QuinStreet Inc (QNST) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to QuinStreet's second quarter fiscal 2012 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session with instructions following at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. And now I'll turn the conference over to Erica Abrams of the Blueshirt Group. Your line is open.

Thank you, and good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet's second fiscal quarter of 2012 financial results. This call is being simultaneously web cast 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.

Factors that may cause our results to differ from our forward-looking statements are discussed in our most recent 10-Q filings with the S.E.C. on November 8, 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 in the December quarter was down 7% year over year. We had indicated in our November earnings call that we expected revenue for the December quarter to be flat to down, versus last year.

Profitability was good, with EBITDA margin of 22%. Normalized free cash flow was $14.9 million, or 16% of revenue. Adjusted net income was $10.9 million, or $0.23 per diluted share.

We are continuing to manage through challenges in the education and financial services client verticals, as previously discussed, while also investing in new capabilities and verticals. We are disappointed to report a drop in year-over-year revenue. But despite near-term challenges, we are making good progress for the future.

Our current forecast is for revenue to be down year over year in the March quarter. We expect to return to year-over-year growth in the June quarter. While circumstances in education and financial services make it more difficult than usual to be precise in our forecasting, we currently expect full fiscal year revenue to come in at approximately $400 million.

We expect to deliver an EBITDA margin of 20% or better for the fiscal year. We remain confident in our business, our capabilities, and the online marketing opportunity and, therefore, in our long-term growth prospects.

Let me touch on some of the specific reasons for our confidence. In education, while this period of adjustment to new regulations is difficult, the for-profit post-secondary industry and our clients there are adapting their programs and approaches to be effective under new rules and to meet the needs of the important segments of students they uniquely serve, all in the context of ever-increasing demands for education here and around the world. We are confident in their return to growth.

Industry changes in education are also accelerating consolidation among internet marketing and media players. We expect to continue to benefit from that trend and to be an ever more important partner to our clients.

We also continue to expand our footprint of clients, segments and products and now into international markets in education. These growth factors are early and small today, relative to US for-profit post-secondary market revenue. But they are coming along, and their potential is enormous.

In financial services, client engagement has been excellent and auto insurance click pricing has returned to our historic range. We are now busy rebuilding client volumes and media.

In parallel, we are continuing our program to expand our auto insurance product offerings, much of which is built on the foundation of the acquisitions we made last year. These initiatives represent exciting and significant increases in adjustable market and media access.

Also in financial services, our credit card business is growing rapidly, a result of strong propositions for clients, visitors and publishers, and of growing industry budgets.

Our positions in mortgage, deposits and other insurance sub-verticals are strong and will benefit quickly when market demand in those areas returns. While we have already begun our international efforts in education, we are looking forward to expanding financial services into new markets in coming years.

Our growth in other verticals continues to be strong. Our investments and efforts there are paying off and, though early, providing us with big new footprints in huge new areas of growth opportunity.

We remain focused on being a long-term leader in targeted, measurable marketing online, an enormous growing market and on sustaining our consistent, attractive economic model, as we have demonstrated. With that, I'll turn it over to Ken, who will discuss 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 second fiscal quarter of 2012, we posted $90.5 million of revenue, or a 7% decline compared to the same quarter last year, and reported a 22% EBITDA margin.

We continue to navigate the challenges we've been discussing in our two largest verticals. We believe we have made and are continuing to make progress to that end and expect to return to growth in the June quarter.

To be clear, we've not enjoyed navigating through a period with our growth on pause. However, you should also understand that we do not believe there's been any fundamental change in the longer term outlook for QuinStreet. Our market represents a massive opportunity, and we are positioned to create significant growth again after we manage through this flat spot.

So we aren't happy with recent top line results, but our fundamental outlook for the business remains enthusiastic. Nothing has changed in our belief that this is a great business and that we will deliver growth again.

Also, nothing has changed in our financial model in light of the revenue decline. We are still delivering 20%-plus EBITDA and still generating significant cash from operations. Ours is a resilient model. So with that backdrop in context, I'll discuss details of our fiscal Q2 results. First, I'll walk you through the performance of each of our client verticals.

Our education client vertical, which represented 41% of Q2 revenue, declined 15% compared to the year ago quarter to $36.6 million. We, along with our education clients and media partners, continue to adapt to the new regulations that became effective in July.

Financial services client vertical represented 44% of Q2 revenue or $40.1 million for the quarter, which is a decrease of 9% compared to the year ago quarter. We've continued to see a recovery in our pricing, and we expect to see the benefit of our ongoing initiatives to grow this vertical over the longer term. Remember that this is a very, very early and large market.

Revenue from our other client verticals, which include B2B technology, home services and medical, represented 15% of our total fiscal Q2 revenue. Revenue from other increased 33% compared to the year ago quarter to $13.8 million.

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 line item in the supplemental data sheets available on the front page of the investor relations portion of our corporate website so you can evaluate our costs including or excluding those items as you desire.

Our cost of revenue was $60 million in the second fiscal quarter, representing a 34% gross margin. Our cost of revenue includes all the costs used to produce our measurable marketing results including media and personnel costs.

