QuinStreet Inc (QNST) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the QuinStreet Third Quarter Fiscal 2011 Earnings Conference Call. At this time, all participants are on a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. I now would like to introduce our host for today, Ms. Erica Abrams. Ma'am, please go ahead.

Thank you, and good afternoon, ladies and gentlemen. Thank you for joining us today as we report QuinStreet's fiscal third quarter 2011 financial results. This call is being simultaneously webcast on the IR section of our website at www.quinstreet.com.

Before we get started, I would like to remind you that the following discussion contains forward-looking statements 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 report, notably our 10-K filing with the SEC on September 13, 2010 and our 10-Q filing with the SEC on February 11, 2011. 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 BofA Merrill Smid conference - Smid Cap conference in Boston, the Jefferies 2011 Global TMT conference in New York, JPMorgan TMT conference in Boston, Stifel Nicolaus Denver One-on-one conference, Stephen Spring investment conferences in New York, BMO Media and Marketing conference in New York, and the Needham & Co. 6th Annual Internet and Digital conference in New York. We will also be visiting investors in various US cities and Canada during the 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 had a good fiscal third quarter, revenue was a record $108 million, up 19% versus last year, organic growth was 15%, adjusted EBITDA was $23 million or 22% of revenue. Cash flow from operations was $29 million with normalized free cash flow of $16 million, both company records. Cash and equivalents at the end of the quarter totaled $150 million.

We are particularly pleased with the performance of our education client vertical where revenue was up 26% over the prior year. The result reflects continued client demand for more compliant and effective marketing partners as well as the effects of fundamental growth drivers like new client signings and greater penetration of more segments.

It is ever more clear that the for-profit education industry will emerge from the regulatory scrutiny and uncertainty of the past couple of years, a more disciplined and therefore stronger industry for the long-term. For-profit schools will continue to fill the vital and growing need to provide access to career-improving education and training opportunities to segments of society that are under- or poorly served by more traditional alternatives.

We look forward to continuing to be the leader in helping prospective students research and match with those programs for decades to come. While we continue to benefit from flight-to-quality effects in the near-term, we're also executing against a number of more fundamental long-term growth vectors in education. They include broadening our client base.

While we have significantly reduced our concentration in the education client vertical over the past couple of years, we still do almost 50% of our education revenue with a small number of clients. We believe there are thousands of clients yet to sign just in North America.

We're also increasing our share of wallet with education clients as they reasonably seek to work more closely with fewer, stronger, more capable partners over the long-term. We are improving visitor choice and match rates in our programs and network, leading to a better experience for visitors, substantially increased media yields for us which drive very positive margin and revenue growth effects and significantly enhanced quality results and conversions for our clients.

These improvements are being enabled by our latest and accelerating advancements in matching technologies, algorithms and proprietary data sets.

We are adding and penetrating more segments of the education industry, including non-profit schools where we now serve over 100 clients, vocational education training segments, not well-served in the past, continuing education, test preparation and more.

Our footprint in education has been pretty narrow and we are aggressively broadening it. We are adding new products, giving our clients more ways to promote themselves and advertise in our network and to do so in new forms of online media with us.

We estimate that this area alone could double our addressable market opportunity in education just in our current footprint. We have launched new initiatives in social and mobile media that we believe will add meaningfully to our media capacity in coming quarters and years.

And we have begun to expand internationally. While we still have plenty to do in the United States and plenty of growth available to us here, we are seeing dynamics in several countries that indicate the timing is finally right to allocate resources to our entry into some of these large markets.

We believe the opportunity for long-term growth internationally is enormous. We will share more about these efforts in future calls and as that business becomes more significant.

So as you have heard me say many times before, education is by no means a mature business or opportunity for QuinStreet. We have strong momentum in the education client vertical and we see strong growth opportunities for many years to come.

Revenue on our financial services client vertical increased 17% year-over-year in the quarter, solid growth at this scale and consistent with long-term overall company growth targets. The performance was also consistent with our expectations for a period of more muted growth in financial services as discussed in our last quarterly call.

We are in a period of greater volatility for auto insurance advertising online as clients, competitors and media all adjust to the hyper growth of the past couple of years. This period is not unexpected at this stage of market development. It is in fact strikingly similar to what we have seen and worked through in the education client vertical over the years.

Some of the dynamics of this stage include more highly concentrated spin with fewer early mover clients and thus greater impact from individual client fluctuations unrelated to our service or performance for them.

Client budget movement between on and offline channels and among online alternatives, as they seek to test and determine best sources and optimal mix, and pricing discontinuities caused by new entrants and competitive offerings, mostly with inferior propositions and/or a willingness to buy market share at unsustainable price or quality levels.

We have seen all of this before. These are all phenomena that we have experienced through the years in the education client vertical, some several times through several cycles. We are confident that we will successfully navigate this period as we always have and just as you have seen us do in education as recently as this past year.

We expect the volatility in auto insurance online marketing could continue for some time and could result in flatter growth in our financial services client vertical in coming quarters. We also expect that auto insurance growth will resurge in future quarters as we work with clients to improve and measure results and to expand online marketing and media capacity to deliver those results consistently, defensively and at ever greater scale.

