QuinStreet Inc (QNST) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. You've joined the QuinStreet Third Quarter Financial Results Conference Call. At this time all participants are in a listen-only mode. Late, we will conduct a question and answer session, and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Miss Erica Abrams of the Blueshirt Group.

Thank you, and good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet's third fiscal quarter of 2012 financial results. This call is being simultaneously webcast on the Investor Relations 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. QuinStreet's actual results may vary materially from those discussed here. Factors that may cause the results to differ from our forward-looking statements are discussed in our most recent 10-Q filings with the SEC on February 7, 2012. 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 for the third quarter was $93 million, a decrease of 14% versus the same period last year. While we projected revenue to be down in our last quarter's call, the decline was bigger than expected. EBITDA margin in the quarter was 19%. The EBITDA result included a $1.4 million unexpected bad debt write-off of receivables due us by an agency that became insolvent during the quarter. Excluding that effect, adjusted EBITDA for the third quarter would have been 20% of revenue.

Normalized free cash flow was $15 million, or 16% of revenue. Given the weaker than expected results in Q3 and continuing uncertainties and challenges in education and financial services, our outlook for Q4 and the full fiscal year has diminished. As we have indicated previously, volatility is making it difficult to be accurate in our top-line forecasting. That said, our current best estimate is that revenue will be down year-over-year in fiscal Q4 and that total fiscal 2012 revenue will be between $360 million and $370 million.

Let me now update you on the challenges we are facing and outline what we are doing to overcome the challenges and return to growth. We will also try to leave plenty of time to answer your questions. We have discussed in some detail over the past several calls the challenges and uncertainties we are facing in our education and financial services client verticals. In education, new regulations are continuing to create uncertainty and to affect client marketing approaches and effectiveness.

In general, industry trends include; one, lower conversion rates by clients of new student prospects or inquiries and, therefore, generally downward pressure on marketing budgets and inquiry pricing. Two, increased concerns and uncertainties about interpretation of and compliance with new marketing regulations, resulting in tighter constraints on marketing programs and approaches, tougher contract terms, and client desire for more direct or controlled spending. And, three, a shift away from lower quality traffic, media sources, and marketing partners.

All that said, the for-profit post secondary industry is adapting toward what we expect to be a new, healthier, and more sustainable equilibrium. Also, a consolidation of marketing services providers and vertical online media companies is underway -- a phenomenon from which we expect to benefit.

We're working hard to be well positioned through this transition period and, most importantly, on the other side. Our current key initiatives include; one, developing and launching enhanced targeting and matching technologies and taxonomies to improve conversion of student prospects or increase for clients, and to increase media yields for us, which can lower the cost or pricing of inquiries.

Two, shifting our media mix even more heavily to higher quality sources by growing and acquiring organic traffic, better measuring and pricing or eliminating lower quality publishers, and better optimizing marketing programs and media mix. Three, increasing our account management staff and their engagement with a greater number of clients to help dampen swings and quicken change cycles.

Four, introducing click product offerings in education incremental to our core inquiry product to convert more visitors, thus lowering effective media costs, and to serve increased client demand for more direct spending and control. And, five, expanding our footprint for the longer-term into new areas, including not-for-profits, certificate programs, management training, and big, promising international markets, initially and especially Brazil.

Shifting now to financial services, we continue to recover from the market disruptions of the past year or so caused by a number of related and unrelated factors, including incentivized, low value clicks; losses of traffic and media buying power due to lower click prices; Google ranking changes and resulted drops to internal and publisher traffic; losses of publishers to acquisition by others; and more recently, aggressive and, in many cases, we think, unsustainable competition for remaining good quality media sources -- media and traffic sources.

We expected to be able to recover click volumes faster after recoveries in prices, but that process is taking longer than hoped and is being offset by near-term losses of publisher traffic and media placements. These trends have been weighing heavily on our auto insurance results, but we do not expect them to continue to dominate our results in auto insurance or in financial services over the medium to long-term.

Auto insurance marketing spend is a huge market opportunity and is still early online. Our SureHits model has been a breakthrough in online marketing effectiveness and market growth, and we are continuing to strengthen its effectiveness as the click-to-application and secondary monetization platform of choice.

As you are aware, we have also been working hard for a couple of years now to expand our auto insurance offerings and model, which we believe will allow us to grow the online market, access more budgets, and regain lost media sources and grow new ones. The roll-out of the expanded model is going well. Clients are signing and committing, and the early metrics are in line with our expectations to significantly grow monetization.