Moving on to operating costs, product development costs were $4.2 million in the second fiscal quarter or 5% of revenue, as in the past quarter and the year ago quarter. Sales and marketing costs were $2.8 million in the quarter or 3% of revenue as in the past quarter and were lower than 4% of revenue in the year ago quarter. General and administrative costs were $4 million or 4% of revenue, the same as in both the prior quarter and prior year.

Our annual EBITDA target of 20% remains the same as it has for a decade now, supporting our growth initiatives and delivering consistent profits and cash flow. Again, we have demonstrated an incredibly resilient financial model by delivering to this 20% target for a decade.

Moving to taxes. Our GAAP effective tax rate for the quarter was 39%. You may remember that last quarter, we announced that we brought down our expected ongoing effective tax rate to 40% or slightly lower, though as you know, that will vary quarter to quarter with discrete items. A discrete item rounded our effective tax rate down to 39% this past quarter, and our 40% ongoing effective tax rate guidance for your modeling purposes remains the same.

Regarding shares outstanding, as you see in our press release for the quarter, our fully diluted weighted average shares totaled $47.9 million. We've begun to execute on the $50 million share repurchase we announced last quarter, purchasing 1.8 million shares for $16.5 million. We plan to continue to execute on the repurchase but we, of course, can't guarantee the exact number of shares we'll be able to acquire under the various regulations. So we guide you to 46.5 million weighted average fully diluted shares for this March quarter.

Our GAAP diluted EPS for the quarter was $0.09. Our adjusted EPS for the quarter was $0.23. Adjusted EPS adds back two items only, stock-based 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, the same as at the end of last quarter. You can see the details in the cash flow statement in our earnings release, but the two largest items were the generation of $14.3 million of cash from operations and the repurchase of $16.5 million worth of our stock.

Total debt increased to $114 million from $104 million last quarter, including the recognition of a $4.5 million payable for the fourth and final earn-out installment on our Sure Hits acquisition, which we disbursed last week. Net cash totaled $30 million or $0.63 per diluted share.

Now, moving to one of the fundamentals we can (inaudible), cash flow. As mentioned in discussing our cash balance, cash flow from operations was $14.3 million for the quarter. Fiscal Q2 normalized free cash flow, which is free cash flow excluding working capital changes, was $14.9 million, or 16% of revenue.

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.

So as a brief overall recap on our results and position, I will complete my prepared remarks with six items that I believe summarize our financial and market context.

One, we continue to navigate through a challenging time in our two largest client verticals which has paused our top line growth.

Two, we expect to return to growth in the June quarter. Three, our fundamental financial model is unchanged. This is a fundamentally sound business. Our EBITDA and cash flow remain solid. Four, we believe that we are well-positioned in a large, early market.

Five, we maintain ample liquidity to pursue our opportunity, including significant cash resources on our balance sheet and $200 million of available borrowing capacity at attractive rates.

And six, we are executing on our stock repurchase plan. This reflects our belief in the underlying opportunity in front of us and our belief in our ability to execute on this opportunity based on our competitive position and assets. With that, I'll turn the call to the operator to open Q&A.

(Operator Instructions)

Our first question is from John Blackledge of Credit Suisse.

In the education segment, the top line was a little bit worse than I thought it was going to be. So maybe Doug or Ken, if you can talk about volume and pricing for the quarter, your share of wallet, kind of up or down in the quarter, and then kind of initiatives. You guys have talked kind of initiatives. If you could maybe provide a little bit more detail. And then what provides you with the confidence that top line is up in the fiscal fourth quarter? Thank you.

Thanks, John. In terms of volume and pricing, the pricing was pretty stable. Up --

Up a little bit.

Up a little bit, actually.

A bit more than 5%, but a little bit.

Year over year. So the effect was really a volume effect. That volume effect is related to a number of factors, mostly to do with clients adjusting their program mixes, their marketing spend targets, their budgets according to where they're seeing new emphasis or less emphasis, the fact that clients are, in large part, seeing lower productivity out of the increase that they purchase for a number of reasons.

One of the smartest CEOs in this space said recently that -- gave a list of a number of reasons why they think that's the case, including the fact that the enrollment counselors have to comply with the new regulations, including long-term unemployment and the effects that might have on students' willingness to commit and other factors.

And so the volume is really what's moving down. What we're doing is working very closely with clients to try to make sure that we build up our capacity and quality in the areas that they now need us to focus on relative to where they were and help them by supporting them through that adjustment period. So that's the gist of what's going on.

In terms of share of wallet, we believe, based on what we've been told by clients and competitors, that while we are down, we are both generally not down as much as enrollments and we are down generally not as much as competitors. And we've had a number of clients tell us that they have not reduced us as much as they have other folks.

It's relatively anecdotal, but there's certainly not good data on that out there. But it's our belief that we have not lost share. Certainly over the past few years, it's apparent that we've gained quite a bit of share if you look at what has gone on with competitors and what has gone on with enrollments and spend.