As you would expect, we already have a number of promising initiatives underway to that end. The online auto insurance market and this opportunity for QuinStreet are still early and the long-term potential is enormous.

I would also remind you that while auto insurance is the largest of our current businesses in the financial services client vertical, we also have a significant presence in five more sub-verticals, all of which represent large markets and promising growth opportunities for QuinStreet.

We certainly believe that there is more ahead of us than behind us in auto insurance, and in financial services, more broadly. In our other client verticals, which include B2B, home services and medical, revenue growth was essentially flat versus a year ago as we lapped inorganic growth from the Internet.com acquisition.

As a reminder, our client verticals, our other client verticals are all development verticals for us. We are doing over $40 million in annual revenue between them, and we believe that each of these three verticals represents a nine-figure annual revenue opportunity for QuinStreet. We are investing too in their development to that end.

The flat revenue growth this past quarter belies the excellent progress we're actually making in the other client verticals. Let me crack each open to give you a sense for that progress.

First, B2B. Recall that we bought the Internet.com assets to give us the scale and credibility to serve large technology clients - probably the most attractive segment of B2B for our purposes. In Internet.com, we gained properties with strong followings and millions of unique visitors as well as access to important technology client budgets.

But we bought those assets fairly inexpensive because of the technology backbone of the sites and advertising platform were antiquated and fragmented, and the primary revenue model was unscalable display advertising.

We set about to completely rebuild the technology infrastructure on our modern unified technology platform and to replace the revenue model with measurable or performance marketing offerings that we expect to be able to grow dramatically and sustainably over time.

We have made good progress on both fronts. The technology track transition is now quite far along and we've just completed the second quarter in a row where measurable or performance marketing revenue exceeded display advertising in the B2B client vertical. The market opportunity in B2B technology is many billions of dollars and we intend to be the best online at delivering against that demand.

Home services is our oldest and historically largest vertical in other. That business has faced gale-force headwinds from the recession and housing crisis due to the nature of services offered by our clients, for example, remodeling and window replacements, and due to the relatively early stage of development of our business.

As such, and as many of you know, we had chosen to manage the home services business more for contribution than growth over the past couple of years.

While the market is still constrained, we have seen enough traffic productivity lately to have hired and focused a new senior level manager over home services with great early effect. March was the highest revenue month so far this fiscal year in home services and we see much more opportunity ahead.

Medical is the smallest and earliest of our other client verticals. It is a huge opportunity and very greenfield. Our initial focus is on diabetes and diet, elder care, and elective products and procedures. Those three areas alone represent billions of dollars of addressable marketing spend in North America.

As with B2B and home services, we have new focused leadership in medical and we are seeing accelerating effects. The medical vertical was up 160% last quarter versus a year ago and is now running at almost $10 million per year in revenue. So we made real progress in the other client verticals in the quarter and we are confident that these markets will soon be significant contributors to growth.

Now, I understand there have been concerns about recent Google algorithm changes, a.k.a. Panda. As far as our business goes, there is no change versus what we stated in the 8-K filed on February 28th. That is, the algorithm change did affect organic traffic to many of our sites. We saw significant drops in traffic to some sites while traffic to others was up. The net effect on our financial results was not material and is not expected to be so going forward.

The full impact on quarterly revenue, had we made no adjustments, would have been in the low single digit percentages. We, of course, adapted quickly and effectively to accommodate client demand and to achieve target margins as we always have.

The impact was greatest in education where we still grew 26% in the quarter and where we continue to see good momentum and to have a strong outlook. The impact from the algorithm change on financial services results was negligible.

Importantly, the changes have not altered company guidance going forward in terms of growth or EBITDA margins. We continue to expect that we will be able to grow revenue an average of 15% to 20% per year for as far as the eye can see, reflective of the still early stage of our market opportunities, our large footprint and our uniquely powerful competitive advantages. We also expect to deliver average annual adjusted EBITDA margins of 20%.

In summary, we are pleased with our financial performance, strong execution and progress across the business in the third quarter. We are still very early in the pursuit of enormous and fast-growing market opportunities. We continue to adapt effectively to rapidly changing market dynamics.

And we believe that we are uniquely positioned to capitalize on multiple large market opportunities for many, many years to come. We remain focused on investing in media, technology, and marketing initiatives that we believe will fuel continued sustainable growth and profitability.

The economics of clients of measurable marketing on the internet are proven and compelling. And we are the most sophisticated company today in delivering those results. We have formidable competitive advantages and we are investing heavily to make them even stronger.

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

Thanks, Doug. Hello, and thanks, again, for joining us today. As Doug said, and as you've seen, we delivered a good quarter. We posted 19% top line growth over the third quarter of fiscal 2010, the reported 22% EBITDA margins.

Before delving into the details, I want to remind you of our long-term financial targets which remain the same as they have for many years, that is to maintain 20% annual EBITDA margin and an average 15% to 20% top line growth per year or better. We've met or exceeded those targets for the past eight years and we believe we can achieve these targets for many years to come.

