QuinStreet Inc (QNST) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the QuinStreet Fourth Quarter Fiscal Year 2011 Financial Results conference call. At this time all participants are in a listen-only mode. Later, we'll conduct a question and answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference may be recorded. And now I'll turn the program over to Erica Abrams. Please go ahead.

Thank you, and good afternoon, ladies and gentlemen. Thank you for joining us today as we report QuinStreet's Fiscal Fourth Quarter and Fiscal Year 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 May 6, 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.

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 the results of fiscal 2011, and Q4, both of which, of course, ended June 30th. Fiscal 2011 was a year of good progress and results for QuinStreet. Full year revenue increased 20% over the prior year to $403 million. EBITDA increased 27%.

Cash flow from operations was $78 million. Normalized free cash flow was $61 million, up 33% from last year. Adjusted net income grew 27% to over $50 million. Adjusted EPS was $1.02 per share. Fourth quarter revenue was $94 million, growth of 6% year-over-year; in line with the outlook we provided in June, which was for a generally flat year-over-year quarter.

Recall that we defined generally flat as ranging from a single digit negative to mid-single digit positive change in year-over-year revenue. Adjusted EBITDA margin was 22% for the quarter. Cash flow from operations was almost $20 million and normalized free cash flow was $15 million. During the quarter we made good progress continuing to expand our footprint, capabilities, and business, while also well navigating near-term challenges just as we have for the past 12 years.

Turning to our results by client vertical, education revenue increased 15% in fiscal 2011, to $175 million. In the fourth quarter revenue and education increased 12% versus the prior year to $42 million. We remain confident in delivering good growth in education in fiscal 2012 and beyond. We are seeing strong, increasing demand from clients, and we are making good progress on a number of initiatives to meet that demand with the quality of results and approaches clients expect from QuinStreet.

Revenue in the financial services client vertical increased 26% in fiscal 2011 to $182 million. In the fourth quarter revenue increased 2% over the prior year to $39 million. The slower growth was due to softness in auto insurance click pricing as discussed in prior calls. We made good fundamental progress building financial services for the future in the quarter, including working with auto insurance clients to improve click quality. The vast majority of our auto insurance clients have now measured and noted our better quality. Our click pricing has stabilized and improved as a result.

While difficult, managing through the market issues in auto insurance has improved the quality of our engagement with clients, accelerated the development of the channel, and widened our already substantial competitive advantages. Not unlike similar phases we have seen in the development of education and other verticals over time. Auto insurance and financial services more broadly represent huge growth markets for us going forward. In our client verticals, annual revenue increased 18% in fiscal 2011. For the fourth quarter revenue was up 4% year-over-year to $13 million.

The modest growth in other in the quarter is largely due to a difficult one time comp from last year, and really belies the good progress we are making in these newer verticals. At $13 million last quarter, we are now running at an over $50 million annual revenue rate, already well above fiscal 2011. We expect growth in other to accelerate, and for it to be a much more meaningful contributor to total company growth in fiscal 2012. We continue to work toward building nine figure businesses in each of the three current other verticals which, of course, include B2B, home services, and medical -- all very big markets.

Stepping back, we just grew revenue 20% in a year filled with economic, regulatory, and market challenges; all well discussed. We continue to expect strong growth for many years to come, due to the enormous size and early stage of direct marketing advertising online, and eventually in all digital media. An estimated $40 billion per year is spent on direct marketing advertising just in our current footprint of verticals and just in North America.

Direct marketing advertising overall represents about half of total advertising spend worldwide. And we are the leading direct marketing advertising company online. While we have delivered strong growth in profitability for 10 years now, we have truly just begun. Our markets are huge. Our capabilities are industry leading and expanding. And we intend to deliver strong growth and profitability for many, many more years to come.

In terms of near-term outlook, we continue to expect that revenue results for the September quarter will be generally flat year-over-year just as projected in June. We also continue to expect that full fiscal year 2012 revenue will be between $455 million and $475 million; growth of approximately 15% at the midpoint. As always, we will plan to manage to a 20% adjusted EBITDA margin for the year. Inclusive of spending aggressively on new client, media, and technology initiatives.

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 released fourth quarter results that were at the upper end of the revised outlook we provided in June. For the fourth fiscal quarter we posted $94.1 million of revenue, up -- or, 6% top line growth over the fourth quarter fiscal 2010, and reported 22% EBITDA margins.

We provided an intra-quarter update in June because we wanted you to know what we understood in a timely fashion. And we wanted to provide a near-term outlook so that you had full context. We've continued to navigate our early insurance market, which heretofore has provided excellent growth, and around which I'll provide some more color in a bit.