There are certainly a few competitors that have gained some share as well, but that is not the dominant effect that we're seeing out there. The competition is a factor, but not -- is a factor primarily in fighting for the best sources of traffic, rather than for client budget.

We have pretty much as much client budget as we can deliver on, if we can make the equation of quality, price, price point they need to pay and margin for us to work. And those things will all move around over time as we and they both adapt our business systems to the new realities. And one of the things that's going to have adapt is if, in fact, enrollment counselors and advisors are less productive which they most certainly will likely be and appear to be, then that side of the cost equation probably has to be adjusted, rather than putting pressure, trying to put pressure downward on [increment] pricing, because there's only so much media out there, and you can only get so much yield on it.

So those kind of structural changes are going to have to happen over time. But share of wallet wise, despite the disappointment, we think we're up for the adjustable budget certainly over the past couple years and I think even over the past year.

In terms of initiatives, I listed some of them in my opening remarks. The one that is most important right now or the series that are most important right now are those that are allowing us to continue to improve our matching, our qualification, and our sources of media to meet revised program targets and emphasis of the clients and new and increasing quality requirements for the clients.

We have a lot going on there. We've made great strides in terms of all of that. We have a lot more to do. But it's very promising and, again, we're making -- we've made very good progress along all the dimensions that matter in terms of quality of the mix, quality of the sources, and the performance for the clients.

We also have initiatives to add more products for the clients. More of the clients want to have more direct control over the conversion process due to concerns about quality and compliance. We're happy to accommodate that and we're adding a click product to the mix that allows them to buy traffic directly from us and directly to their sites, built really on the back of all that we've learned in the click business and financial services.

It's an exciting industry because it opens up a lot of new budget. It's an exciting initiative because nobody's as good at that as we are because of what we've built technologically and expertise-wise in financial services. And it allows us to convert traffic that we had historically not been able to convert because these are folks that would not -- much of this segment would not historically be willing to put their contact information into a third party website, and that's high leverage for the business. And so margins have been actually quite good in education.

So we're excited about that initiative. We are excited about the improvements we've seen in our own monetization. And because of the increased improvements we've made in technology primarily, but also the quality improvements we're seeing with clients as a result of that and the increases in pricing that we're seeing.

And we think it's rational that clients should pay more for inquiries that are higher quality and better suited and fitted to them. It costs us more money to do that, but it's well worth it if you look at the leverage on the marketing and sales line of the clients. And more and more clients are coming to that realization, and we see a lot of movement toward a willingness, a recognition to pay more. That's exciting because that's really what we specialize in.

We're excited about our initiatives internationally. The growth there, albeit on a small basis, has been very exciting. And I think our total Latin and Hispanic business is now running at about $200 million a year -- I'm sorry, $2 million a year. Hopefully in a year or two I'll say $200 million, but about $2 million a year but with a lot of momentum, a lot of client signings, a lot of clients in the process of being launched. And the engagement of clients is great.

And as I think you've heard me say before, in Brazil, which is probably the most important market because of its size and structure in Latin America for us, we now own more education, media online by quite a margin than we do in the United States. So we're early, we're extraordinarily well-positioned.

We just closed on the acquisition of the leading career site, education-oriented career site down there. So we're quite bullish and excited about that initiative and we will announce shortly the other large market that we've entered and we're excited about that as well.

So, you know, if you add that to the fact that we're also adding new segments, we're growing our non-profit, school-based client base more rapidly than ever, we're focusing on adding executive education, continuing education, and other areas, all of which draw nicely on the traffic we already own.

We see a lot of goodness going forward in education particularly, you know, as the industry continues to adapt and then the returns to growth which, again, as I said, we are quite confident it's going to do, and we see it coming.

So those are the reasons we feel good about education over the next couple of years, certainly. And in terms of how long it will take us to work through the current period so that the positive begin to outweigh the negatives again and we return to growth, that's a difficult thing to call.

In looking at the March and June quarters, we've attempted to be quite conservative, and I would say that it's certainly less certain than we'd like it to be in terms of forecasting, but I'm pretty comfortable with -- I'm certainly comfortable that we're accurate that we're going to be down again this quarter, and I'm also quite comfortable that we're going to be up in the June quarter on some very conservative estimates.

I think the question is more how much in either direction and, you know, how much above or below that [$400 million] we come in and then I return to great confidence if you ask me do I think we'll grow again next year and the year after. I think again, as you look at the vectors of growth from certainly what's going on in education and financial services and the international investments as well as the other verticals, the investments and progress we're seeing there, I feel quite confident in that. We have not yet done a formal forecast, so I'm like I can't give you an amount, but --

Fiscal '13, of course.

Fiscal '13, but we feel quite good about next year and the year after in terms of being growth years again for us and we feel quite good about where we are in this market.

So I think, John, let me know. Did I cover that for you?

No, that's great. Thank you very much.

You bet.

Thank you. Our next question is from Douglas Anmuth of JPMorgan. Your line is open.