While delivering on these targets, we plan to -- one, generate significant cash from operations, more on that in just a bit; two, continue to expand our leadership position and growth potential in a large but still early stage growth market; and, three, continue to create shareholder value.

Moving on to performance for the quarter, on a year-over-year basis, our education client vertical grew 26%, our financial services client vertical grew 17% and our other client verticals grew 1%. Keep in mind that these are growth rates on a $400 million plus business, so real growth at real scale.

Now, more details on each of our client verticals. Our education client vertical which represented 45% of Q3 revenue grew nicely with a revenue of $48 million, up 26% over the prior year's third quarter. We have benefited from the increased client demand that we've been discussing for some time.

We expect the benefits to continue as we work hard to produce high quality student inquiries that are well-matched to our clients' offerings. We also benefited from our efforts to pursue new segments and sign new clients.

The financial services client vertical represented 45% of Q3 revenue or $48.7 million for the quarter. Our growth moderated to a still solid 17% year-over-year increase. We expect more muted growth in the near-term due to the volatility of this market's early stage, as Doug discussed earlier.

Revenue from our other client verticals which include B2B, home services and medical, represented 10% of our total fiscal Q3 revenue. Revenue from other increased 1% in the quarter to $11 million as we lapped the inorganic benefit of the Internet.com acquisition.

Overtime, we believe these verticals have the right characteristics to perform for us at scale. We made some real progress at those quarters Doug discussed in detail. In the third quarter, as to the last four quarters, we have no 10% customers.

Moving into cost portion of the P&L, for cost revenue and operating cost, I will provide you the result 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 the 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 [$70.3 million] in the third fiscal quarter, representing a 35% gross margin, two percentage points higher than in the year ago quarter. So I'll remind you that we focus on EBITDA margin, not gross margin as we manage the business. Our cost of revenue represents all the cost used to produce our measurable market results including media and personnel costs.

Moving on to operating costs, product development costs were $5.9 million in the third fiscal quarter or 5% of revenue. We continue to invest in technology that expands our competitive advantage. And as you might know, well over a third of our employees are engaged in technical and engineering roles.

Sales and marketing costs were $3.6 million in the quarter or 3% of revenue. And general and administrative costs were $4.6 million or 4% of revenue. Note that the large majority of the costs in each of these departments is personnel cost, with the exception G&A which also includes professional fees and insurance cost. Total OpEx spending as percentage of revenue remains the same as the year-ago quarter at 13% of revenue.

On the EBITDA line, 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 exceeded that annual target margin for this past quarter, achieving 22% EBITDA margins for fiscal Q3 and growing EBITDA 27% over the past year.

Moving to taxes, our GAAP effective tax rate for the quarter was 42.8%. Consistent with our historical comments for your modeling purposes, we believe a sustainable adjusted effective tax rate is 42% or slightly lower. Though as you know, that will vary quarter to quarter with discrete items.

Regarding shares outstanding, as you see in our press release for the quarter, our fully diluted weighted average shares totaled 50.6 million. As I mentioned on our last call for the next couple of quarters, I believe that 52 million diluted shares is a good figure to use for your models at similar stock price levels.

Our GAAP diluted EPS for the quarter was $0.13, our adjusted EPS for the quarter was $0.25. Adjusted EPS adds that two items only, stock-based compensation and amortization of intangibles inclusive of tax effect. For our adjusted net income and EPS computations, as always, 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 $150 million, up $24 million from the prior quarter. You can see the details from the cash flow statement in our earnings release. At a summary level, though, the most material items affecting our cash position included, one, the generation of $28.9 million in cash from operations. That's a QuinStreet record.

And, two, $5 million for acquisitions of which $4 million represented our penultimate earn-out payment (inaudible). Total debt decreased to $111 million from $117 million in the prior quarter, reflecting $1 million of payment on bank debt and a reduction in seller notes of $5 million.

With regard to cash flow metrics, cash flow from operations benefited from some improvements on an already strong DSO metric which drove us to $28.9 million in operating cash flow, far surpassing any historical quarter's cash generation. This represents two consecutive quarters of record operating cash flow.

Fiscal Q3 normalized free cash flow which is free cash flow excluding working capital changes was $16 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 account fluctuations and to drive the underlying cash flow characteristics of our model after minimal CapEx.

Over the last five years, our annual normalized free cash flow has ranged from 13% to 15% of revenue with an average of 14%. We're at 15% for the first time since fiscal 2011. 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. For this past quarter, we had $1.5 million for CapEx.

I encourage you to review the trend results and the detailed computation 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 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 to Q&A, it was a good quarter of growth for revenue, EBITDA, and cash flow.

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

(Operator Instructions)

And our first question comes from the line of John Blackledge of Credit Suisse.

Thank you. Just a couple of questions. So education was much better than expected. I'm just wondering what the key driver was, assuming both higher volume and better pricing, but if you could give us some detail on that. And if you could just talk to the demand levels from existing and new clients both in the quarter and then heading into next quarter.

And then separately, the type of growth that we saw in the fiscal third quarter, is that something we can look forward in the fourth quarter and going out? Thanks.