Most importantly, you should understand that we still firmly believe that this market represents a massive opportunity. That we are the leader today at good scale, and that we are positioned to create a much larger revenue line for QuinStreet in insurance itself, while also expanding the other financial services verticals. While we are executing through early-market dynamics in a nascent but enormous space, we are continuing to develop competitive advantages that we believe will make us one of the leaders for many years to come. That context is important.

Even more importantly, while we are still a relatively new public company, with our IP on February of last year, we have executed consistently for much longer. And in the face of operating environments, much more difficult than we face today. For the past 10 years we've demonstrated relentless growth, 15% or better each and every year, and some years much better. And consistent profits around our 20% EBITDA target for the same period; a decade straight and at some real scale. This is an operationally strong company, delivering on our business outlook year in and year out, generating significant growth, profit, and cash flow, again, each and every year.

It is not always easy, but we have executed relentlessly. I emphasize this to find context that are discussion and outlook today reflect our expertise and our ability to navigate evolving markets. QuinStreet is an established $400 million-plus revenue company that performs when times are easy and when times are hard. Our outlook and evaluation come from a long history of proven results.

With that context, I'll discuss the results for fiscal year 2011, and the fourth quarter. The fourth quarter wraps up a good fiscal 2011. Revenue increased 20% in the year to $403 million. Adjusted EBITDA margin was 22%, or more than $90 million growing 27% over fiscal 2010.

I'll now walk you through the performance of each of our client verticals; both for the quarter and the fiscal year. Our education client vertical, which represented 44% of Q4 revenue grew 12% compared to the year ago quarter to $41.7 million. On an annual basis the education vertical delivered $175 million of revenue, up 15% over the prior year.

We continued to benefit from our efforts to pursue new segments and deliver the market results that our clients need. And we are optimistic that we'll continue to see market share gains as the high quality leader in the space. As we partner with our clients during this period of adaptation, we continue to hear that they plan to spend more money with us over the course of the upcoming year.

The financial services client vertical represented 42% of Q4 revenue, or $39.3 million, as our growth moderated 2% compared to the year ago quarter. On an annual basis, the financial services vertical delivered $182 million of revenue, up 26% over the prior year. In the near-term, we believe that click pricing issues will impact our growth outlook in this client vertical. But we also believe that our efforts to improve quality and work with clients to measure the real cost of customer acquisition have been effective and that pricing pressures have stabilized.

Revenue from our other client verticals, which include B2B, home services, and medical represented 14% of our total fiscal Q4 revenue. Revenue from other increased 4% compared to the year ago quarter to $13 million. On an annual basis, our other client verticals produced $46 million of revenue, up 18% over the prior year. As a reminder, we look to these verticals as large opportunities with the right characteristics to become $100 million-plus businesses as opposed to focusing on near-term growth. That said, we expect other to contribute materially to our fiscal 2012 growth.

Moving to the cost portion of the P&L. 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 $1.5 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 decide to evaluate our costs, including or excluding those items as you desire.

Our cost of revenue was $61.5 million in the fourth first quarter, representing a 35% gross margin. Our cost of revenue represents all the costs used to produce our measurable marketing results, including media and personnel costs. That margin has been consistent at 35% for each quarter this past year. Moving on to operating cots. Product development costs were $5 million in the fourth fiscal quarter, or 5% of revenue as in this past quarter and for the prior year.

Sales and marketing costs were $2.5 million in the quarter, or 3% of revenue, as in the past the quarter, and less than the 4% of revenue we recorded in the prior year. General and administrative costs were $4.4 million or 5% of revenue, as in this past quarter and for the prior year. 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. Total OpEx spending as a percentage of revenue remained the same as in the year ago quarter at 13% of revenue.

Our annual EBITDA target of 20% remains the same as it has for 10 years now. Supporting our growth initiatives while delivering consistent profits and cash flow. As I noted earlier, we achieved a 22% adjusted EBITDA margin this past quarter, 4% higher in absolute dollars compared to the year ago quarter. EBITDA increased 27% on a full year basis.

Moving to taxes. Our GAAP effective tax rate for the quarter was 32% and benefited from an R&D tax credit catch up for California due to a legislative extension. Consistent with our historical comments for your modeling purposes, we believe a sustainable adjusted effective tax rate is 42% or slightly lower. As you know, that will vary quarter to quarter with discreet items.

Regarding shares outstanding, as you see in our press release for the quarter, our fully diluted weighted average shares totaled 49.6 million. As I mentioned, on our last call I believe that 52 million diluted shares remains a reasonable figure to use for your models for this coming year. Our GAAP diluted EPS for the quarter was $0.13. Our adjusted EPS for the quarter was $0.24. Adjusted EPS adds back two items only; stock-based compensation, and amortization of intangibles inclusive of tax effect.

Moving to the balance sheet. Our cash and marketable securities balance at quarter end was $167 million; up $17 million from the prior quarter. You can see the details in the cash flow statement in our earnings release. At a summary level, though, the most material item affecting our cash position was a generation of $19.6 million in cash from operations. Total debt decreased to $106 million from $111 million last quarter, reflecting $5 million of payments on debt with no additional draws.