Hi, this is Bo Nam on behalf of Doug Anmuth. I was wondering, can you talk a little bit about what you're seeing for educating companies in terms of their current allocation of spend between lead aggregators and brand and if there's any more shift towards the lead side? And also, if you're seeing any impact from BrokersWeb through the Vantage acquisition. Thanks.

Sure, Bo. In terms of education companies allocation, it's all over the board right now. I would be -- anything I say in terms of precision there, it would be going out on a limb. I can tell you -- let me give you some anecdotes to the extent it might be helpful.

It appears to us, though we don't have firm data, that a lot of the schools have been spending more on branding lately. I think I mentioned that last quarter. And the rationale there is I think a sensible one, which is a need to rebuild the voice of the industry and some positive voice about the industry to counter a lot of the negative stuff that has been out there over the past couple of years and to prepare the direct marketing channels to therefore be more productive.

I think that's -- we don't know for sure that's what's going on, but it certainly is apparent. Appears that that's the case to us. And anecdotally, I would say that that certainly is something that we're seeing.

In terms of leads directly, clients will always spend as much as they can directly that can make -- they can make economic sense with if there's a relatively small but important segment for them of folks that uniquely suit them or uniquely respond to their brand messaging and fit their program criteria.

For those folks, schools are wise to build the capabilities to go and address and capture them directly. That's an important segment for them, and some of the most advanced clients are very good at that, as they should be.

There's also a very large segment where we are, a large if not the largest participant of folks that don't necessarily uniquely suit your brand, but where you could -- they could match to your brand in the process of their discovery and research. And we have an advantage there because we can match multiple schools and we can sometimes match multiple times. And therefore, we have great media economic leverage.

And that part of the channel is an important part of the channel too, and that's the part of the channel in which we thrive.

I would say right now, I can't tell if there's more spin going on one or the other there, and I'd say that it probably depends on the school and depends on what's going on with that school. But there's no significant trend in either direction right now, certainly, that we can discern.

The trends are more reductions in spend, reductions in price targets based largely on program mix changes or quality or conversion rate drops due to a lot of factors that some of the schools have talked about, including, again, remember these enrollment advisors now are under much different rules in terms of what they can do and say. And not surprisingly, they are not converting increase at as high a rate.

In terms of BrokersWeb, I think everybody gives those guys way too much attention. They're just not that important a competitor. They're aggressive. They talk a lot. They're probably growing quite a bit for their size. But they don't really have much by way of special capabilities. And no, we're not seeing that much from them in education, any more differently than we have from Vantage historically. Historically has been an education competitor for probably a decade now, and the guy that started Vantage had been a publisher for us.

And so I think that while they will make a lot of noise, they're just really a latest version of what we have seen many, many times in the past of somebody that comes in and makes a lot of noise and thinks they're the latest genius to pay out a higher split and think that somehow that's going to end up in them building a great business.

They're easy to defend. They will take some distribution. We'll probably eventually get it back. And at some point, they'll either run out of money or have to change their business model like their predecessors, because you can't build a business on the basis of just paying higher splits because you can never build a real -- the capabilities and more sustainable competitive advantages that folks like us have been able to invest in.

So they probably wouldn't even be in my top five in terms of folks I think about long-term as formidable competitors in education or, for that matter, in financial services.

Great, thank you very much.

You bet.

Thank you. Our next question is from Matt Schindler of Bank of America.

Yes, hi. Just wanted to -- maybe this goes into John Blackledge's question. I didn't know if I fully understood the answer. But I'm a little unclear on how you can have that much visibility into the fourth quarter, especially given the rapid deceleration on the education vertical. I can see looking at easy comparisons on the fourth quarter, how you could turn back to growth. But what do you have -- what kind of visibility do you get in the business in particular that tells you now that things will change by June? Thank you.

Sure. You know, we've always had quite a visible business, as you know, largely because we have virtually no client churn, and we have quite close relationships with these clients. Most of the efforts that it's going to take to deliver on revenue for growth in the fourth quarter -- by the way, which is an easy comp, you're correct -- comes from a client-by-client buildup of what they've told us they want to do, a knowledge of what we're currently able to do for them, and very little adjustment in terms of some initiatives where we have a pretty clear line to developing more capacity, particularly on the media side, because we're very much media constrained in education and financial services right now, which 80% of our history have been media constrained. A lot of client demand, really.

It's not that there aren't issues of client demand in some places. But in general, if we could -- you know, if we had enough media to meet the price quality margin triangle for, you know, every client, our business would be two, three times bigger. So that's not a bad thing. At least it gives us clarity about what to focus on.

It's a bottoms-up build. It's based on the knowledge of what we see. It's knowledge of what the clients are telling us. And again, we think it's a pretty conservative buildup. We say approximately $400 million, because to your point, we don't feel great about sticking too firm a stake in the ground. But again, it's a -- the June quarter is a pretty easy comparable. Our assumptions about what we do between now and then, we think to get to what we've told you are pretty conservative.

