QuinStreet Inc (QNST) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quinstreet First Quarter Fiscal 2012 Financial Results conference call. At this time, all participants are in 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 call is being recorded. I would now like to introduce your host for today's conference, Ms. Erica Abrams of the Blueshirt Group. You may begin.

Thank you, and good afternoon, ladies and gentlemen. Thank you for joining us today as we report QuinStreet's first fiscal quarter of 2012 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 risk and uncertainties are discussed in our most recent 10-K filing with the SEC on August 30, 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. Revenue and EBITDA results for the first quarter were consistent with the outlook we provided in our June and August calls. Revenue is generally flat, down 2% from the year-ago quarter at $101 million. Adjusted EBITDA margin was 20%. Normalized free cash flow was $15 million, or 15% of revenue. Adjusted net income was $11.6 million, or $0.24 per diluted share.

We made good progress expanding our footprint and capabilities for long-term growth. Year-over-year results though, were hampered by adjustments to new regulations in the for-profit post secondary education market, lower pricing for auto insurance clicks, and challenges more broadly in employment and the economy. Turning to results by client vertical. In education, revenue was $44 million. Right about on our fiscal Q1 plan, our competitive position in education is strong. And we are launching new offerings in capabilities at unprecedented rates.

We expect these initiatives to allow us to lead digital marketing in this vertical far into the future. However, in the near term, client adjustments to new regulations are combining with continued economic and employment weakness to create volatility, and uncertainty, and lower expectations. Results in the education client vertical for the current or December quarter are going to be disappointing, likely negative year-over-year. We still believe that there is good growth potential in future years for us in education as the for-profit post secondary industry renews its growth and as we gain share with existing clients.

We are also adding new clients, new offerings, and new geographies. And plan to enter new sub-verticals, complementary to the for-profit post secondary sector. In the financial services client vertical, revenue was $42 million, down from a tough year comp, or year-ago comp of $50 million. We are continuing to manage through changes in the auto insurance click market related to quality and price dislocations over the past few quarters as has been previously discussed.

Disappointing year-over-year results this quarter belie the really good progress we have made with clients and click pricing in auto insurance recently. Engagement with clients has been excellent and productive, as have been initiatives to improve and differentiate our quality and results. As a result, click prices are up nicely. And we are seeing renewing client demand. We feel good about our foundation in auto insurance for future growth, but we have a ways to go to get demand, pricing, and traffic back to levels that will once again result in year-over-year growth in financial services.

In other client verticals, revenue grew nicely to $15 million, reflecting strength in home services and B2B technology as projected. The acquisition of ITBE contributed roughly $1 million to revenue in the quarter. Let me now turn to and summarize our overall business outlook. Education market dynamics in the near-term are more volatile and uncertain than expected. The recovery in the auto insurance click market is progressing, but will take time, and remains a drag on year-over-year performance.

Those factors combined with continued weakness in employment and the economy lead us to lower our outlook. While we hit our internal budget for the quarter just reported, we now expect that current or December quarter results will be flat to down versus last year. And that fiscal 2012 results are likely to be considerably lower than the outlook range we provided previously. And closer to flat versus fiscal 2011.

We remain confident and enthusiastic about the fundamentals of our business and about our long-term growth prospects. We remain and will continue to be a leader in the early enormous market represented by digital marketing. We have formidable, and growing competitive advantages, and a large and expanding footprint.

We also continue to generate profitability, and cash flow, and have a strong balance sheet, and enviable access to capital. We recently closed a new $300 million credit facility with our bank partners. Covering the next five years that provides even better terms than our previous facility. And that ensures continued availability of inexpensive capital if and as desired.

Consistent with our long-term business optimism and capital availability, the QuinStreet Board of Directors has approved a stock buy-back of up to $50 million over the next year. We believe that investing in our stock represents the potential for strong returns for our shareholders. 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, for our first fiscal quarter of 2012, we posted $101.2 million of revenue for a 2% decline compared to the same quarter last year. And reported a 20% EBITDA margin. While we're in a period of generally flat results, we do not believe that there has been any fundamental change in the longer term outlook for QuinStreet. We believe this is a lull as we navigate changes in our two largest client verticals.

Our market represents a massive opportunity. We are the leader today at good scale. And we are positioned to create significant growth after we manage through this flat spot. And while no one, particularly us, likes the near-term flatness, you should note that as we have always communicated regarding our model, we are highly variabilized on our cost structure. And retain the fundamental profitability of the financial model. We are entering our 10th year of sustained 20% EBITDA margins.

So, while we are navigating near-term challenges to return to top-line growth, our 20% annual EBITDA model remains unchanged. With that important context, I'll discuss details of our Q1 results. First, I'll walk through the performance of each of our client verticals. Our education client vertical, which represented 44% of Q1 revenue grew 4% compared to the year-ago quarter to $44.3 million.