Full roll-out is taking longer than we hoped, mostly due to complexities of client launches and integrations. Those complexities should eventually translate into competitive advantage, but the delays are hurting our results versus expectations in the near-term.

The expanded model includes not just clicks to client applications, but also leads and policies written by our call center agents. Its roll-out is the culmination of two years or so of acquisitions, planning, selling, negotiations, and integrations. We are excited about the prospects for better serving auto insurers and growing the online market, and our share.

We also remain well positioned in other financial services subverticals, including mortgage, credit cards, and deposit accounts among others, and we expect to benefit as those markets recover.

To touch briefly on other client verticals, we are pleased with the assets we have assembled in B2B, and with our progress integrating those assets into a platform for strong growth in that big market over time.

We are also pleased with the progress we are making in home services in what is still a pretty difficult environment. Medical is still early for us and for performance marking in that industry. We remain committed to developing that vertical.

Even in the face of current challenges, the QuinStreet business model has remained attractive and stable. That is due to the fundamental resilience of our business. But it is also due to our historic and continuing decisions to pursue long-term, sustainable strategies, like investing in technology advantages, increasing monetization rates, and improving media yields for us, and inquiry quality and conversion rates for our clients.

In summary, this is a challenging period, but there is still a very big opportunity in front of QuinStreet. A huge new market for targeted, measurable marketing in media in a digital form is emerging, and is still in its early stages. These kind of tough transition periods are probably to be expected as such a big, new, complicated channel and market surge forward.

Right now, the challenges are outweighing the good progress we are making, and are masking the advantages we have, and will continue to build. Despite near-term challenges, our confidence and enthusiasm for our business and markets remain strong. We continue to pursue opportunities that we believe represent substantial growth potential.

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

Thanks, Doug. Hello, and thanks again for joining us today. For this call, I'll spend more time on the overview and context, rather than the intricate details of the financial results. I will provide those too, but for this quarter the context and expectations are more important.

For our third fiscal quarter of 2012, we posted $93 million of revenue, or a 14% decline compared to the same quarter last year, and reported a 19% EBITDA margin. In the quarter, we suffered a bad debt expense of $1.4 million, as Doug mentioned, which was highly atypical for us, and well over $1 million greater than any previous write-off in the Company's history.

The write-off resulted from the insolvency of the agency of record of one of our clients, and we continue to provide marking results for that client, now, on a direct relationship basis. Without that write-off, adjusted EBITDA margin would have been 20%.

Adjusted net income was $9.5 million, or $0.21 per share on a fully diluted basis. The write-off reduced net income by $0.02 per share. We did not specific revenue guidance for Q3, but to be clear, we're disappointed with the top line results. As been discussed, we are resetting revenue guidance for the fiscal year downward to a range of $360 million to $370 million.

Doug provided the details, but at the highest level we are suffering from independent issues in our two largest client verticals, which we have been discussing over the past couple of earnings calls. The severity of the impact of these issues has been larger than we had expected, and both our efforts to mitigate and strategies for creating new growth to offset the headwinds, have been slower to produce results than we had anticipated.

While this reduced revenue for Q3, it has a greater impact on Q4. The near-term outlook is disappointing to us, extremely disappointing. We are fully focused on the initiatives that will restore growth. So, that is the bad news.

To balance that, and put the financial results in a broader perspective, I believe it important to understand that the fundamental financial model has not changed. We delivered 20% adjusted EBITDA for the nine-month period, as we have for the past nine years. We delivered free cash flow 16% of revenue this quarter, and we expect that we will deliver 15%, annual free cash flow margins going forward. Our financial model remains resilient.

We still believe that our market represents massive opportunity, and the we're positioned to create significant growth again, after we manage through this challenging period. We believe that the growth initiatives that we've been implementing will deliver improvement, but given the lack of visibility in the near term, and disappointments with our outlook for the current quarter, we're not providing a specific timeframe.

So, we're unhappy with near-term top-line results. But our fundamental outlook for the business over the long term remains enthusiastic. Nothing has changed in our belief that this is a great business, and that we will deliver growth again.

We plan to continue to invest our growth initiatives through Q4, and still target an adjusted EBITDA margin of 20% for the year, which means that Q4 adjusted EBITDA will be below 20%. Again, we do not see a change, [to] the underlying financial model, and expect to maintain our 20% annual EBITDA target, as we have done now for nine years. We expect to see 20% EBITDA or better for the coming years, even in light of near-term visibility.

In that light, we will continue to execute on our stock buy back program, and expect this quarter to complete the remaining $13.5 million of repurchase capacity under the $50 million program. So with that factor up in context, I'll discuss details for our fiscal Q3 results. There was mention that I will do so in a relatively brief fashion.