And while yes, it is much less certain than it has been, we have a lot of things going; on and generally, we do a portfolio analysis. So we think historically, before this past year, or the past few quarters, I should say, we've been awfully good at it. So we're giving you our best shot, and we feel like it's as accurate as we can be, and that historically has been pretty darn accurate.

Thank you.

You bet.

Thank you. Our next question is from Carter Malloy from Stephens.

So first off, I want to talk a little bit more about the media constraints you're seeing. Specifically on the financial services side, what may be driving that. Because click pricing was our issue a year ago, and it seems you've gotten all of that back, but the segment is still down. I assume that's because of quality and availability of media. But first question is why is that? Second is how do you actually address that without increasing the split with your affiliates?

You bet, Carter. In financial services in particular, the media constraint is generally due to a couple of things, and let me get into more detail about both of them. But in all cases, media availability, and I think you indicated this, so just to be clear, media availability is always in the context of quality. There's also the client and margin to us.

So there's a lot of media out there, but being able to convert that media in a way that makes us margin and provides the measurably attractive results for the clients is always the challenge.

Why we are constrained there now, we have -- an over arching effect has been, over the past year, the loss of pricing power due to the drop in click pricing set us back quite a bit because we lost a lot of media buying capabilities, and we lost a lot of media placements and the ability to compete for media.

We have largely recovered from that now. We are now back to approximately the same click pricing that we were at before the drop in last January, February. So that's super good news, but it's relatively recently that we've gotten to that point. So we have to go and take advantage of that to go back and rebuild, as I said in my opening remarks, the media and to also rebuild demand from clients at that price point because not all clients necessarily follow the price up. We think they should. We think it's justifiable, but it's not always a short cycle.

On the media -- on just the traffic side of the equation -- so that's the pricing side of the equation. On the traffic side of the equation, there are a number of things that have happened over the past year that we've had -- that we have to now overcome. And generally, in order of size, those include the loss of bank rate traffic, as they shifted to an in-house click product away from our click product. And including the fact that they acquired a couple of our larger affiliates, including [ends web].

And so that's been -- you know, that was at a point, and I think I talked about this in some past calls. That at one point was as much as 20% of our traffic. So that was a big hit, and we have to recover from that, and we're going about that. But that was probably the biggest hit.

The second biggest effect has really been clients largely, somewhat ironically due to our pushing and probing, being much more sensitive to ROI on the back end and adjusting their budgets to be more conservative with respect to the ROI and be more aggressive and precise with respect to that ROI. We think that is a long-term great thing. But in the short-term, it creates slower moving, more difficult client budgets.

We like that. That plays right into our long-term competitive position. We have been pushing and prodding and encouraging those clients that weren't already there to get there. And many were already, to be clear. And so but that is something that we are somewhat created by the fact that we went through the issues that happen in the industry, incentivized clicks, and our response to that put us a little bit in that position. That's been the second biggest effect.

Third biggest effect has been Panda. And not so much Panda's effect on our own sites, though certainly we had an effect on our own sites. But much more, Panda and, you know, and sons of Panda, grandsons of Panda and great-grandsons of Panda which continue to roll through and affect on the traffic and the organic traffic in particular of many of our search traffic driven publishers.

And that landscape has changed quite dramatically over the past year, and we are adapting rapidly to that so that we are working with those that have won, and we've lost traffic for those that have lost. And that is something that's an ongoing battle as Google continues to adjust their algorithms to do what they want to do.

And then kind of a relatively distant fourth, and we just went through this analysis, by the way, partly because we've heard so many folks talk about this last item. A relatively distant fourth is competition. There are some competitors, brokers who have, in particular, who have been very aggressive. They know now that they can't sell the incentivized clicks, going out and very aggressively bidding for higher quality traffic sources, very often quite irrationally if you look at the prices they're paying, and that's why we're comfortable it's not sustainable.

In some cases lately, very lately, they've picked up some distribution in doing that. We have effectively defended most, and we will probably get back much of what they've done, and they'll eventually, again, run out of bad money to throw after -- or good money to throw after bad.

So that has been a factor. It's a fairly recent factor and it is by no means in the top three of the factors. And again, I think folks need to maybe quit listening to them and actually get real facts, because they're getting a lot more attention and credit than they deserve. But those are the primary factors that we're fighting back against and that we're rebuilding from.

Okay. And so to sum that up on my end as we make modeling considerations for the next three to twelve months, you've recently, and probably very recently, gotten a full rebound in click pricing. So that's your positive. Offsetting that is loss of [ends web] and maybe a little bit more on the tail, on the rate traffic up front and then on competition on the tail there.

So does the pricing, in other words, going forward from here, does the pricing recovery help to offset, or does it completely offset those losses, or should we expect to see financial services actually dip further in the coming quarter or two?

We don't expect there to be a material further dip going forward. Now, there's always the January effect, which makes the March quarter a little bit stronger historically than, say, the December quarter. We may or may not see that full effect because of these other factors. But we feel like -- we don't feel like there's -- you know, year over year, we still think there's going to be a fight to be fought over the next at least quarter.