Net cash totaled $61 million, or $1.23 per share. Now, moving to one of the fundamentals we considered core, cash flow. Cash flow from operations was $19.6 million for the quarter, and was $78 million for the year. We've benefited from a robust operating cash model, and also from good working capital dynamics, including a 46-day DSO metric.

Fiscal Q4 normalized free cash flow, which is free cash flow excluding working capital changes was $15.1 million or 16% of revenue. As always, we look to normalize free cash flow as our primary cash flow metric to remove the effects of current quarter working capital account fluctuations, and to drive to the underlying cash flow characteristics of our model after minimal CapEx. On an annual basis, normalized free cash flow was $61 million or 15% of revenue.

Over the last five years, our annual normalized free cash flows ranged from 13% to 15% of revenue with an average of 14%. Aside from taxes, the vast majority of our EBITDA drops down to free cash flow. The businesses now require large amounts of working capital expenditures.

While the stock market experienced tumult, and many companies provide funny metrics that mask fundamentals, we want you to measure us on three metrics; revenue growth, adjusted EBITDA as measured traditionally, and cash generation.

I encourage you to review the trended results and the detailed computation of historical operating cash flow, free cash flow, and normalized free cash flow in addition to revenue growth details by client vertical and adjusted EBITDA. All of which we make available and clear. We want you to understand the fundamentals, including the cash generating capacity of our model. We provide these detailed metrics and supplemental data on our website. We also include numerous other trended financial details beyond the metrics I just discussed.

To summarize, before opening up to Q&A, we completed a very solid year at QuinStreet, once again delivering record revenues, EBITDA, cash flows and EPS. We are positioned as a leader with the deepest experience in competitive advantages in a marketplace that will see tremendous growth for many, many years to come. Direct marketing on the internet is an early market that will grow rapidly in coming years, and we have the market position, and competitive advantages to become a very large company.

With that, I'll turn the call to the operator for Q&A.

Thank you, sir.

(Operator Instructions)

Our first questioner in queue is John Blackledge with Credit Suisse. Please go ahead, your line is now open.

Thanks for taking the question. Financial services was a little bit better than we expected in the quarter. Just wondering if the environment got better right at the end of the quarter. Was there an inflection point? And if you could just provide maybe some more detail on how the pricing environment stabilized? What that means exactly? Thank you.

Sure John. We made good progress throughout the quarter, progressively month to month. So I guess it is fair to say that June was probably the strongest of the three months. And we've continued to make progress since, both in terms of engagement with the clients, as well as that engagement turning into more volume and better pricing.

In terms of more detail, we have the last couple of months into the current month, we have began seeing progressive increases in pricing. Attributable to clients, both recognizing as well as experience higher click quality. Generally from us versus where we were as we continued to learn where the best clicks are coming from, and how to make sure we're sourcing those and differentiating those.

And significantly differentiating us from a lot of the lower quality click volume that's out there that of course, we're not associated with, so both effects. We're getting close to the more traditional price range. The bottom end, but the more traditional price range we saw before this period hit us around January, I guess. So, actually I would say that we were making faster progress than I would have expected and we are seeing a continuing good progress.

And I think it's still going to be a matter of -- it's early, and clients have to shift budget, and pricing has to come. But the -- while the trends were until three months ago, continue to be kind of down to flat, the trends over the past few months have been up. And that's a fundamental turn. And I think it's because we've made the decision, and taken the actions to make sure that we're looking out for the long-term benefit of the clients, and the long-term strength of our business.

And I feel very good about where we are and where we're going. Not just in click pricing and the continued -- and our continuing work with clients to get that price and quality -- both the price and quality right with them and for them, but also the other products and initiatives we have in place to continue to expand our footprint of products and services to those clients in coming months. It's good to have a positive report where the last few quarters have been fighting our way on the down side.

Right, just a follow-up. Thanks for the detail. You'd mentioned that there was one client that had gotten away from leads and went into the more traditional advertising mediums like TV. That had an impact on the pricing environment. Just wondering if that client has reversed course and come back, or is still allocating more dollars towards traditional mediums? Thanks.

Sure, yes, they're -- and that's going to happen as it happens in all markets. It's just more of an effect in the markets earlier and we're more concentrated like this as you know. But that client is still spending -- their commitments on the traditional media side were pretty much through -- mostly through the whole calendar year. So, we don't expect big jumps in spend from them again until January. Though, there have been some reallocations from them where they had flexibility and could back to the channel, and specifically to us over the past couple of months, but not in a way that we expect it will happen January and after.

Great. Thank you.

Thank you.

Thank you, sir. Our next questioner in queue is Doug Anmuth with JPMorgan. Your line is now open.