Sure, John. In terms of the mix of, say, price, volume and the growth for education, it was once again primarily volume-driven. I'd say as with the past few quarters, maybe 5% to 10% of the growth was attributable to a mix to higher value inquiries and demand for those higher value inquiries from the schools as they look to bulk up on those programs that are most sustainable under new rules.

The demand was -- most of the growth came from existing clients giving us more budget and shifting more business to us, I would say, of the overall growth that probably less than 10% of the growth came from new clients at this point. But that does not give enough credit to the impact of new clients over time.

As they -- as we grow their revenue with us, as you know, about 85% of our historic growth comes from existing clients giving us more budget. And as they provide us with greater leverage in media because we're able to match more of the visitors to a program and/or match visitors multiple times where that visitor wants to look at more options. So a lot of leverage coming to us in greater and greater numbers of client signings, accelerating client signings in education.

We don't want to give short-term guidance as you know. I can tell you that we feel very good about education, about where we are in terms of that business, its outlook and the momentum that we have. We are not seeing any diminishment for the dynamics of both flight-to-quality effects or fundamental vectors that, from what we've seen over the last two quarters.

So, well, we've benefited of course on the flight-to-quality. There's a lot of fundamental growth drivers that we see continuing to grow the business for as far as we can see.

Yes, I think that's important. I think what I don't want folks to -- and I know there's always a well-deserved degree of cynicism amongst public company investors, our growth in the short-term is probably less than half driven by flight-to-quality effects and significantly more than half driven by fundamental growth, and fundamentally delivering better results for clients on a bigger footprint and doing a better job of delivering quality experiences and matches to visitors, stuff that's really sustainable, and entering new segments.

So, I think that's important that it be understood.

That's great. If could just have just one follow-up. I thought it was interesting talking about the addressable market potentially doubling in education. I think it was in North America. If you could just talk about the components of that and then just the potential opportunity internationally. Thank you.

I'm happy to. Yes, in terms of the doubling of the footprint, I was alluding to the fact that we're offering clients a lot more access to our networks. And that they have to spend money that they've historically set elsewhere with us.

And that includes ways to promote themselves, more specifically, that includes advertising placements and targeted venues and includes qualified traffic that they bought and delivered to their websites and their apps more directly instead of it having to turn into an inquiry, and many other -- of those types of elements.

Those are budgets we have not historically been able to access. Typically, they're allocated differently with the clients. And most of the large clients have been asking us for these capabilities in the past.

It just was a -- that we have not had the priority in the system to develop those placements and those products. And now we have those products and we're rolling them out aggressively. So that's what's driving that footprint expansion which is quite significant.

In terms of international, we believe that the international opportunity in the markets that we're now entering probably doubles again, our overall education opportunity. And when we're able to talk to you in a lot more detail about that, we'll give you some stats that will get you to the same price.

But the numbers of students and even the visitors at the properties we already own and a couple of those areas are actually larger now than we have in the United States. So we are -- when we say we're doing something, that means we're actually doing it. It doesn't mean it's a twinkle in our eye. And again, we'll be able to talk in a lot more detail about that before too long. And we think those markets could actually come quite fast.

That's great. Thanks for the color.

Thank you, John.

Thank you. And our next question comes from the line of Mark May at Needham.

Thanks for taking my questions. The first was I just want to clarify something that I think, Doug, you said in your prepared remarks. You talked about how the financial services vertical could see, I think you said flatter growth, going forward. But I just -- I'm just trying to understand.

I know that the comps in that segment get more difficult particularly in the first half of the '12 because of the two acquisitions, on revenue, I guess particularly with Insurance.com. So just trying to get to your kind of 15% to 20% revenue growth and making sure that that's a target that you have even as the comp scale will be toughen for that segment in the first half of the next fiscal year.

And then my follow-up question is in the education vertical. You did allude to I think half of your revenue from a small group of customers, I wondered if you could put some numbers around that in terms of percent of revenue from how many customers and how that has changed maybe year over year. Thanks.

Sure. In terms of financial services, the flatter growth, you are right on, Mark. Part of the flattening we might expect is due to very difficult comps in the next couple of quarters due to the fact that we have some windfall revenues at Internet.com from businesses that we shut down and we have to make that up and then grow on it.

The other cause of the potential outlook for flatter revenue growth is really just greater volatility. We want to make sure that we make everybody aware that we say volatility, there's less predictability right now given some of the dynamics in the market with kind of a gold rush mentality particularly of some folks that are selling much lower quality click results in an effort to try to take advantage of the market we've created in auto insurance. And clients aren't always yet able to differentiate.

And so as that -- as those clicks come onto the market, we're seeing some suppression of click pricing and the lack of differentiation. Something we've seen in the past and we lived through in education a few times. Something that we were incredibly confident about working too because clients do over time get rational.

But we do have one competitor in particular that's buying market share and selling low quality results, and that's driving kind of -- the supply clicks up while demand grows a little bit more slowly right now and therefore pricing down. And so, that is a fact.