Education clients are reacting and adapting to the new regulations that became effective this past quarter. Each is navigating in their own way with many changing emphasis amongst their programs. And making changes to their marketing approaches. A disruptive time indeed. We continue to partner with our clients during this period of adaptation. And work through their operational changes with them. The financial services client vertical represented 41% of Q1 revenue, or $41.9 million for the quarter, which was a decrease of 16% compared to the year-ago quarter.

We continue to work through the disruption in click pricing as expected. And as we've discussed in detail on our last two calls. For the current quarter's results as compared to a year ago, our pricing is down about 30%. That said, we have seen significant pricing improvement on a sequential basis as we have worked with clients to both measures the returns on our marketing results and improve quality. We expect to see continued benefit from our ongoing initiatives that we believe will allow us to return to significant growth over the longer term.

Revenue from our other client verticals, which include B2B technology, home services, and medical represented 15% of our total fiscal Q1 revenue. Revenue from other increased 34% compared to the year-ago quarter to $15 million. We executed to significant growth in home services and benefited from $1 million of incremental revenue from our B2B tech client vertical due to the acquisition of ITBE. 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.

However, as we stated on our previous earnings call, we expect other to contribute materially to our fiscal 2012 results. 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. We break out the stock based compensation charges, depreciation, and amortization by income statement and line item in the supplemental data sheets available on the front page of the Investor Relations portion of our corporate website. You can evaluate our costs, including or excluding those items as you desire.

Our cost of revenue was $67.9 million in the first fiscal quarter representing a 33% gross margin. Our cost of revenue includes all the cost used to produce our measurable marketing results, including media and personnel costs. Moving onto operating costs, product development costs, or $5.2 million in the first fiscal quarter, or 5% of revenue as in the past quarter and year-ago quarter. Sales and marketing costs were $3.2 million in the quarter or 3% of revenue, as in both the past quarter and year-ago quarter.

In general and administrative costs were $4.4 million or 4% revenue. A decrease from the 5% last quarter and the same as in the prior year. Our annual EBITDA target of 20% remains the same as it has for now over a decade. Supporting our growth initiatives and delivering consistent profits and cash flow. We have demonstrated an incredibly resilient financial model. Moving to taxes - our GAAP effective tax rate for the quarter was 39%. We benefited from a change in the California state tax code effecting the sourcing methodology of income.

This change will provide an ongoing benefit. As a result, we now expect a reduction in our effective tax rate on a go-forward basis from our previous guidance of 42% to an ongoing effective tax rate of 40%, or slightly lower. Though, 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 million. Depending on the results of the share repurchase that Doug discussed, I expect that figure to decrease over the remainder of the fiscal year, though you should feel free to use that 49 million share figure as a conservative share count for the full year.

Our GAAP diluted EPS for the quarter was $0.11. Our adjusted EPS for the quarter was $0.24. Adjusted EPS adds back two items only; stock base compensation, and amortization of intangibles net of tax effect. Moving to the balance sheet -- our cash and marketable securities balance at quarter end was $145 million, reflecting cash generated during the quarter and the acquisition of ITBE. You can see the details in the cash flow statement in our earnings release.

Total debt decreased to $104 million from $106 million last quarter, reflecting payments on debt with no additional draws. I'll provide some details regarding our newly expanding credit facility in just a minute. Net cash totaled $41 million or $0.85 per diluted share. And now moving to one of the fundamentals we consider core, cash flow. Cash flow from operations was $11 million for the quarter as our DSOs increased to a still respectable 51 days versus 46 days last quarter. The largest portion being the addition of ITBE receivables. And still less than the 54 days in the year-ago quarter.

Fiscal Q1 normalized free cash flow, which is free cash flow, excluding working capital changes, was $14.9 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 the current quarter working capital 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%.

Aside from taxes, the vast majority of our EBITDA drops down to free cash flow. The business does not require large amounts of capital expenditures. I also have two important financial updates. Our stock repurchase plan of up to $50 million and our new increased debt facility. Doug discussed the stock repurchase plan already. However,

I would like to add my additional commentary. We evaluated this repurchase decision based on two fundamental criteria. One, capital needs to run and grow the business inclusive of strategic capital demands. And two, return to our shareholders based on our outlook for the business. We believe that inclusive of the funds to fulfill the entire repurchase, we have enough capital availability to finance our strategic imperatives for growth.

Certainly, our model generates significant free cash flow. Our capital availability funds acquisitions that we believe will benefit from and enhance our leadership position in the market to create more revenue, profit, and free cash flow at a cost that provides significant returns over our costs of capital. All based on discipline DCF models.