Please see the supplemental datasheets available for download on the front page of the Investor Relations page of our corporate website. They provide, essentially, all of the figures that I will now walk you through.

For revenue by client vertical, our education client vertical represented 42% of Q3 revenue, and declined 19% compared to the year ago quarter, to $38.9 million. As we've discussed, that market is challenged as clients react to changes in the regulatory environment that became effective last year. The declines we have experienced have been volume driven with pricing mostly the same as a year ago.

The financial services client vertical also represented 42% of Q3 revenue, and declined 20% compared to the year ago quarter, to $38.9 million. As we mentioned on our last earnings call, pricing has stabilized in this client vertical, and our revenue clients have been volume driven with pricing similar to the year ago quarter. Our volume declines have resulted from the losses of publisher media as Doug described.

Revenue from our other client verticals which include B2B technology, home services, and medical, represented 16% of our total fiscal Q3 revenue, and increased 39% compared to the year ago quarter, to $15.3 million. Increased revenue in both our B2B technology, and home services client verticals drove the growth.

Our cost structure has remained stable with operating costs at the same percentage of revenue, as they have been for the entire fiscal year, with the exception of G&A, which increased due to the $1.4 million of bad debt expense previously discussed. All of those figures and their stock expense, and amortization and depreciation components are included in our supplemental datasheets.

Our weighted average shares outstanding decreased to 45.8 million on a fully diluted basis reflecting the share repurchase. During the quarter, we repurchased 2 million shares for $20 million.

Moving to the balance sheet, our cash and marketable securities balance at quarter end was $115 million. You can see the details in the cash flow statement in our earnings release, but the largest items were the generation of $17.4 million of cash from operations, the repurchase of $20 million worth of our stock, and acquisitions totaling $23.4 million, primarily consisting of the purchase of the assets of Ziff Davis Enterprise.

Total debt decreased to $108 million from $114 million last quarter as we made payments on seller notes and bank debt, and had no new borrowings. As previously mentioned, cash flows were strong. Fiscal Q3 normalized free cash flow, which is free cash flow excluding working capital [changes], totaled $15 million, or 16% of revenue, and operating cash flow totaled $17.4 million.

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

Thank you, ladies and gentlemen.

(Operator Instructions)

Our first question comes from John Blackledge of Credit Suisse.

What gives you comfort longer term of managing the business toward 20% EBITDA margin in an uncertain top-line environment? That's one. Two, if you could just expand on the loss of the publishers. Are you losing them given better splits that other providers are offering, or acquisitions, I think you mentioned? I'm just wondering what the main source of that is.

And then, lastly, the expansion of the auto insurance model, can you provide some more detail? Where are we at in the roll out, what's the gating factor for the -- maybe the slower roll out, maybe than you guys anticipate as a budget? Maybe I'll stop there, and let you guys talk. Thanks.

Thank you, John. In terms of our comfort level with the -- managing business toward 20% EBITDA margins, the fundamental business model, as you know, generates significantly more surplus than 20% EBITDA margins, and it really is a matter of two primary things.

One is managing the level of investment in new growth initiatives. We still have substantial investments in new growth initiatives, including several new verticals that you know of, a lot of new media initiatives, three new country footprints at this point going, and several others. And then just making sure that the fundamental media margin works, and it does, and our media margins are actually -- continue to be good. And we have a lot of initiatives in place to continue to improve those.

And then, just the right-sizing of the overall company and organization, and that's -- second to media margin is kind of sizing. As long as we don't deviate dramatically from where we are, we're in a pretty good spot as we balance those three things. And we see ourselves as being able to quite easily being able to manage to the 20% EBITDA margin if it makes sense.

As Ken indicated in the fourth quarter, we're expecting that to drop, because we don't want to -- as we hit kind of an air pocket in revenue, we don't want to dramatically reduce investment in the organization, or in our growth initiatives in the short term. And as we've always indicated, the 20% EBITDA target is an annual target. And we will -- we do that so as to not create too much volatility in operations, if and as, we hit periods like this. We've hit similar periods in the past that we've had to adjust to.

So, I think it's just a fundamental business. We think we have the right -- continue to have the right mix of metrics. As you also heard, this is not a pricing issue. This has been a volume issue driven by independent, but coincidentally simultaneous things going on in our two biggest verticals, which I think it would have been difficult for any of us to predict, but we will manage through it, and despite it, we're showing that the business is pretty darn resilient.