And so that is an effect that we know we'll work through, we don't know how long it will take us to get to the next stage of market development, where we will work through that. And, in fact, and we just want to make sure that we're articulating that and making everybody aware of that.

In terms of our 15% to 20% growth, the 15% to 20% average annual growth is just that, it's average annual growth. We certainly think we're going to beat that fiscal year by a handsome margin. Our plans for the next fiscal year are, to date, still reflect that we think we'll beat it again. And then we think, on average, we'll beat it for as far as we can see as we look at the demand, the development of our markets.

I do think, though, that if there's a flattening of financial services, it's more likely to be because of what I described in the first couple of quarters relative -- rather than the second half as far as what we can see today.

But again that's how we -- the 15% to 20% is based on -- we have a lot of growth vectors, not just financial services, it's an average annual rate and we know we're going to finish this year and we're completing planning for next year. And our planning for next year indicates that we will be well into or above that range as well.

And a follow-up on your comment about quality and clicks instrument space, is it possible that with Panda -- I know that you've talked about its impact on your O&O sites, is it possible that Panda did have some negative impact on some of the click affiliates in that segment?

It could have but not to a discernible or material effect. I mean -- what we saw by way of deceleration in financial services this past quarter was really driven by auto insurance stalling down from where it had been.

A surge of lower quality click volume largely from publishers and affiliates that we had cut because of quality issues picked up by a new competitor who quickly signed them up and put them onto the market and without the client's ability to really differentiate or make that quality connection, as that competitor pops itself up to try to sell, which they're now in the market to sell themselves. We've seen that movie before as well.

And one, and this is -- I hate to say this as much as you hate to hear it, a large client shifting a bunch of budget over the past couple of quarters to branding programs that they expect to come out over the next quarter or so. And I know that sounds a lot like a large education client but it is what it is.

And in an early market, you have a big guy that does that and you have that demand drop, while also simultaneously having supply increase on the click side, you get some pricing effects. And again, when you read in the MD&A in the 10-Q, you see that the volume of clicks for us is actually up dramatically. Pricing was down and then offset it to that degree.

But for the pricing effects which we do expect to cycle right back out of it as we have in the past, and we even up at 45%. So it's -- those were the three main effects going on in the market.

Thanks, Doug. Thanks, Ken.

You bet, Mark.

Thank you. Our next question comes from the line of Justin Post from Bank of America Merrill Lynch.

Just a couple of things. Is the international investment going to be a big expense resource? Or, I know you've reiterated your kind of EBITDA margin guidance, but how do you see that affecting your expenses as you look out a year or two?

I'm sorry?

The international expansion?

Yes, [Jordan] I'm sorry. Oh, how do you expect international expansion to affect margins?

Yes.

Not at all. We have no change in outlook. I mean, that's coming out of our budget for spending on expansion just like it would if we are working on a new vertical or a new media here.

Okay. And, I think some of the things that Google is doing as far as lead generation, are you seeing any impact on your business at all from that? I appreciate the disclosure on Panda, but how about some of the things that they're doing as far as finance lead generation and what verticals are they in versus your verticals?

You know, we are not seeing any effects. And we don't really expect -- I mean based on what we've seen in other areas where they've come in, we don't really expect that our view is going to change because they tend to displace folks that are much thinner or don't have as deep capabilities or media presence as we do. That's been a historic pattern.

They've been in mortgage, for example, for about three years. During the same timeframe our mortgage business while there have been some pretty notable exits from the mortgage vertical in that same period.

They're in credit cards, which is a business that's growing very rapidly for us right now. And I don't expect again that given that we participate in a different part of kind of the ecosystem than they do, that their offerings are going to change our outlook. We expect them to -- and we understand that they may be introducing some products in insurance -- we expect very similar effects and dynamics as we're seeing again in some of these other areas there.

But no, we're not seeing effects that we're able to discern, that -- and I think we'd probably know from Google financial service product offerings.

Okay. And I don't know if you can tell us this, but you said there's five more sub-verticals in finance.

Sure.

Do those amount to a material percent of revenues and can you tell us what percent is non-auto insurance?

The answer is that it's material.

Oh, yes, they're material. I think auto insurance is around 60% to 70% of financial services revenue overall.

And did the growth rate of those verticals hold up pretty well?

Well, it depends. A couple of them are growing very rapidly and a couple of them are not growing very rapidly largely due to kind of macro effects. For example, the deposit accounts is a vertical that we are strong in but it's not growing.

It's not not growing, it's just not growing super rapidly and that's because, again, the banks for the most part are getting all the funds they need from the Fed, they don't need to access funds from consumers. And so that's not it was. It's growing, it's not growing rapidly.

Credit cards is growing pretty rapidly. That market was actually fairly dead about six months ago when the securitization market had gone away and the banks were concerned about their balance sheets, we're seeing a much more aggressive marketing budget from the credit card companies and that's fueling some very nice growth in credit cards.

Life insurance was growing nicely for a while, it's a little bit flat for us. But I think that's more of our stages of development and I think that's going to continue to be a very good vertical for us.