Over the past year, we've been successful at acquiring the right assets at the right prices to provide this opportunity. While we continue to evaluate additional opportunities, we believe that our current capital capacity more than meets the needs of attractive opportunities in the near-term. The share buy back was a thoughtfully considered decision. The second financially related announcement is our new and expanding credit facility. You can see the agreement yourself as an exhibit to our 10-Q that will be filed tomorrow. But I will summarize -- better, cheaper, more, and longer.

We expanded our borrowing capacity from $225 million to $300 million. Today, as noted before, we have $104 million of total debt outstanding. Our marginal borrowing rate has decreased by 50 basis points. And the cost of borrowing for our current outstanding debt has decreased. That current marginal rate is LIBOR plus 1.875%, or less than 2.2% interest rate. That's pre-tax cost. The facility has a five-year duration beginning this month. Extending the duration of our previous facility by 34 months or close to three years. This is a significant enhancement of our capital availability and for a longer duration.

Weighted average cost of capital is fundamental to shareholder returns. We remain vigilant on this front. I would like to thank our lending banks, which include Comerica, Bank of America Merrill Lynch, and Union Bank as our largest sponsors over several years. US Bank and Bank of the West have also substantially increased their commitments. Additionally, Silicon Valley Bank is a new and significant participant. And both Credit Suisse and JPMorgan remain in the syndicate. With gratitude to our shareholders, lending banks and employees, I'll turn the call to the operator to open Q&A.

Thank you.

(Operator Instructions)

Our first question comes from John Blackledge from Credit Suisse. Your line is open.

Thanks, thank you, guys. A couple of questions. Just wondering, I guess what changed since you last gave guidance? What changed in the business, particularly on the education side? If you could talk to kind of what the lead growth was versus pricing for a lead in the quarter? And just demand and education, given the institution of the new regs. Thank you.

Sure, John. What's changed has really been the amount of volatility and uncertainty, particularly in education. We expected, I guess, that there would have been more adjustment prior to the regs going in. What we saw is once the regs really went into effect in July, a lot more change on the part of expectations and projections. And actual programs on the part of clients. And that's been something that we're tracking very carefully and being very responsive to.

But it is much more significant than we had expected, both because of the expectation that so many of the changes had been made prior to the effect, the regulations. And based on what clients had indicated to us that their demands would be end of fall. We still expect that we'll manage through this and that the changes will wind themselves through and down. But it's more significant than we had expected and that had been indicated to us.

In terms of leads versus pricing. Pricing has been quite stable. The change has -- or the flatness is really coming from a volume rather than from pricing. Demand is -- we continue to have a lot of stated demand in education, particularly over the next year or two. Again, the follow-through on that demand has been variable and volatile. I think we're just trying to make sure that we are reflecting what we're seeing this quarter. I think this -- one of the dimensions of this is that this is a kind of calendar fourth quarter that we're in currently, our fiscal second quarter.

I think some of the softness in change we're seeing is that clients aren't in a hurry to spend a ton of money in this, their softest quarter when they have a lot of their enrollment counselors on holidays and vacations. And they're coming off of such a long, soft period. There are indications that folks want to be a lot more aggressive in the January forward period. But we have to just wait and see how that comes. I'd say we're a little gun shy projecting or counting on that given that what we've gone through of the past few months.

I'll add on for those who don't have this at their fingertips or people aren't as close to it. This current quarter we're in now, this December quarter is typically our seasonally most difficult quarter. The March quarter is our best seasonal quarter. Just to keep in the back of your heads as you update models.

And that's primarily related to education.

Yes.

Thank you.

Thanks, John.

Our next question comes from Doug Anmuth from JPMorgan. Your line is open.

Hi.

Thanks for taking the question. It's Shelby and me on the phone. I apologize because it's just hopping between a couple of calls. I just wanted to ask if there's any sort of change in terms of how you were thinking about your long-term targets overall in terms of growth rate and EBITDA margins. Then also I know you may have mentioned this, but can you just talk on the education side in terms of sort of the mix and what you're seeing between volume and pricing? Between those two and just breaking out sort of where those shortfalls are. Thanks.

Sure. We still think we're a strong double-digit growth stock on average for as far as we can see as we add up the opportunities and our initiatives against those opportunities. We historically had said that we thought we could go on average 15% to 20%. If you take the last three years. If this year is completely flat, and we're hopeful that that is conservative. But we think it is certainly a realistic conservative estimate.

We would still average about 16.5% over the past three years in terms of growth. We think a good strong double-digit growth defined somewhere in that range of double-digits from pick a number and pick a time frame. But 10% to 20% on average, given all of the opportunities we have for the next number of years is good. That's what we believe based on our initiatives and market sizing as we've indicated in the past.

EBITDA margin and targets still 20%. We will continue to try to aggressively spend on growth initiatives or capability building initiatives to get down to 20% EBITDA margins. We should be averaging 15% or so free cash flow margins, particularly with the recent change to our benefit in California tax policy.