Thanks for taking the question. Just two things. First, you had mentioned that you are looking for a substantial portion of the growth in the coming year from the other bucket. So, I was hoping you could just give an update there in terms of what you're most excited about as you look forward 12 months.

And then second of all, can you just talk more about your uses of cash -- it looks like you now have about 30% of your market cap in cash -- and what you could do with that going forward? Thanks.

Yes, thanks, Doug. In terms of other - we -- the past couple of years we've been working on putting the pieces in place to prepare the other verticals to be able to grow more rapidly at the scale we need them to go to have an overall impact on company results.

And so, what you've heard us say the last couple of calls is that we see 2012 as being a year where we expect that to happen. In particular, we think that other will be a meaningful contributor to growth in 2012, whereas it's been more of a drag on growth and/or it's been too small to matter in the previous couple of years.

So we still expect that other, now running at about a little over $50 million a year, can grow this year in the range of 30%-plus and maybe considerably more than 30%, which could deliver for the Company a pretty meaningful contribution to overall company growth. That doesn't mean that it's going to drive overall company growth, but it's going to be a more than proportionate contributor. And now it's getting to a share of -- or to a size where that matters over the coming year and I think over the coming few years. Where we're most excited is we are through the -- mostly through -- almost 100% through the transition of Internet.com from technologically.

And as I mention I think in the last call also most of the revenue now is performance revenue, whereas when we acquired that asset, the technology infrastructure is really in a very poor condition and the revenue was on display. And so, we're now in a position to expand on that footprint, and to spring off of that platform, and we're going to be very aggressive. And we think there's a lot of market opportunity to do so in B2B, and we're seeing great progress there.

We're excited home services. As you know the last couple of years because of the economy, we'd really not managed home services for growth. We'd really more -- we're much more focused on margin. We've been focused on growth now for about six months again, and we're seeing tremendous momentum there.

And we had -- I think we've had three or four months in a row where we had record revenue versus the prior year. And so -- and we think there's a lot more to do there. A lot more to come, and we have a lot of great assets and capabilities and clients in that space that we're working with. And the remodeling market is actually a decently robust, versus say, the new home market.

And then the third component is medical where it's earlier, but pretty greenfield and we're serving a lot of great clients. We think we're comfortable with the revenue model. And we have a big focus on signing more of those clients and continuing to execute like we have recently. And medical is actually seeing some pretty explosive growth, but it's just at its earlier stage a little bit lower scale. But I think that we're going to continue to make good progress there.

In terms of cash, we're going to continue to accumulate cash if and until we see an opportunity to acquire something that either is an asset that adds competitive advantage for the long-term as in some of the media assets we buy do, or accelerates the development of a new or existing vertical as in say a Sure Hits acquisition and did for us in insurance.

But I'd say that the use of cash is going to continue to be -- we'll accumulate it and use it. The only use we'll really have will be when we see opportunities to make acquisitions that are, that we think are highly accretive and beneficial strategically for the long term.

Okay.

To add on a little bit Doug. You noted the third of the market cap in cash. The net cash --because we also carry debt -- the net cash is $61 million or about a $1.23 a share. And by the way, we have and we always try to be thoughtful about our use of capital. We've discussed things like share buyback.

We think keeping the money to use for the business versus the huge opportunity we see is the best thing for the shareholders. But I just -- it's worth understanding that we do discuss and debate these things and try to be thoughtful as stewards of the capital.

Okay. Very helpful, thanks.

Thanks, Doug.

Thank you, sir. Our next questioner in queue is Bill Warmington with Raymond James. Your line is open. Please go ahead.

Hi, this is Bethany Caster in for Bill Warmington. Thank you for taking my call.

Sure, Bethany.

Let's see, so I'm going to ask if you could talk a little bit about the impact your seeing from the macro economic client. Have you seen reductions in ad budgets, or have you seen clients slow down the pace at which they released the budgets? Are you seeing longer sales cycle? Any comments about that?

Sure, not anything different than we've seen over the past couple of years. I mean, the themes that we've seen for the past couple of years that are ongoing include things that would not surprise you like the mortgage market is pretty darn soft. And there, we pretty much have to gain share in order to grow, and we've done that nicely. But it's certainly not a robust and growing marketplace.

Deposit account clients don't have a lot of marketing budget to go source capital from consumers because they have great access to really cheap capital from the fed. And then home services still has some headwinds, particularly associated with the lack of home equity values and people postponing big projects. But it's such a massive market, and there's enough remodeling going on there that we still think we can grow nicely.

I would say not really any different than we've seen. There are pockets of softness that I just indicated. But there's certainly plenty of penetration. And at this stage of our development, and these markets are so big that we don't really, but for some, the cases I just talked about; we don't really allow macro economic effects to deter us or to give us an excuse for anything. There's enough activity in these markets and we're early enough in our penetration that we should be able to grow anyway.