But in terms of the trend lines, we like where we are given pricing. We think that should be -- and you can see that it's helped us overcome a lot of effects on the traffic side because the list I just went through is lot more than 9% on the drop on the traffic side.

And we like the rollout of a broader product offering, which we didn't talk about but I mentioned in my opening remarks, which gives us a much higher monetization capability and the ability to build a lot more media presence than we can in the simpler kind of Sure Hits click-only model. And that is incorporating the acquisitions of insurance.com, carinsurance.com, the ability for us to realtime quote, the ability for us to write policies through our call center and where we're licensed in 50 states and the addition of other monetization vehicles in auto insurance, which much -- gives us a lot more strength.

So we feel very good about the trend line over the next certainly six to 12 months. The next -- you know, the current quarter is likely to be down again year over year certainly, and I think -- I'd have to look at what we're looking at for the June quarter. But as you know, in the June quarter, we believe we're going to be up overall. And I believe that also, I'm almost positive it also means we're up in financial services in the June quarter as well.

And beginning the next year, the combination of the return pricing and the broadened product offering, we think, adds up to a pretty good year for financial services and for auto insurance in particular.

All that's very helpful. Thanks for the color. I'm sorry to take up time, but I've got to follow up on the same string there.

You bet.

Which is as you're seeing payouts sometimes become irrationally high and the affiliates asking for more and more, is there some long-term risk here that you have competitors that say, you know what? I'm willing to take 10% EBITDA margins rather than 20; and ultimately, that payouts could stay irrationally low?

That's been a risk in our business for 12 years. I think the answer is it's highly unlikely, because it's not just about them being willing to settle for ten points less EBITDA margin. It's about them being able to finance the investments they'd have to make to continue to compete with our ever-increasing monetization rates and the advantage we already have in monetization because of our historic investments in those technology capabilities and other.

So the gap is ever-increasing and far outweighs historically -- because this is not our first rodeo, right? These aren't the first geniuses that thought they'd win by paying higher splits. Historically, it just doesn't work. It's painful to go through it when you have somebody that wants to try, but it's, in the long run, it's an unworkable business model because the gap of advantage we have and then the gap of advantage we are creating as we continue to progress and invest makes it untenable for them.

So yeah, they may continue to try to do it for a while, but we'll just wait for them to realize it's good money after bad, and they'll probably go the way of the other couple of dozen folks that have tried the same strategy historically against us.

Great answer, and very helpful. Thank you.

You bet.

Thank you. Our next question is from Shyam Patil of Raymond James.

Hi, thanks. Just in terms of the declines that you're expecting this quarter and the increase you're expecting in the June quarter, could you help maybe quantify that a little bit better for us in terms of what kind of range you're thinking about there?

And then separately, I think last quarter, you mentioned that you felt comfortable with a 10% to 15% longer term growth. Just wondering if you think that's a realistic range for 2013. Thank you.

Thanks, Shyam. I don't know that I'm comfortable, given the degree of uncertainty, getting too precise for you next quarter and the June quarter. I mean, certainly, we have precise numbers and we have a range of precise numbers based on certain scenarios, but I'd be -- given the degree of uncertainty, I'm much more comfortable saying down than up and then giving you what we think the end point is. And again, I'm not trying to avoid anything. I'm just trying to keep from giving the illusion of precision because there are so many moving parts. And I just don't feel great about that.

In terms of the long-term growth, yeah, I think if you look at our industry and you look at the growth rate of our industry and you look at the potential in our marketplaces and the potential in our verticals and the fact that we grew historically, have grown historically at rates way above, on a compound basis, 10% to 15%. And even over the past three years, if we're flat this year, I'll remind you that we will have averaged, over the past three, since we went public, we will have averaged a growth rate of about 16%.

Yeah, I feel pretty good about 10% to 15% as a long-term growth target. I don't think -- I think we're super early, very under penetrated, even in education. The industry itself is growing at, at minimum, high single digit rates. We do see, over time, competition get easier as we open up more and more of a gap and as the benefits of scale accrue to us. So I think that's a good number.

Just to follow up --

Yeah, now, it makes sense. It's hard to say when we sit here and we've suffered the past couple of quarters, right. So it's not an unfair question. But nothing's changed in our approach to the business, the assets of the company, our ability to monetize, which has all kinds of effects beyond even what Doug was talking about before as it relates to insurance. There's a lot more there.

It's a tough time. For different reasons, as we've discussed in great detail, we're having near-term problems in our two largest verticals. Makes it really rough. Nothing's changed about the business. The question is when is the inflection and at what rate.

Nothing fundamentally has changed and there's lots of, as Doug talked about in his prepared remarks, there are all kinds of opportunities we're pursuing, and we'll be very successful with some of those. But it's a tough time to ask that question. But to be clear, nothing's changed.

Great. Thanks, guys.

Thank you, Shyam.

Thank you. Our next question is from Brian Fitzgerald of UBS.

A couple quick questions. With regards to Google's most recent Panda changes, one in November, another one in January, any impacts from those? And then in general, has the magnitude of the impacts from each successive Panda change, are they declining throughout the industry? And then really quickly, nice growth in other. Any color on how B2B, home services, medical are progressing? Thanks.