In terms of education, it's not been price driven at all. Prices are pretty consistent and flat over the past few quarters. It's been mostly a drag on volume demands as people shift their budgets, stop their budgets. Shift their program mix. Come in and out of various marketing programs. Or based on their read of what they need to change and how they need to change things to be as compliant as they'd like to be with the new regulations. That's really what's created the volatility.

Again, it's -- the state of demand is much greater than what we've seen in terms of the actual execution. We continue to have a lot of stated demand, but it's not coming through. We need to fight through this period and as these people make these adjustments and get to the point where they're comfortable with what their mix is going to be, we'll certainly be ready to execute for them. I think that's coming. Certainly they're indicating it's coming. We're hopeful it's coming, but we're reluctant to project it aggressively in the back half. Again, given what we've been going through the past couple of months in terms of commitments coming in and out and changing.

Doug, thank you.

Sure, Doug.

Our next question comes from Justin Post from Bank of America. Your line is open.

Great, a couple of things. First, you've kind of hit somewhat of a volatile period in this quarter. When you look at sequentially over the next two quarters, would you say we could learn anything from prior years for overall revenues? Or in the finance vertical? And then secondly, is there a new competition in the finance vertical that's driving continued pressure versus where you were last quarter? Anything, any updates on that vertical? Thank you.

Sure, sequentially, I think -- and Ken made the point, Justin. The fourth quarter calendar, fourth calendar quarter, or our second fiscal quarter is always our softest quarter. There's always a down quarter sequentially that's driven primarily by the fact that our clients' employees take vacation. Those employees include enrollment counselors, cost center reps, mortgage underwriters and brokers, auto insurance cost center folks. You should expect that sequentially we will be seasonally down in the fiscal Q2 versus fiscal Q1 as has been the case historically. I don't think that we will see any particular greater or lesser effect in financial services than we've seen in past years. Ken, do you -- ?

Yes.

Any indications of that?

No.

In terms of competition and financial services, I wouldn't say there's any new competition. One of the competitors was acquired or merged into another company. I don't expect that that's going to have a significant effect on their behavior or on their capabilities. The company they merged into is not much better capitalized or otherwise capable than they were. We'll -- I don't expect that that's going to be a big difference. Bank rates is always a competitor. Now, is the main competitor in the financial services vertical.

That said, we certainly have a different mix of capabilities in businesses for the most part. It's really much more about for the foreseeable future in our opinion growth of that market. Execution again client demand than it is about competing or taking share from one another. Certainly, in short-term periods, there's always some of that effect. We had some of that effect this past quarter in clicks as we saw some shifting volume with some of those players back and forth.

I don't think it's. I think while it's in the near-term it was in effect. I don't think for the long-term the governing of the long-term, or that matters in say the next three to five years. I think the governing effects are going to be much more about market growth and execution than they are going to be about competition in any of our verticals, including financial services.

Let me do make a statement though about the nature of competition besides that. I mean, that's the overriding -- an overriding point. Is this is still an early market. It's much more about growth than the medium to long-term than it is about near-term back and forth. Certainly we've gone through great periods, and then flat periods. And some of our competitors have gone through great periods and flat periods. I think you'll see some of that back and forth as we both execute, or as we all execute.

But certainly, I think it's important to note that in none of these verticals in a vertical model and medium model is there a winner take all phenomena. There are going to be at least two and probably several pretty large players on the vertical side of the business model for all of our markets. That's governed by a lot of things. Not the least of which is client demands. Our clients want to have options and want to have several providers in all of our verticals. They certainly want several strong providers in financial services as alternatives to anybody that might be overly large.

We are happy to accommodate that. The other thing that governs that, frankly, is placement in media on not the least important of which, of course, is Google. Google, over the long haul is going to continue to make sure that there's a variety of offerings and responses of the right caliber for visitors. They're not going to let us or anybody else dominate either organic or page search, both of which are important components of the media mix in any vertical.

There will be a number of large players. We certainly -- [expect our] -- and expect to continue to be one of the two largest in the vertical format in financial services. We expect to be one of the few in education, B2B, home services. Eventually, we hope medical and maybe a couple of other verticals as well.

Great, thank you, I appreciate it.

Thank you, Justin.

Our next question comes from Carter Malloy from Stephens. Your line is open.

Hey guys, just looking at incremental and new drivers within your business. Can you talk about the new geographies you referenced earlier? Or, some of the new products within the insurance? And if you expect those to be meaningful drivers near-term?

Sure, Carter. In terms of -- well, there are a lot of initiatives and things we have going on that we expect to be significant growth factors going forward. Let's talk about the geographies. We now are the largest owner of education and media on the Internet by a very wide margin in Brazil. Brazil, is by our calculations easily the second most attractive by size and structure education marketing market in the world.