We're new -- health insurance was, again, dead for about the past two years due to the health care law and the cuts and broker fees and all the things that happen there. We're seeing new life there, but that's been pretty flat prior to lately. But lately, we're seeing much more activity and new life there.

So that's -- kind of depends on the vertical but all -- and I guess I'm the only one that didn't cover mortgage. Mortgage was -- we have done very well in mortgage over the past few years. It's been a little flat lately as the rates are starting to creep up, which is not unusual. But we love our position in mortgage and we like that market.

On the long-term, obviously it's not a rocketship right now given the housing situation. But as it comes back, we are -- we probably went from being number 9 or 10 in that market a few years ago to being certainly in the top two or three today. So as that market comes back, we like our odds a lot.

Okay. And last question, we go into the other verticals. Definitely prepared comments, you sounded much more optimistic than we've heard recently.

Yes, yes. I am.

Do you expect growth to start to really pick up and aggregate there and really start to help your overall growth rate or do you think it could be a drag on that 15% to 20% that you talk about?

I think it's going to be a contributor to growth this coming fiscal year. And that is a change from where we've been but that's what we believe.

Great. Thank you. I appreciate it.

Thank you, Justin. Sorry about the confusion at the beginning there.

By the way, Mark, and I know you're not on but just to -- you asked about EDU numbers. We had I think three clients in education still represent between 30% and 35%, depending on the month, of education revenues. I think if you add the next three, you get to about 50%. So it's about five or six clients in any particular month or quarter currently representing half of education revenue.

I just to want to make sure I close that loop because you asked that question and I've forgotten to answer.

And Jordan is next I think.

Our next question does come from Jordan Rohan from Stifel Nicolaus.

Okay, a couple of things. First some small things and some big ones. On the small side, product development and G&A outstrips our forecast. While we may have been off, they stepped up pretty nicely. Do we expect that again in the next couple of quarters?

And the second is a little bit broader and related to Panda. Can you talk about the commonalities and characteristics of the sites that was improved and got hurt out of Panda? And then what kind of tactics you might have used to improve your relative position or rank for the things that were impaired?

Thank you.

You said product development G&A you said had --

Had [out-stripped] his model. They've stayed consistent as a percentage of revenue, but they did both bump this last quarter. I think we'll see slower growth as we get through the course of this next year. We don't forecast any of those specifically. Obviously we balance all of that to get to our 20% EBITDA target or better. But I think you'll...

So there's nothing structural there, Jordan.

Absolutely.

Yeah. I would not expect there to be some kind of greater slope lined up into the right of product development G&A relative to revenue or any diminishment of margin from that. There's nothing fundamental or structural going on there.

Even with the international ventures?

Even with the international ventures. But most of what we're going to do internationally, we're going to do from here on our technology platform with teams. One team in place already and another team partially in place already in a couple of large countries on the ground. Quite expensively frankly and many of the clients will serve our clients from here with the presence, where we're going.

So we do not expect that there's going to be material change in terms of those line items relative to revenue or that it will in any way diminish our ability to continue to deliver our target EBITDA margins.

You asked about Panda sites. You know, I wish we knew more about the common characteristics. We have put enormous amount of time into trying to sort where we got hit the worst and why versus where we benefited and why.

I can tell you that from a very high level, the good news appears to be sites that we have truly focused on with our strategy to improve the media and content of our properties. And I've said before, we're not all the way and are not all the way through that process.

But those sites, though, we had put those efforts and we had gotten to have faired much better than the sites that we had not gotten to, where we had maintained the sites after acquisition but really hadn't gotten to the point of being able to focus editorial and content staff on making them into what we thought they could be.

A big part of why we bottle off these sites was because we thought we could do a better job of creating a great targeted media properties for the future. And we've gotten to some of them and haven't gotten to others. And I could tell you that it appears to us that the ones we've gotten to certainly faired better than the ones that we hadn't.

Other teams would be kind of which you might have read in the blogosphere or the press, but beyond the grand broad teams, other than those, we're working very hard to understand it and we continue to make sure that where we had success we build on it, where we didn't have success, that we get to those sites and we incorporate the things that we have done on the sites that did do well or better. And we're kind of plowing through it.

All right. Thank you.

You bet.

Thank you. And our next question comes from the line of Brian Fitzgerald from UBS.

Thanks. I have a couple of clarifications, guys. You talked about some propping us in the PVC in the financial vertical as a poorer competitor was rushing to get poorer affiliates to market quickly. Was that just endemic to financial or are you seeing that across EDU also?

And then one follow-up. I don't want to bad your Panda, but --

And you're mixing all kinds of animals up there too.

As you see poorer players get moved down in the relevancy and they start moving over to the paid side or the right side of the page to acquire traffic, is that ruining some of the efficiencies? Is that driving up pricing also? Is that what's driving up that financial competitor?

Let me try to answer that, Brian, but don't go away in case I don't get this, in case I don't answer the right question. In term of frothiness in TPC, it's really in click offerings to the auto insurance clients out of the affiliate networks and primarily out of affiliates or doing things like incentivization and then have very, very poor conversion rates for our clients.