Sure, Brian. In terms of Panda, the direct effects on us do seem to be diminishing. We haven't had as big a hit as we had last February, or anything even close since. We've had some successes rebuilding, although certainly not back to where we started.

But we are seeing, as these different Panda algorithms roll through, we sometimes see pretty dramatic effects on the mix of publisher -- other publishers out there, including some of our publishers.

And so we just had, just with one of the Panda changes that came through last week, there was a publisher that got -- that had been under -- I don't want to talk about who they are, because I don't want to talk about somebody. But it was a publisher in one of our verticals that had been in the rankings for, gosh, years. Probably six or seven years, quite effectively. And they got virtually wiped out. And that mattered to us. It really mattered to them.

So I'd say that there continues to be effects not. As big effects directly on us. But there are effects that are pretty significant to other folks. And in some cases, they're meaningful to us, though not devastating. I'd say it has definitely settled down. But it can still really matter, and it's unpredictable.

And it's one of the things that, when we say the uncertainty and we talk about it's harder to forecast and we talk about trying to just give you an approximate number, those kind of things you don't see coming, and they're not predictable under any imaginable scenario. There's no reason to believe, given all the Panda changes we'd seen, for example, that that particular publisher would suffer such a devastating hit this late in the game after so many years of success and after living through the first -- by the way, Panda's rolling all the time. And so they probably lived through I don't know how many Panda updates through their vertical before they got hit.

So it's an uncertainty we now have to live with. We will live with it. We'll adapt and adjust to it as we always have. And we'll thrive going forward because we have the ability to do so. But it certainly creates uncertainty.

In terms of other, we saw strong growth in both B2B and home services. Medical, not so much. Still going okay, but it's still early and we haven't really -- I don't think we've really found our growth legs. And we've done some restructuring to eliminate revenue there that we just weren't comfortable was going to get to big scale or was going to get to the kind of margins we liked. So we set ourselves back there a little bit, but I think for the right reasons, given the long-term objectives in the broader business.

B2B is an area we continue to like a lot. We like it because we've invested a lot in understanding that area and that business. We think it's a -- we know it's a huge, very, very early stage market and that the clients themselves want to and need to spend a lot more, a lot more effectively.

So it's not search traffic driven. So it's a nice diversification into B2B. And outside of some of these markets that have more structural issues, it's a nice diversification from a traffic, what drives -- what the sources of media in traffic are. And it's just good diversification because it's another big vertical to be a big player in. So you'll see us continue to invest.

Those investments that paid off nicely, despite what some folks might think. I think it's important to know that when we make these acquisitions and investments, we're very long-term oriented. And in B2B, the investments we've made to date are returning double digits returns already. And we're still very, very early in the full development of that model, and that return rate is accelerating and inflecting quite nicely.

So home services, it's been a lot of just much better blocking and tackling and a healthier consumer market. And a lot of the investments we made historically in clients and media are paying off there, and we expect that business to continue to grow nicely. So I think they both grew at 30 something percent, whereas medical was pretty flat, I think, year over year.

Now, some of the growth in B2B, of course, was inorganic because that could be acquisition. But it certainly wasn't all inorganic and. The ITB acquisition, you can't -- again, we immediately integrated those capabilities. So thinking of that as separate revenue -- and by the way we lost a lot of the revenue when we did it, because clients often consolidate.

When you add two different sources, they usually don't keep letting you have two times the budget because of the way they allocate things. So one and one usually equals like one and a half, not two. And we didn't buy them for the revenue access to clients. We bought them for the fact that they, as we talked about at the time, they had a great database, but they also had the capability, [soon] life cycle, e-mail marketing, the way we know it needs to be done in B2B, and they had the reputation among clients and through our own research for having done that as well as anybody in the last ten years, and that was a capability that was super important to add to the mix.

So that's -- we like both of those. We think they're going to keep growing. We think next year's another good growth year for them, and we think that they're going to be very, very big businesses for us over the next three to five years.

Thanks for the color.

Thank you, Brian.

Thank you. Our next question is from Robert Coolbrith of ThinkEquity.

Thank you. Good afternoon. I wanted to ask a quick clarification in that question, and then I have a few others. For the June quarter, do you anticipate growth across the business or just overall? And that's an easy one, just go.

Thanks, Robert. Right now, it looks like across the business.

Okay. And then a couple more. Given some of the pressures, obviously, in organic or partner traffic acquisition, is there more you can do, or are you doing more with alternative traffic acquisition like display and social?

No, that's a great question. Display, not so much. We're working very hard with Google to try to make that work. The metrics just aren't there yet. But again, they are being super helpful with us. And we have some joint projects under way to continue to try to make that work. So we're working on it, but we are not there yet in terms of making the metrics in display work.

