consolidation, given how much they put online, and given their desire appropriately to kind of take a breath and see if it's working, I think we're down closer to a range that's where we ought to be, at this scale, for a while.

All right. Great. And how much of that extra CapEx was from the new space? What's a more normalized fourth quarter level?

It really doesn't break down by quarters. We look at it as a budget overall for the year. You're safe to use $5 million annually. The amount related -- it's hard to break out how much is related to the move. Some are TIs directly, but there's -- we also bought some new equipment, because as we moved into -- we redid some network things, as a natural time to do it. But the vast majority of it is the answer -- was related to the move.

[But $5 million a year] is the right -- is kind of a good modeling --

Yes. $5 million. Exactly. If you look over -- really, over the Company's, at least, last five years, we've never spent more than $5 million on CapEx, and I -- it's safe to assume that'll be the case going forward, for at least the next couple of years.

All right, guys. Thank you so much.

Thank you, Jordan.

Our next question comes from Brian Pitz with UBS.

Great. Thank you. A follow-up on CarInsurance.com. Have you been successful at generating traffic to the site, despite swapping the old agency business model out for your model? Any color would be great on that.

And then, separately, would you give us any indication on what you're seeing in terms of pricing increases on those pay per click search side? Is your traffic acquisition cost increasing faster than your [relief prices]? And any sentiment around that would be great. Thanks so much.

Sure, Brian. CarInsurance traffic is good. It has not diminished. In fact, it's grown since we acquired the property. We expect that would be the case. We are more the media operation than the guys we bought it from, so while we didn't plan for it in our investment model, we are seeing that we are going to be able to continue to -- we believe we're going to -- and we have been able to maintain and grow traffic -- we think we're going to be able to continue to grow traffic on that property, over time, at good rates. And our average -- I think the average rate we grew traffic on organic properties last year was about 15%, 20%. So we think we can deliver those kind of results in that insurance portfolio as well.

In terms of pricing on the PPC side, we are -- we have such a broad mix of PPC buying, in so many verticals, it's kind of hard to make a comment about it generally, but I would say that, in general, as has been a case for many years, our PPC pricing is -- or cost to us is up and to the right, no question. We recently, over the -- certainly, over the past six months or so, in particular, have been able to far outpace that cost by increasing margins, mostly because of -- not because of pricing to us, but mostly because of our ability to better yield and match that -- those clicks with clients.

And certainly, in education, the pay per click performance over the past number of months, and when I talked about initiatives and it improved our capacity, have been dramatic, and that really was just a lot of fundamental applications of technologies and practices and just taking us to another level. That's one of the many initiatives that helped us -- has helped us in education that I think is going to carry us forward quite nicely. So, yes, I think PPC, on average, but averages are dangerous, is our costs are going up, but, on average, as well, our margins are going up, and that's tied to our ability to, again, run good programs, yield that media, and find good matches with clients.

So it's our better effectiveness with those clicks, as opposed to increasing prices to our clients.

Yes, which we hate to do. We'd rather --

(inaudible - multiple speakers) more output.

We'd rather get more matches, consistent with the visitor needs, and get paid that way, for more of the traffic, than we would going to a price increase. We loathe price increases to the clients.

Great. And just, real quick one on acquisitions. You -- it sounds like things are going to slow down a little bit. Any comment on valuations out there? Have things skyrocketed, given current market conditions, or how are you seeing the general landscape for potential targets?

Yes, I would say we're not seeing anything that's notably a trend. We are always having a lot of conversations, and there aren't any that we've had lately where I said that's a deal that we should be able to do, but the price is just out of whack. No more than we always do. I mean, we always have a few of those, but I wouldn't say that it -- it doesn't appear to (inaudible) good. We're not as active right now as we have been, but it -- I don't -- it doesn't seem to me that we're seeing more deals where price is the issue than we do typically.

Yes, and just in cases, the implication -- the slowdown is because we've achieved quite a bit the last couple quarters, specifically with our targets, as opposed to we're being priced out of the market. It's a very different --

Yes, that's right. We're kind of taking a breath, and we have a lot of operational things we want to do, and we're not at a point in some of these businesses where the acquisitions are the key to the next step of success. We need to do some other things to prepare for them. There certainly will be more acquisitions, but we don't -- we have some operational we need to do internally. That is -- and again, that doesn't mean we won't do any. It just -- I -- the pipeline is pretty light. I would not expect us to spend anywhere near the rates that we have spent over the past couple quarters.

Great. Thanks so much.

Thank you.

Sure.

Thanks, Brian.

Our next question comes from Carter Malloy with Stephens.

Hey, guys, thanks for taking my questions.

Hey, Carter.