We're engaged with two of the top four by size, clients there, and many, many others. We also serve one of the largest clients in Mexico and have other Pan-Latin American clients down there. Our progress in what are very important education markets has been strong and we expect that will be, continue to be a good growth area for us. We are similarly expanding into a third geography that we aren't yet talking about publicly, but represents an extraordinarily large market as well. It's just a little bit earlier than Brazil. But it's structurally very attractive and it's actually quite bigger in terms of it's overall size. And we have made very good progress there and have a lot of assets in place; and about half of the team there. Whereas I think in the Brazil case, we have the whole team in place.

We're excited about those. We think the growth rates are going to be quite strong. We expect to be doing a $1 million a month in those markets in the, in sometime in the next six to 12 months. We're already doing well over $1 million a year. Although we've really just begun there. But those markets have a lot of growth potential. Just talking specifically about that. In terms of other products in education, we are rolling out a click product to complement our leads product, which has gotten great reception with clients. And great results under our initial pilots and testing.

That will be rolling out over the next six to 12 months. We expect good, strong demand there. We'll access new budgets. It will allow clients to do a lot more direct buying through our network on a very cost effective basis. And it's really built off of the learnings we've had in auto insurance. It addresses a whole segment or set of consumers that historically we have been unable to address. Those are consumers that are unwilling to fill out their contact information on a third party website. No matter how good the content.

We don't get paid for those folks. They may actually be a bigger segment than the lead segments. We're excited about that. We're rolling out paper call and phone call products also in education. In financial services, particularly in auto insurance, we're excited about the -- we have soft-launched our expanded model in auto insurance through the car insurance dot com and insurance dot com properties. We have seen results as good as we hoped in terms of the broadened offerings to consumers and increased modernization rates. We would expect that that will be -- become material to the financial services results in the second half as we roll that our more aggressively and certainly over the next year to 18 months.

We also, in financial services, not unlike in education supplementing all of our categories with -- that are driven by clicks with leads and calls at any vertical -- any subvertical driven by leads with calls and clicks, if you're going to -- expands our access to budget. Expands our consumer relevancy and addresses more consumer segments. We'll see that thematically in all of our verticals over the next couple of years. I think all of those represent, in addition to the international expansion, great opportunities for continued growth. Of course, in the newer verticals we just have a lot more, just blocking and tackling to do. Just basic execution to address the market that's available to us even in our current format. Those would be the main drivers we expect of growth over the next couple to three years.

Okay, very helpful. Then lastly on the education side of the business. Historically a lot of the constraints around the media are the supply side of the equation. You guys touched on demand and pricing earlier. But can you talk a little bit about.

Yes.

Is the traffic still there? If you're seeing them pull back and lead buying, are you seeing increased direct buying from those education providers that would make traffic more or less expensive for you guys?

We are more -- you're exactly right. Historically there have been much more media or traffic constraint than we have in client demand constraint. We are now in an unusual period where we're much more client demand constrained. Driven by, again, a lot of the clients are just in periods where they're not spending much as they adjust internally. And from a policy standpoint to what they want to make sure they're doing in the new regulatory paradigm. I think, I mean, that's been the -- that's the overarching effect. But we're not seeing clients spending direct having a big effect on our ability to grow. Other than, not unlike we see periodically in every vertical with almost every large client.

We are seeing a little bit more spending on branding right now in for-profit education than we have seen lately. I think that's because they're -- again, this is not coming from the clients. This is Doug's opinion. But I think it's probably being driven by the fact that there's been an awful lot of bad news in for-profit education. I think the clients are trying to put a little bit more balance into that mix. Make sure that they establish some equity in the mind of the consumers to kind of prepare the ground. So that when they do get more aggressive in direct marketing, the response rates and conversion rates are likely to be better. That would be a very solid strategy. It's consistent with what some of the activity we were seeing through observation. I think it could make a lot of sense, actually.

Okay, thanks for the color.

Sure.

Our next question comes from Brian Pitz from UBS. Your line is open.

Thanks and just a couple of questions here. Doug, just taking a step back for a second in terms of the financial category. Looking at your results and your guidance. Comparing it now to one of your bigger competitors that you have mentioned before. That your competitors are putting up 40% growth rates with outlooks in the plus 30% ranges. I think if you dig down on some of those results, it's even higher on the CPC or lead gen basis. Can you help us kind of understand the differential? You kind of parsed it out for education, but what's the biggest differential you think right now in the financial services category? Then I've got a follow-up.

Sure, difference in expectation, which I think the expectations are pretty consistent with what they were before. Though, I think we're being a little bit more conservative in the timing of our differences versus a competitor.

No the difference is, but it's versus your competitor, which are -

Yes.

They're saying, look, we're being more conservative, too. But there are those things; 30% forecast versus your kind of flat to down. But what's the biggest differential right now?