Many of that which we worked with before and dropped and they've been picked up by a guy that's building up a business, flooding the market with those clicks and driving the pricing down.

We are not seeing that education. We have historically do a couple of cycles of seeing that in education as far back as about '03 and as recently as probably around '06. It's a cycle that we also cite going through and not surprisingly it's like the stock market.

You know, when there's money to be made people are going to incrementally get into something. And then as the increments work, they accelerate it. And then once it accelerates, it gets to the point where clients actually are able to see the effects and work to differentiate.

Now, we're trying because we have the experience to make sure the clients differentiate and sort more rapidly this time. And I think we're having some success there. But that's where we're seeing and it really has to do more with the earlier stage of development of those budgets in those markets online than it does anything else and that's financial services versus education.

Right, Doug. It's the newness clients to the market generally?

Right.

And how they measure. This is less likely to happen in education for instance where they'd become more expert over time at measuring. And I was wondering, you know, we're talking the other day about incentivization. And I'm not sure everybody gets that tactically.

Well, let me give you some examples. We have -- there are some of those affiliates, they're selling clicks to these other guys that basically you get game points for filling out an insurance lead. And if you can find some of these, you'll actually see that on the form, it says oh, by the way, don't -- that you're going to get a phone call. When they're call, don't tell them you got points for this because they don't want to get in trouble from the clients.

So you guys know that stuff we don't do. If we ever catch an affiliate doing it, we are going to immediately cut them out of the system and we measure there's also clients so you can tell often times this is happening because they're not getting any conversions. So that's the kind of thing we're seeing and we're seeing that -- that it will sort itself out but it will take some time to sort itself out.

Hopefully, shorter than it might if we weren't experienced with it and we weren't aggressive about making sure that we are communicating and demonstrating and showing the clients.

As far as Panda goes and enforcing people from free to paid, which I think was the question, Brian, we are not seeing that having an effect on us. It's very difficult for somebody to compete with us in TPC or paid search on any basis.

So if somebody has historically lived off of free traffic and they think they're now going to compete with us in paid traffic, that's going to be a very, very difficult hill for them to climb. We do not cross-subsidize margin. So when we bid for paid search, the contribution margins we get out of that channel meet our financial targets and objectives.

So -- and remember, only 10% to 15% of our revenue comes from organic traffic. So we are very good at it, we have a lot of technology. We have enormous experience, we've been doing it for many years.

We're actually seeing accelerating effects in that particular part of the channel for us in terms of volume and margin as we continue to fundamentally deploy better technologies that are matched visitors to programs and get better pricing with clients based on that improved quality.

Perfect. That's exactly what I wanted.

Great. Thanks, Brian.

Thank you. And our next question comes from the line of Bill Warmington from Raymond James.

Good afternoon, guys.

Hey, Bill.

Hi, Bill.

A question for you on the education side. You talked about adding 100 non-profit schools and about the opportunity of expanding your client base there. And I want to ask the new schools that you're seeing, are they coming to you basically greenfield where you are the first internet lead gen experience that they're having or are they switching to you from someone else?

We're seeing both. There are folks that have served these clients in the past. And that's usually not good news for us because very often what we hear is, you know, we tried it and it really didn't work, or, we worked with so and so and the results aren't very good.

And so it's actually -- while we're seeing both, where they have been served, we often have to sell over that and sell through that. But we're getting very good reactions from folks, a very good growth rate out of folks that are -- some are -- some of which are quite new and some of which worked for someone else before to a little effect.

Yes. So, it sounds like if they have tried it in the past, they were -- they may have tried it in the past, but they weren't active users of the service. And this represents a move of offline dollars to online basically.

I would say it sometime represents a sheer shift to online, but most of the time, as it grows, to your point, it represents a sheer shirt from offline to online, yes.

Okay. And then on the -- also on the education side, can you talk a little bit about what you're seeing in terms of program mix and if you're seeing a change in the mix of the programs that you're dealing with today versus a year ago?

Yes. We've been seeing a program mix change for over the past year or two as folks become sensitized to the coming regulations and as those regulations were being developed, and as they were going to see what the regulations are going to be. And that's been pretty profound in some of the themes.

Without wanting to really, you know, give specific client details, but some of the things might be more demand for graduate programs which tend to persist, convert and repay at greater rates; less demand for --.

And, again, these are relative statements, not absolute statements, but relatively less demand for a number of associate type programs which tend to not convert and not repay great rates; and then a little bit of less -- a little bit less emphasis and/or reductions in value or cost of some of the passion programs which might include certain, you know, culinary and/or art program, although some of those actually do quite well, too.

So, again, you have to be careful not to paint anything with a broad brush.

Yes.

But we -- we have seeing clients adapt very aggressively to make sure that they get their formulas in line and their mix in line in the way -- what they and we both expect to be more sustainable.

Now, very importantly, even where some of the clients aren't making those changes, we are making those changes. So where we -- where we choose to focus has been on programs that we know to be much more compliant and are sustainable under any new form of deregulations as it had been proposed.

Yes. Then the last question, any clients break the 10% level in the quarter?

No.

Nope?