Bethany, one more thing you might want to keep in mind as you think about marketing and advertising spend overall. Is that what we do is direct marketing. And so, what we could see is changes with clients' businesses contracting. We directly affect their revenue. There is direct linkage to the revenue that they can measure, which is very, very different from brand advertising or display, which companies frequently in tough times; and I've been there myself at previous companies.

We will pull back on in a quarter that looks tough or a year that looks tough because it's discretionary. It doesn't have any near-term impact. What we do in the market, we play in is very, very different and has a direct and fairly immediate effect on top line. So, the behavior is quite different than it is for the broader display or brand advertising.

Thank you for that. One more question, if I can. One of the issues we faced going into the quarter was that your education clients were running out of budget money. Where do you stand on that issue? Have clients reloaded their budgets? Can you talk about how you expect them to allocate their spending over the next few quarters? You touched on that a little in your prepared remarks, but I'd welcome any additional color.

Sure. Yes -- no, that's just a good question, and we should update you. We certainly have seen in education as you might expect given the regulatory changes, and other things that have been going on in their markets. There's just a lot of activity. I wouldn't go so far as to say chaos. But I would say there's an awful lot of activity as schools have been adapting to and anticipating changes to the regulatory frameworks. Many of which or most of which went into place July 1st.

Many of the new regulations, particularly with incentive compensation and other areas. So we have seen clients. Prior to July 1st we did see a lot of clients holding back, not necessarily to wait for the regulations but to make sure that as they moved forward they were spending in ways and against programs that were both compliant and best, most resilient relative to the new rules.

We continued and by the way, many of the client contracts in education renew or renewed July 1st, or renew this month. And so, we have seen a lot of activity around restructuring the contracts to reflect the new regulatory environment, new regulations and risk sharing between the client and us. And redefining terms and behaviors according to the new rules.

I would say that they were both running out of budget and holding back budget waiting for the new rules and, or looking to deeply the budgets in ways that were most compliant and suited to the new rules. We saw that last quarter. We've seen some of that this quarter. I expect that we'll continue to see that. I don't think we'll see it much more deeply into this quarter or much beyond this quarter.

And I don't expect -- it does not as I indicate in my remarks; it doesn't change our outlook for the year or beyond. We still think we're going to see good strong growth in education. Because we're still hearing from the vast majority of clients that they want to increase their allocation to QuinStreet as part of short-term need to work with stronger, more complaint partners in a long-term natural consolidation with partners that they think are more capable of delivering again better, more compliant results at scale for many years to come.

Those themes all continue and continue to give us -- combined with the other vectors of growth I talked about in the last quarterly call -- continue to give us great confidence in the education growth over the next year and beyond.

Great. Thank you, very much.

Thank you.

Thank you, ma'am. Our next questioner in queue is Justin Post with Bank of America. Your line is open. Please go ahead.

Hi, this is Joyce Tran for Justin Post. Last quarter QuinStreet mentioned that the Company will enter the international market in the education sector. Can you give us an update on that, and which countries have you launched, or how much growth coming from international markets? And should we continue to expect the modest margin impact from that?

Sure. We have launched. Internationally, we're not really talking publicly about where we're going and why for competitive reasons. I could tell you we've launched successfully in two countries. We're about to enter a third and we're now running about $1 million a year in revenue, but we only launched two months ago.

So it's coming very fast. We like it a lot, but we're in markets that we think are extraordinarily attractive. We have a lot of great assets that we've already got in place. We own more education online media in what we believe to be the second most attractive education market in the world than we do in the United States. So we have quietly and aggressively moved into those markets because we think timing is right. We'll certainly provide more details and updates as we move further along and as it becomes more publicly known what we're doing.

In terms of margin impact, you're not going to really perceive a margin impact because this is inclusive in the money that we spend developing new media, new clients, new technologies on an ongoing basis that would take us beyond 20% EBITDA.

So, we still expect to manage to 20% EBITDA inclusive of expansion into some massive new markets. So that's kind of how we look at it, and how we're executing against.

Okay, thank you.

Sure.

Thank you, our next questioner in the queue is Carter Malloy with Stephens Inc. Your line is now open.

Hey, guys, thanks for taking my questions.

Sure, Caster.

Looking at the ramp this year in revenues -- great to hear about the stability and actually improvements in the financial services vertical as far as pricing is concerned there. Is that sort of the primary driver for the acceleration and growth for you guys, or is that coupled of education and others? Across the board is there one stand out that we should be looking at as the driver this year?

Sure. I think what the real drivers of growth this year are going to be a combination of education and other. If we over perform versus the guidance, which we certainly are trying to do, it will be because financial services is better than kind of flat.