Yes, you know what it is? I'd say there are a couple of different differences. One is, and I'd remind everyone that it, just a little over a year ago we were posting 40% to 60% growth rates. Named that same competitor was flat to down much more significantly than we are now. In fact, had to go through a major restructuring to get back on track. Our recapitalization, let me say it that way, to get back on track. I wouldn't read too much in the near-term results. I would expect that will be ups and downs and by both parties over time.

That's just the nature of this. We've got a different mix of business. We're executing it at different rates and different ways. I wouldn't expect that any particular trend is going to last forever anymore than a trend a couple of years ago did. That's one point.

The second point would be there are very different mixes of business. We have been intentionally focused on the direct clicks to clients model in auto insurance. We really pioneered that business, being able to run that business at large scale. The original model was pioneered more by Sure Hits before we acquired them, but it's small scale. We created a lot of demand. When that market got hit by incentivized clicks, we suffered disproportionately from that. We're recovering from that. The other player was much more focused on leads to agents, which they strategically decided to be in. That's a good business. I think it's a business that we decided we didn't want to invest in the years it was going to take to build that kind of agent coverage network.

We think the direct -- there's, this is an awfully good business to be in. We like our standing with clients and consumers in that space. We'll be expanding incrementally into leads and phone calls. They're expanding incrementally into clicks. Again, we'll bump into each other but in the long haul, growth in auto insurance marketing on the Internet is going to be strong because it's still. There is still a long way to go before the amount of budget is spent online that should be. We'll benefit from it as we launch our -- as we re-establish pricing in clicks. And as we launch incremental opportunities there. They'll benefit from it. We're in their mix. Over time they will probably go through a period where we'll grow faster than them for awhile again. I think that that's all in the context of a market that's still early in its development. We have again, different mixes of business and very different capabilities.

We have exceptional capabilities of modernization and technology. Some of our competitors have a lot more organic traffic. It leads you to different strategies, and different advantages, and different periods, and different verticals. Again, net, we feel very good about where we will be in financial services over the next number of years. I would expect that some other guys are going to do pretty well, continue to do pretty well as well.

Great, and just a really quick follow-up in a different direction. Any color on Google's most recent algo chain, which is intended to improve the freshness of search results? If you could comment if you're seeing any impact to your traffic from that?

I'm sorry, Brian. Intended to improve the what of search results?

There's a part of the [caffeine] push that Google is doing. It's a freshness update for search results.

I see. (Inaudible - multiple speakers)

Not that we have been able to discern, no. We haven't had a significant recent or a material effect from Google algorithm changes. We had the big effect. What was it? I guess, February or so, and we continue to have minor effects from that. Both, some positive and some negative, but nothing that's nearly, has been nearly as material as the original chain. I would say that nothing that we have seen or been able to discern as being significant or material.

Great, thanks for the color.

Sure, Brian.

Our next question comes from Robert Coolbrith from ThinkEquity. Your line is open.

Good afternoon. A few questions. First off, in education. Just wondering if any of the renewals in July played into some of the weakness? I guess, just try to recap and understand the situation properly. It seems like you're communicating with customers or trying to figure out their enrollment targets, their mix across programs. As well as their total marketing mix. I hope I'm paraphrasing correctly; which are the most important factors from your perspective? Then I have a couple of follow-ups. Thank you.

Sure, Robert. The renewals from July had an effect last quarter, but they are really. We're kind of over that now. There were some delayed renewals last quarter. I'm talking about the September quarter now. That effected revenue in the quarter as we and clients sorted out what our agreements would look like under the new regulatory policies. Not all of those agreements are complete. But all of the agreements that we're holding up spending are complete at this point. That was pretty significant last quarter. Certainly to the tune of I think about $1 million. Ken?

Yes, roughly.

I don't have the numbers on that (inaudible - multiple speakers) make that generally and roughly. We're not seeing that as in effect this quarter. Because even where -- and most of the agreements, and I think with the largest clients are now done, or many of them. At least not saying most in case I'm not doing the accounting correctly or where we draw the line. But we don't have any. Even where they're not complete, we haven't had any clients hold back spend in any meaningful way to my knowledge. I most certainly would know that.

In terms of the -- I think you. Robert, I think you paraphrased pretty accurately kind of what we're seeing from the education clients. I don't know how to tell you which of those is the biggest driver. Because we're seeing such a very mix of it amongst the various players. We don't always. They don't always tell us exactly why they're doing what they're doing. They just sometimes get us indications.

But it certainly would be -- Those factors would be the ones that we are seeing playing a role in some of the decisions that are being made in terms of what they're doing with budgets right now.