Now, in social, similarly, we have not seen that work as well as we'd like. But we do have a group that's now focused on it, and I expect that we will make more progress faster there now. It's harder with [safe base], because the ad system and ad center isn't really that conducive yet. They're really more driven right now by displaying gaming, as you know. But they fully understand, because they know Google, that we and our ecosystem are an important source of revenue. And we have very good, productive conversations with them and we expect, as they continue to develop the ad platform, that there will be more opportunities to do more there.

Email -- I'm sorry, mobile is growing very nicely for us. We've had a number of joint projects with Google that have worked out very well and a lot of effort there and a lot of focus there. And so that's been productive for us in performing well. Not surprisingly, given the breadth of iPhones and Androids and iPads out there, the increased distribution there. So mobile is not really mobile anymore. It's just a different device. But it's an internet device.

So we like it a lot. We have a focused group and a VP focused on it now and we have so for about the last, gosh, four to six months exclusively. So I expect that that's going continue to be a good area of development for us.

But to your point, it's important diversification for us. We have other things going on as we get these monetization rates to the point where we are in some of our verticals. We are continuing to look at other media sources as well.

We're certainly not running away from search. We love search. We're good at it. We align with Google in terms of how they think about the world, and we work very well with them, and they're a great partner of ours. But we need to continue to find more good sources of traffic to monetize, that's for sure, and we're getting better and better at that.

One more, couple more. Just there was an announcement recently that you're experimenting with being a publisher on the ad exchange. I would imagine that's not going to be all that incremental, but could be probably pretty high margin. How do you think about that in terms of improving RPM on the owned and operated sites?

That's a great question. We have not -- let me answer it a little more broadly, Robert, because you're on to something that is a latent opportunity for us. But we don't expect that to be real big, but we do expect it to be nicely incremental, to your point.

We have a lot of traffic in our in the networks of owned and operated and, by the way, publishers too where we could get placement that we just simply don't broadly monetize. We really just drive it to a particular vehicle, be it a Sure Hits or an education inquiry, for example.

And the fact is that we could add incrementally not just display, but a lot of other offerings. And as I think you know, we, for example, in adding clicks to education, it's not just about increasing budget, but it's about taking media or traffic that we currently don't convert and addressing it and converting it. And that's very high leverage for us on the margin surplus generation side as well, which is another version of the same concept.

And we're also adding, in the auto insurance and the broadening of the model, we're adding a lot more ways for the traffic that we engage to convert not just clicks to clients, which we love, but also, as we said, we can write policies in 50 states now, and we're working on a number of other leverage in vehicles there. So generally, we don't do enough monetization of broader segments to the traffic that we already own or acquire and it is a priority for us. And it's a high leverage priority for us.

Last question, just to sort of be the devil's advocate of some of the partner splits and some of the aggressiveness going on in the marketplace. It seems as though you're keeping the historical margin target intact, but obviously deviating a little bit, arguably, from the growth target that you've historically had for yourself on the theory that the competitors will eventually blow themselves up. You know, to look at it differently, why not pay the more aggressive splits now and basically starve them to death aggressively?

We are selectively doing that. We're trying to accelerate their demise by fighting them off. We're just being select about where we do it. But we are not holding a standard margin everywhere depending upon how we're having to fight the battle. So the answer is, yeah, we are doing that on a selective basis.

But we also don't want -- just because somebody pays more for traffic right now doesn't mean they're ever going to make any more margin on that traffic, which is the irony, right? They somehow convince themselves that if they get the share that something magical's going to happen.

Usually, they're just paying too much for the traffic. And so we don't want to structurally bring down the margins to the point where we, like they, can't make the necessary investments in growth and capabilities to increase monetization so the publisher can make more money without us having to pay a higher split. So we need to do it selectively, and we're much more oriented toward sustainable margins that allow us to invest in new capabilities that increase monetization without higher splits so that the whole ecosystem can be healthy than we are following higher splits down and having the whole industry end up where, say, auto leads did.

So we are going to continue to take a long-term, sustainable perspective with high returns on our capital orientation. But I think it's -- I think it would be wrong to assume that we are black and white one way or the other. I'd say that given that bias, we're still also willing to be aggressive where we think it's strategic to do so, and I think we're running laps around them.

Thank you.

Thank you. We have time for one further question. Our final question is from Kevin Allen of Barclays Capital.

Hey, guys. So you still have a considerable debt capacity. Do you expect to increase that materially over the next few quarters? And if so, what do you think is a sustainable level for the business?

Thanks, Kevin. I would say no is the general answer to that. But it does depend on what we come across. We historically have thought of a sustainable level as not to exceed three times EBITDA, which is certainly relatively conservative, given our economic model, and is actually quite conservative relative to where we probably could go, given the stability and attractiveness of our cash flows. But that's historically what we thought of. We are not there, of course. I'm not forecasting that we're going to go there, but I'm just answering the question.

Okay, thank you.

You bet.

Just finally, were there any acquisitions contributing in the quarter? Anything material.

Yeah, the most material effect on kind of an inorganic measured basis would be ITBE in B2B.

And that was the only one that had any effect, really, that was substantial, to be fair.

Okay, great.

Yep. Thank you, Kevin.

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