I think you recall when the guidance we said, what this really implies is that education is going to grow at our target rates. Others is going to grow at 30% or more, and financial services will be flat. To the extent we do better in any of those three segments, they will beat the guy, will beat the outlook. That's the mix we're looking at.

Okay. And I know you already commented on the education side about this specific question. I just wanted to get some --

Yes.

-- some further color on commitment to budgets from your advertisers there as you guys have conversations with them about their outlook for the next year. If you're seeing -- really, any particular advertisers gearing up, or even winding down that would have specifically impacted you guys.

We're seeing more gearing up than we are winding down. We've had very few clients, and I can't think of any, that have reduced in a material way their commitments to us this year versus say, last year. We've had a lot of clients increase their commitments and their target amounts with us.

I would say that right now we have client budget indications or requests that are about 30% higher than we're able to deliver against. So, we've got a lot of work to do on the media side to continue to develop the sources to be able to deliver to them what they want from us over the next year in ways that are acceptable to us and them.

We could go deliver that right away in unsustainable or not high quality ways. We're not going to do that. But I would say that we have a bit of an embarrassment of riches right now in terms of client demand all associated with the things I've talked about in terms of the dynamics out there.

It doesn't mean it's a [lay-up] to get it because we have to work hard to make sure we're finding the right traffic sources, continuing to segment the traffic sources while engaging those visitors, and make sure that they're finding what they're looking for and give them a good match so that they turn into a good quality inquiry that converts at a good rate for our clients, and gives them an acceptable acquisition cost. And it's kind of QuinStreet 101.

But that's where we're about. So in education it's a matter of how fast can we execute well against what looks like it's going to continue to be good strong increase in fundamental demand. And other, it's all the things that I've talked about before in terms of why we're with Doug -- under Doug's question in terms of why we're excited about it.

And then financial services, we've got some great things going on; not just in auto insurance, but certainly there and beyond. And we're hopeful that we've been too conservative in our outlook there, and we'll see how the year progresses.

Okay. Thanks so much for the color.

Sure. Thanks, Carter.

Thank you, sir. Our next questioner in queue is Brian Fitzgerald with UBS. Your line is now open.

Thanks, we've had the Panda changes out for several months. Could you give us some color on what you think the impacts were to the industry? Have the traffic patterns stabilized? And maybe as a follow-on, are you seeing any increase in CPC prices as maybe participants in the industry shifted from natural to paid search?

Interesting question. Yes, in terms of Panda, the Panda effects haven't really changed from when we first saw them back in I guess it was the first calendar quarter. We reported that quarter, which would be our third quarter. Anyway, we dimensioned kind of the scale of the impact of Panda on us back a couple of quarters ago, and that really has not changed at all in terms of the impact.

It's about a single-digit percentage -- probably mid-single digit percentage of revenue impact. If you take all of Panda, we had some winners, we had some losers but net it was negative. And based on what we've heard -- you asked about the industry. Based on what we've heard from others, the impact on us was less material than it was on a lot of other folks in our industry. These based on what they tell us at conferences and what they've told clients.

So, it's been relatively stable since. Google is -- Panda appears to be a perpetual algorithm change, just so you know. I mean, the Panda related adjustments and changes appear to be running through the indexes every couple of weeks. And so there's continuing general shifting, but the impact on us has been pretty stable as it has been in most of our verticals.

And we and others will continue to adapt to make sure that we understand what Google is trying to accomplish there. And make sure that our properties are delivering the kind of experiences that our visitors first and foremost find attractive, but then also that Google agrees our visitors find attractive. So, we're highly engaged with Google as we always have been. And we're very much of like minds in terms of what they're trying to accomplish.

In terms of CPC prices, it's hard for me to say. So much of the paper clicker CPC pricing is driven by what we're able to bid. And what we're able to bid is driven so much by how we're doing in terms of our client coverage, our programs, or segmentation. Our matching and getting the matches right. All we really look at is margin on CPC.

We don't really look at the underlying cost trends usually. Because typically those are really outweighed by the progress we make on the revenue and yield side. And I would tell you that for us our paper click business has been thriving. It's up pretty dramatically in volume and also quite dramatically in margin. As we've just continued to up our game, and invest in technologies, and do a better job with the latest kind of matching taxonomies and algorithms.

But I can't speak for the underlying trends so much, as I can tell you that for us business has grown tens of percent year, versus last year. And the margins are up, on average, probably 10 points. But it's because of a lot of hard work and I think continuing incremental progress on again, QuinStreet 101. Better matching taxonomies, better engagement of those visitors, better segmentation, and on, and on, and on; it's kind of what we do everyday.

Great, Doug. Thanks for the color.

Thanks, Brian.

Thank you, our next questioner in queue is Robert Coolbrith with ThinkEquity. Your line is open. Please go ahead.