Great, and insurance, thank you for making the distinction between Europe's model and some of the people out there that position themselves with competitors. That was helpful. Just wondering also is pricing the entire issue? Or was there any shift in terms of affiliate distribution? Then, just one other quick one. You mentioned paper call a couple of times. Just wondering if you're building that out yourself? Or, if you're working with a partner there? Thank you.

Sure. Pricing has been the dominate issue. Pricing also effects media, as you know. Because it's what allows you to most affordably compete for -- or even just go access traffic. In terms of affiliate shifts, there have been some of those. I think we're through the most, through the majority. The biggest one of those that was -- we thought might happen did happen. It certainly had an effect. But it's now 80%, 75% to 80% done. I would expect that won't be a factor going forward. So, I mean, it's -- the pricing is dominate. But certainly, pricing and its effect on media is a derivative of that.

We did have a fairly significant shift of volume that was expected. The majority of which happened a couple of -- about a month or two ago. It happened over a period of time. We're kind of through that now. I don't expect that's going to have a big effect going forward. There was a pretty significant shift there, but we're through it. Right? All but, I think there was. I think with this last report I saw, it was we through 75% to 78% of it. We expect the rest of it may not go away, but it may well go away at any time.

It went on --

It represents somewhere in the neighborhood of 5% of our volume in auto insurance claims.

That's right, and then on paper call you just. Are you guys going to -- ?

Sorry, paper call. We're doing it ourselves at this point. We built a contact center -- a software platform. We've building it for awhile now. It's incredibly functional and it's well integrated to the rest of our capabilities. That doesn't mean that there won't be function. That there isn't functionality around the edges that specialize it. We'll choose not to build. That we may rent or buy from somebody else. For the most part, it's our own technology. Largely because we could customize the functionality. It's not that hard to build. It's easier or more easily integrated with the other aspects of the platform, which are important to us as you know. As we look to optimize or match in yield.

Okay, thank you very much.

Thank you, Robert.

Our next question comes from [Sanjay Patel] from Raymond James. Your line is open.

Hi, thanks. Doug, based on the previous experience over the years. What's your sense on the amount of time it might take your education clients to adjust to the new environment so that your education business can kind of return to the double digit long-term growth target that you talked about in the past? Do you think it's something that it's realistic to expect in the next fiscal year? Or, do you think it takes longer than that?

Shauna, we haven't really lived through this before. I can tell you that all indications from the clients in the market. Or there certainly isn't going to be forever. I guess the most honest answer is we're not sure. We just completed a three year planning process in education where we tried to be as accurate as possible. Use as much marketing client information and data as we could. That indicated that we thought we can grow next year and the two years following that at average rates more in the 15%, 12% to 15% range year-over-year each year.

Today, our best estimate today is that we'll be pretty flat this year. That the next couple, the next three years after that, we expect to grow in that kind of 12% to 15% year-over-year range. We will certainly as we progress and as we see significant deviations from that, we'll let you guys know. Our policy has been to be sure that we tell you guys what we know when we know it. Or what we think when we think it. But for now, that's the hottest off the press stuff. That is as of last Thursday. It's pretty hot off the press. That does not include, by the way, any of the significant incremental programs and vectors, including international that we talked about.

Great, and just a follow-up. You talked about going after new subverticals within education. I was wondering if you could just elaborate on that a little bit.

You bet. We're seeing a lot. We already serve over, and I've mentioned this before. We're seeing a lot of increased demand from online programs by the non-profit sector. We're continuing to focus on that and grow that as a source of revenue in a number of clients there. We're focusing on certificate programs, which we have not focused on in the past. But it's a big area and an area we like a lot. It's proving quite fruitful and promising for us.

We're now serving some test preparation clients, which address some of the traffic that comes through system. That wasn't yet ready to really get into an enrollment process. We're looking at executive education and continuing education. Parts of the traffic; we're not yet. We don't. We're not yet doing any of that in a material way. But it's something that's been an initiative, and a program, and a project. Ken, am I missing? Getting an education -- ?

And then, of course, international, which we've spent some time talking about. That would be another component. The other dimension, of course, as I said is the product mix. The products really are meant to address more segments of the consumers that want to convert in different ways, including calls and clicks. But, also allows us to access incremental and different pockets of budget at the clients. So that if they do say they want to do more direct, they can bid direct on our system for our placements in either click, display, or call format. Those are the dimensions of -- We got a lot going on in terms of growth initiatives in education.

That was helpful. Thanks, guys.

Thanks, Shauna.

(Operator Instructions)

Our next question comes from [Kevin Alan] from Barclays. Your line is open.

Hey, guys. Sorry if you've already commented on this a little bit. But, I guess on the last call you had indicated that for the past several quarters, you've been even more focused on growth in the home service is subvertical or the other segment. Can you provide some color on the momentum that you're seeing there? Then maybe to what extent would you expect the macro climate to temper growth in that specific subvertical if at all?