Returning back to the financial services, or specifically, insurance side of your business, can you talk about the pricing that you're getting there, on a per click basis? I mean, certainly, you've seen recovery over the last few years, but do you think it's at the optimal place where it will stay, or you think we'll continue to trend upward there?

Yes, it goes up and down. Actually, Carter, we -- it's kind of a sinusoid. I mean, we -- depending on the activity of the clients and when they're in the market, when they're out, it's a bidding platform. They bid for placement in our system on the insurance side, so I'd say that the range of that sinusoid is kind of what it's been for a few -- for a couple years, and sometimes we're near the bottom of it. Sometimes we're near the top of it, and it's kind of difficult to predict, but I would say that the trend line, certainly, over the past few years, has been kind of up and to the right. But there's -- but it's inner channel, and that channel is not materially up or down lately.

Okay. And then, turning to the other segment, I know it's less meaningful, but can we expect that to return to positive sequential growth for the next few quarters?

Other?

Yes.

Not necessarily. Much of the growth in other -- remember, a lot of -- several of those verticals are -- have been challenged by the economy, and we're still early. Much of the growth in other this past year was driven by the Internet.com acquisition. So I wouldn't count on a lot of sequential growth there for the next few quarters, and to the extent we do get it, it'll be additive.

Okay, great. Got you. Thank you.

Sure.

We have time for one final question. Our last question comes from Sean Colley with Steadfast.

Hi. Thanks for taking my question. I was wondering if you could comment as to whether or not there's been any change to how many times you sell an education lead?

Yes. Not really. We match, on average, in education -- I think we match about 1.7 times. We have not materially changed that up or down, really, over the past year to two years. What we try to do is make sure that the ones that are -- that -- we would -- the ideal match rate, based on our market research with the consumers, and we know consumers online in this space better than anybody, is actually about 2.7 times. That's how many alternatives or options the average prospect is going to look at before they make a decision to enroll with a school.

So, we would like, frankly, to get our quality match rate, in other words, matches that really do suit that visitor, up to about 2.7 on average, and currently, our match rate -- and not at the quality level we'd like for it to be -- better than anybody else's, I think, but still, not where we'd like to be, is only 1.7. So, what -- the driver of the success lately has not been increased match rate, if that's the question.

Yes, I guess what I'm trying to triangulate is -- I think you said that 5% to 7% of the 18% was pricing, as a factor, and the rest was volume driven from clients, and I'm just trying to triangulate that statement with a call, I believe, Ken did in October, where he described QuinStreet as being supply constrained.

Yes.

So I'm just trying to figure out what -- and I think that call was mid October, so maybe there was a lot of volume that came in in the final six weeks, but --

No, we are typically, and have been, until about two months ago, which would coincide with about October --

Yes, you're right.

Media constrained, for the most part, in our growth and education. As I said in our remarks, the team has done a phenomenal job of increasing our media capacity and increasing in the matching and yielding of that capacity over the past couple of months, and they were able to do that in a way that was -- were -- that allowed us to get more -- serve more volume from the clients. So I think it -- you're -- you didn't hear him incorrectly, and it's not inconsistent.

It's a good question, in fact --

It is.

We were highly focused at the time on increasing our media yield.

And if you remember, in the last call, folks asked how do you feel about your ability to increase -- we know you're media constrained. How do you feel about your ability to increase that? And I said, we got a lot of things going on, lot of initiatives that we're working on that we believe can fix that, primarily around increasing the channel, increasing margins in PPC, and improving the match rates of the -- of each visitor, so that we got more high quality matches per visitor with our new Intelli-Match rollout -- system rollout, which has been a big success for us, but, really, only rolled out in education a couple months ago.

So, we're on it, and this is kind of how we work. We -- when we're media constrained, that's going to be -- there's going to be more effort getting that media capacity built. Media capacity defined is not just access to more targeted traffic, which is, of course, important, but also, the yield of that traffic, which is mostly driven by the match rates. And when we're more client constrained, we're going to be working more on that, and they're never in perfect balance, but most of the time in our history, we've more media constrained than client constrained, because once clients know that we have the capacity to deliver more of these attractive measurable events to them, they tend to buy them as soon as they can shift budget over to do so.

Okay. I thought, previously, and I think it may have been at the JP Morgan conference -- I thought I had heard you guys say that you had sold leads, on average, somewhere in the neighborhood of 2.5 times, previously, so I guess I'm a little bit surprised by the 1.7. But it's -- okay, so it's 1.7. That's what the quarter looked like --

No, you've never heard us say that. You've never heard us say that.

Okay, so it's --

(inaudible), on average, in education, for the last several years, has been around 1.7 times. That's been our average for a long time, and --

Okay.

We've certainly never said anything otherwise.

Okay. Thank you very much.

You bet.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation in today's conference. You may now disconnect. Ladies and gentlemen, have a great day.