Great, good afternoon. Following -- two questions. First, following up on the Panda question. Wondering, the current state of progress, and maybe learning from the impacts of the algorithm change, and making some of the [sites] that have lost relevance more like those that have gained.

And the second question, just wondering in insurance in particular with quick pricing being diminished, how have your network publishers tended to respond to that? Have there been any changes in revenue share? Is that part of the aggressiveness that's going on in the space? Or, is there essentially limited risk because no one's paying anything higher anyway? So, I hope that makes sense. Thank you.

No, it makes great sense, Robert. You're actually looking at it -- I think you're actually looking at it right. And the answer to the second question is pretty much the second one. It hasn't changed a lot because prices are down for everybody. And so, it's not like you can go somewhere else for more. But I'll provide a little bit more color to that, and let me go ahead and do that while I'm on it.

And that is, in general we have not seen much by way of a shift in revenue shares. Because again, the pricing is we're told, that some of the competition with the lower quality that not surprisingly insurance clients are hammering some of those guys. And so, while pricing is lower for everybody, it's a lot lower for guys other than us.

And so, we have actually gained a lot of distribution in the last couple of months. And we've focused, not surprisingly, on making sure we're gaining the highest quality distribution and making sure we're continuing to identify and sort out, and filter out, the lower quality stuff. And, again, it's been a pretty insidious thing to battle because of the way the clicks are incentivized because they kind of -- it's like whack-a-mole, they pop up somewhere else.

But I think we're most far along in terms of being able to identify it most rapidly, and adjust to it, and filter it out, and keep it out. We actually try to keep it out unlike some of the other folks who will happily sell it to their clients.

So, that's kind of been the dynamic there. In terms of Panda, I would say that we've made pretty good progress. Understanding what's being accomplished. We're not yet at the point where we're able to say we really know what elements of a website are going to make it successful on Panda versus what elements won't. And I don't think by the way anybody has.

We do know that we've been able to regress some factors, and we're certainly making adjustments rapidly. We've had some real successes with it, but we haven't been able to do that in any kind of broad based way to-date. But we're still on it. We know in the long run that Panda, along with all the other Google algorithm changes we've seen forever, we're all aimed at making sure that the visitor gets access to the most relevant high quality results.

And as measured by visitor engagement and visitor conversion I mean that's what we focus on every day. So we think of the long run, we and Google will continue to be as we always have, completely aligned in the short-term. Again, hundreds of times before, and this time just in a little bigger case we have to adjust to exactly how they're defining that path today.

I respect them enough to think that it meant something, and I know that whatever they did made sense. We have to -- we'll stay true to the long-term vision, but also have to make sure that we're living to see the long term in terms of organic traffic, which is still only about 10% of our revenue by trying to figure out what it was they were trying to accomplish. I'd say we say we made some progress. We've had some real good wins, but we certainly -- I can't sit here and say that we've figured it completely out, that's for sure.

Okay. Thank you.

Sure.

Thank you. Our next questioner in queue is Jordan Rohan with Stifel Nicolaus. Please go ahead.

Thank you so much, guys. My question is kind of a retrospective on your acquisition strategy, particularly those made in 2011. How much cash in stock and cumulatively was used during 2011 to buy the companies that you did, many which were media properties that you sort of repurposed?

And, how do you think about the incremental gross profit or media margin dollars, or whatever the right metric is that you're now running on those acquisitions since they've been made? And how does that affect -- what was the organic growth number, if you will, for 2011 fiscal? Thank you so much.

I think last -- was it last fiscal year?

Yes, last fiscal year.

We spent $91.8 million on acquisitions, Jordan. As of this -- the end of the June quarter, our cash-on-cash returns on all of our acquisitions made history to date is 29%. And most of the best performing acquisitions are actually the oldest acquisitions.

The acquisitions we made last year, particularly in insurance, which ate up the bulk of the capital we feel very good about. They are not highly contributing yet, but we expect that over the next few years as we continue to build out the model we bought them to launch, that they're going to be tremendously contributing and very valuable to the Company.

Remember that when we bought those assets, we bought them. The baseline was at a minimum we could plug in our current monetization model and to deliver a decent return. With click prices dropping, that return is not where we'd like it to be. It's probably in the high single-digits kind of range.

But that the actual long-term plan for those assets was to be able to increase the breadth of our offerings in auto insurance from just clicks to carriers to add two clicks to carriers, leads to agents, leads to carriers, and actual licensed agent conversations with consumers, along with the ability to provide real-time quotes. And there are three, I think, companies that are integrated with insurance carriers to able to provide real real-time quotes. And we own two of those.

And that, by the way, takes our revenue per inquiry model from a current single-digit number up about 4x, which is a dramatic, and incredibly important step function improvement in our competitive positioning from a media standpoint. And gives us enormous flexibility in terms of media sources in this channel and outside this channel going forward. We couldn't be more excited about certainly our long-term return on capital on all of our assets because the number I gave you, 29%, includes the current returns on those assets.