Sure, Kevin. Home services had been quite hampered by the macro economic environment for the past several years. We had actually de-emphasized that vertical. And restructured it so that we didn't even have a vertical head focused on it. We were much more in kind of maintenance mode because we'd found that the productivity levels of traffic were so low that it really wasn't worth putting much by way of resource or effort into.

As of about a year ago, we did two things. We started to identify areas where we thought the traffic was. We could make the traffic productive. We assigned a new senior head of that vertical to run that organization. The combination of we are seeing a little bit more activity there. Largely it appears driven by folks that have sat out the housing market seeking to renew, or remodel, or add to the value of their existing home. That market has gotten much -- it's gotten better.

Then I think the second area is that with the leadership we have in place, there's been much better, more focused execution where we can. We think there's an awful lot more to be done there. I could rattle off probably more initiatives there than I rattled off for education. All of which are quite promising. That was the driver of growth and other -- really this quarter was home services. We have plans for it to continue to grow quite nicely. I would say that macro economics, if they don't get any worse, they're probably not going to keep us from growing nicely for the next year, or year, or two. Because we see opportunities to just continue to penetrate and execute where we are.

It would be great if we could get a little tailwind from the economy or from the housing market. We're certainly not counting on it. That's again, it's been a long time coming and we don't know exactly when it's going to come. But we feel good about our ability to grow nicely in home services for the next couple of years as we look at what we have in front of us. It's hard for us to see beyond that other than to tell you that it's a really big market.

That's great. Thank you very much.

Okay. Thanks, Kevin.

Our next question is from Carter Malloy with Stephens, Inc. your line is open.

Yes, hey, guys. I just wanted to circle back on. You talked a little bit about capital allocation. Clearly, you got a lot of liquidity at this point. But just $50 million of that dedicated to buy backs. Can you speak any towards your appetite for M&A, both in near-term as well as over the next year or two?

Sure, we're always looking for opportunities that may represent either good assets to firm up our competitive advantage. Or for opportunities that can accelerate our growth, either in an existing vertical or into a new vertical. We're going to continue to do that, but as we scan the landscape we don't see a lot of big acquisitions that are interesting to us for any number of reasons. I would expect that our -- as we did some projections recently, our acquisition rate is going to be much more like it was a couple of years ago. Than like it was say, last year, in terms of the capital that we expect to deploy. Now that -- the big caveat there is that sometimes things come to market you don't expect.

But we feel like with, even if we spend the $50 million right away, we feel like we have enough capital available to us to be very aggressive on the acquisition front. Both because of the cash that we'll continue to generate and because of the cash we have. And will have after the buy back. Because of the about $200 million more of debt capacity that we have over the next two years at very favorable rates. We don't feel constrained at all in what we're looking for. We're not looking any differently after the stock buy back than we were before. Carter, I'll --

I'll add on a little bit, but Doug was quite thorough in his response. But the question you asked was the first question we asked ourselves as we first sat and considered it. Do we have enough capital available for the business, including strategically, including acquisitions. Obviously, we don't need capital to run the business because we throw off a whole bunch of cash. But that was the first hurdle before we even got into a discussion about what kind of returns of repurchase by represented the shareholders. The first question was will we have enough capital to run the business.

For the period of time we're talking about with the various [paths] we just -- Doug discussed. The cash on the balance sheet to begin with; then enhanced that capacity we have with the extended new debt facility. We are more than comfortable that we have much more than we need certainly in the near-term to cover any kind of opportunities on the M&A front.

Okay, and it seems like a lot of the better properties have probably been gobbled up at this point within the financial services. Is that focused really on the other part of the world, vis-a-vis in technology and those types of businesses?

I would say I think that there -- most of the -- yes, I think your depiction is accurate. That there aren't a lot of big attractive things left in financial services. There might be some nice add-ons, but I don't see anything big out there. I would say it will be more focused on the non-education, non-financial services areas. Maybe a new vertical or two. Though we still periodically run across opportunities in education that we'd like a lot.

We'll continue to add those on as we find them to be either great additions to our long-term strategy. Or, highly contributing in high returns on them. I, yes, I think you're right. It's going to be more focused on other stuff, and, or other product capabilities if we. If and as we find those. There are some areas of the online media space that we're not participating in as heavily as we'd like. You'll find us getting more aggressive about expanding there if we need to through acquisition. That would of course include things like mobile and social.

Okay, thanks so much.

Thanks.

Thanks, Carter.

This ends our question and answer session. Ladies and gentlemen, this conference will be available for replay two hours after the call concludes today through November 14, 2011. You may access the replay system at any time by dialing 8558592056 and entering the access code 17043272. International participants dial 4045373406. Those numbers again are 8558592056 and 4045373406, access code 17043272. That does conclude our conference for today. Thank you for your participation. You may disconnect.