Nope, they did not.

Not for four quarters now.

Okay, just checking. All right.

Good question.

Thank you very much.

Thank you, Bill.

Thanks, Bill.

Thank you, sir.

And in the interest of time, we ask that for further question limit yourself to one question and to one follow up.

Our next question comes from the line of Carter Malloy from Stephens.

Hey, guys, thanks for taking my questions.

Hi, Carter.

You talked about pricing and -- and insurance and I just wanted a little clarification there. You said that the volumes in financial services overall were up 45%, but that the pricing pressure was in insurance is what held that segment down?

No. Actually, the volumes in insurance, car insurance, auto insurance were up about -- I think it's 45 -- 45%. I'm just checking with Ken who has the detail in front of him. And the offset was a price which dropped us to about a 70% revenue growth.

Okay. That's helpful. Thank you.

And then, you know, also in the other business you talked about acceleration there and March being a big quarter and that driving growth in the future. Are you saying, you know, driving the company growth, we assume that means, you know, we'll be actually looking at a segment that's sort of above your target range, or are you talking about just getting it back to an $11 million to $12 million-type run rate?

I mean, I -- what I said was just to be sure I say it clearly. We expect that the other verticals will actually be contributors to growth in the next fiscal year, whereas over the past couple of quarters certainly on an organic basis, they've been dragged to the growth.

And -- and, Carter, you're new to the story. So, for fairness, we always talk about multiple quarters out. This is -- don't take anything we're saying as near-term quarterly guidance. So we're really talking more about trends and what we see in the coming quarters.

Certainly. No, it's all understood. Thanks for the help.

Yes.

Thank you.

And our next question comes from the line of Yun Kim from the Gleacher and Company.

Thank you. Hi, Doug. Hi, Ken.

Hi, Yun.

Hi, Yun.

Hi. Well, in the financial services vertical especially in the insurance, can you describe to us as to what has been the progress that you guys have been making in terms of increasing the organic traffic and volumes and their conversion rate on the online asset that you guys own? Can you see other stuff that you see that's controlled?

Let me make sure I understand your question, Yun. You're saying in the financial service particularly in the insurance, what do we do to increase organic traffic?

Yes, and the volume, and the conversion rate. Those are the things that you should be able to control. Right?

Well, we can't directly control all of the volume and traffic as hard as we try. But we do it certainly have an impact. We are -- I'd say, in financial services, our financial services owned and operated portfolio which is a smaller portion of the business -- if that's what you're asking about -- our traffic is about flat versus pre-Panda.

We actually -- it was actually up just after Panda rolled through. And then it was down a little bit below after a couple weeks after that. And it's kind of leveling out about flat. The cause of that is that we still have a lot of organic traffic of those properties.

And we have, as I think I indicated last call or the call before, we're working on expanding our footprint in terms of traffic access and we have a lot of other traffic sources including a lot of big content syndication partnerships with large publishers, where we've created for them and with them targeted traffic and content that flows back to those sites.

And so those sites -- the organic traffic which you asked about which is inclusive of referral traffic as we count it is about flat. And we expect to continue to grow largely off of normal organic growth rates plus contents indications. So we think that we'll also shake out from this flatness and begin to grow it again just as we did pre-Panda going forward.

Conversion rates are good. We're increasing conversion rates as we increase the offering on -- on the websites. I don't know what the latest trends are, but the latest trends have been noise anyway. In general, of course, our business grows because -- to your point we do one or several things.

We either grow traffic access, our own or two affiliates or publisher partners, which we are doing and have done, or we increase effective pricing that's either we get paid more for the same click lead or inquiry because it's more valuable to the client or we're able to match it more times and that's -- that still works for the client and for the visitor.

And, you know, if we do any of those -- or we match more of the traffic, which is the third thing. You always hear me talking about media yield. But, we grew because we are able to effect all of those things to some degree in the mix of media clients and across the board but for the other verticals where we were flat, except for medical.

Okay, great. And then quickly, Ken, the volume mix across these segments -- does one segment have higher margin than the others? Just trying to better understand the dynamics of margin given that EDU is set to grow here, while the other two are (inaudible) are stagnating.

Sure. So, the -- we don't have segments. These are client verticals. That's not how we run the business. But our different client verticals -- it's more about stage and development and media mix and so forth and (inaudible).

There is no fundamental difference from an incremental business standpoint for the margin amongst the different verticals. So -- and I understand your question. You're thinking about, if I grow one vertical versus another, does it affect the profitability differently?

I'd encourage you not to try to break it out at that level because, frankly, we don't. We mix the overall business to get to our EBITDA target. So there is some variability, but it's essentially irrelevant.

Okay, great. Thank you, so much.

Sure. Thanks, Yun.

Thank you. Ladies and gentlemen, this conference will be available for replay after 8 PM tonight through May 13, 2011. You may access the replay by dialing 1-800-642-1687 and entering the access code 60128082. International users may dial 706-645-9291. Again, those numbers are 800-642-1687 or 706-645-9291, access code 60128082. This does conclude the conference for today. Thank you for your participation. You may now disconnect.