But like most of our acquisitions, we expect the real payouts to be over several years, not immediately. I'd say we like it. We like it strategically. I like where we're heading financially, and I certainly like our results to-date financially.

If I could add on a little bit with some data because maybe not coincidentally, but somewhat coincidentally, I was looking at an analysis just this morning of some of the stuff we've been talking about, Doug. With looking at the different layers of acquisition by year, historically and it's generally true, not exactly true that the further you go back with the acquisitions, the greater those cash and cash returns.

And for some clarity, the way we've measured those is it's current margin being generated. We measure that each and every quarter --

After tax cash.

-- after tax, exactly, divided by the total cost of the acquisition. So it's a present period yield, essentially, as opposed to an IRR on those acquisitions. But what you can see is if you go back in tranches by year, it's not perfect but it's pretty close. The further you go back, the better the performance.

Now, what that isn't saying specifically to Doug's points, is that this year's acquisitions weren't great acquisitions. Typically -- and what the analysis supports, typically what you see is our plans for these acquisitions, which we've been accurate with over time, have shown increases the longer we hold them. And Doug discussed some of the things we're doing in financial services.

But I just wanted to back up those comments Doug provided, what we're doing operationally, with the fact that I've looked at detailed data as recently as this morning that absolutely proves that out.

Yes, one of the examples, and I think some people talk about and I think is important to understand would be say -- let's say Internet.com. We went into that acquisition knowing that we had a lot of work to do. But we also knew that B2B Tech, in particular, was extraordinarily attractive market. And that in order to make progress there we had to have enough critical mass to get the attention of clients. And there were very few assets available to do that.

So we bought Internet.com knowing that we had a couple of years of work to do, but that that would take us -- put us in a position to having access to an enormously attractive market. Now, it's almost a bad example, because we bought it so well that our cash-on-cash returns even today are about 30% on Internet.com. But, as -- now that we're through the technology and the revenue model transition, we expect to be able to grow very dramatically going forward from here. And to see an acceleration in the returns that are really associated with that acquisition.

Again, when we talk about managing for the long term, we're really not kidding. Another way to look at it is to ask you, ask us, hey what's your return on invested capital been? And we run that analysis every year. And last time we measured our ROIC for the history of the Company, it was averaging about 21%, Ken?

I think that's what we (inaudible) it out.

We worry a lot about making sure that we're -- that when we invest this capital, we're getting returns in excess of our cost of capital because we're fundamentalists. We know that unless we do that, we're not creating value. So that's how to the extent -- and I think you asked sort of about that, but that's how we think about it.

Yes, you guys answered a better question than I asked. So, thank you very much for the help.

Thanks, Jordan.

Thank you, sir. And we do have time for one final questioner. Our final question comes from Yun Kim with Gleacher & Company. Your line is now open.

Thank you. Is the auto insurance revenue contribution within the financial services segment -- is that about the same a quarter ago? And then, do you also expect a contribution from the non-auto insurance businesses as a percentage of revenue to increase in fiscal year '12, or fiscal year '11?

It's actually -- that's a good question, Yun. It's actually a little lower because we've had a couple of sub-verticals in financial services growing much more rapidly than auto insurance lately. And I would expect that the current plan costs for that trend to continue. We've been pretty conservative with auto insurance as you can imagine.

But we are seeing very nice development and growth, and particularly in a couple of other sub-verticals, including credit cards, which -- where we're positioned for phenomenal and where we've seen triple digit growth for two years in a row now. And it's getting pretty material.

Hopefully, auto insurance will keep up, but we're not planning for it as we're being conservative plan through this period. We've certainly planned for auto insurance to be a big grower again in coming years. But this year we're being -- I think we've been a little bit appropriately conservative given what we've gone with click pricing.

So remind me where we are in terms of the contribution level for the financial services vertical from the auto insurance?

I don't have the number in front of me. It's approximately 60% to 70% as of a quarter ago, which means today it's probably closer to 60% than 70%.

Okay, great. And, Ken, can you just talk about what drove the cost savings in sales and marketing? Was there any one-time benefit in there, and how should we think about it going forward?

Sales and marketing?

Yes. No -- I mean, there's nothing specific. Yun, typically you look at bonuses toward year-end. There is nothing hugely material that affected this given quarter.

Okay. That's it for me.

No (Inaudible) times.

Okay, thanks.

Yes, thanks, Yun.

Thank you, and with that, this concludes our time for questions. Today's conference will be available for replay after 8 PM Eastern Standard Time today, through August 17th 11:59 PM Eastern Standard Time. You may access the teleconference replay system by dialing 1-855-859-2056. International participants can dial 404-537-3406 entering the access code 82236077. Again, those numbers are 1-855-859-2056, and 404-537-3406 access code 82236077.

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