In terms of the loss of publishers, there are several things going on there. We talked about this a little bit last call. But if you look at the overall impact from the loss of traffic or publisher or media placements in auto insurance in the first nine months of this year, the largest effect by far, and it's almost twice as big as the next biggest effect, has been the loss of Bankrate and their click volume as they pulled that in-house, as well as the publishers that we had that they acquired that were significant to us, including NetQuote, InsWeb, [Truvay], and I think a couple of others.

So that's by far the biggest effect -- continues to be a big effect in terms of trying to pull away versus last year. The second largest effect was really our own efforts to remove traffic that either was associated with the incentivized click problems that we saw last year, or that just represented lower-quality traffic, even without the incentivization, as moved aggressively to work with clients to get them focused on quality, and get prices back to where we needed to get them reflective of a better-quality result.

So, those two together, I think in the first nine months -- the first was almost $17 million, $18 million of impact. The second was like 11 to 12.

Kind of third on the list has been -- and half of the second biggest one, so like around $6 million of impact in the first nine months was loss to direct competition, where we do have, in particular, one competitor being very aggressive about bidding on traffic, good traffic sources, largely, we think, because they lost so many of the bad ones that they were working with before, because of the focus we put on it -- on that situation in the market and with clients.

We are pretty convinced that the prices they're paying are uneconomic for them. I'm sure they had a spreadsheet that suggests they'll get prices up, but we would dispute that. I think we're being much more analytic than they are, and we're fighting the battle where we should, and not where we shouldn't. We don't that's a really -- a very sustainable strategy.

You've heard from us before that if you just compete on splits, we're going to leave you behind when it comes to investing in new capabilities and technologies, and we think that's certainly where that heads. And we have indications in that particular case that that's exactly what is going on.

So, those are the -- those have been the primary factors, and the next one after that in terms of size is really the Google stuff, where you have publishers dropping in traffic, or in some cases going way off together from the rankings. And we had, I think I mentioned the last call, between the end of the last quarter and the call, we had a publisher that had been in our rankings for some, I don't know -- years, let me put it that way. And they disappeared, and that was about an $800,000 per month hit to revenue.

So, continuing changes, which we're adapting well to, but are difficult to replace in a very short period of time, and that are hurting us as well. So, those are the -- by size, those are the primary issues. Now, countering that has been significant increase that we've been able to get in terms of media placements because of our re-configured and improved quality in measurement processes. That counters almost $20 million to $25 million of that. So, we've gained what we've lost.

As I said in my remarks, unfortunately, the losses are masking the gains right now. But we're certainly not standing still, nor are we victims, or acting like victims. We're working very hard to get to the other side of this, which leads me to your other question, which is that expansion of the insurance model, which we've talked about now for a while.

And recall that in auto insurance, we have historically been reliant on our SureHits model, which is a great click-to-application platform, but it surely just clicks to applications. And really, it's just a secondary monetization vehicle on the web. And so, relatively limited in its distribution, though a very attractive incremental monetization for us and for others.

And you know, the past couple of years we felt it was important -- we have felt it's important to expand out model to prepare the online market to better serve growing demand from clients, and a growing shift of budget from offline to online. We'd still assess the shift in auto insurance to be in the low single digits, low teens in terms of percent of budget versus many other vertical we're in, particularly, education, where the largest clients now very effectively, and aggressively, have been spending anywhere from 50% to 70% of their budgets online, because of the effectiveness and the better measurement.

We expect, by the way, many, many other verticals to go in that exact same direction for the same reasons, including over time, auto insurance. So, as we look ahead, we wanted to pull together the assets, to have a broader model, and to help grow the online market, just like we do in spurring the growth after acquisition of SureHits, and to gain share, and increase media footprints.

So, as you know, we've acquired a number of assets, which together give us much broader coverage, and much more revenue capacity, particularly in the form of as I said before, not just the clicks to clients, but now leads to clients, leads to agents, and very importantly, policies that we can write in our call center in Florida, and the ability to -- and we have -- we inherited with the acquisitions of carinsurance, insurance.com, the ability to quote directly online, real-time bindable quotes. And we think that's the most powerful content in auto insurance as we survey the visitors.

So, we're able to now do that, and we think that expands dramatically the interest of visitors, and our ability to meet that interest online, and to track budget, and the metrics in that broader monetization, as I said, are going well.

In terms of where we are, we are -- our monetization rate is up about three times where it has been historically. We now have coverage in approximately 30 states. We think that the ability to pretty materially expand that market, our hits as we get to about forty-state coverage, in terms of the amount of traffic we can access, and what we can do.

And so we're -- and the reasons we're a little bit behind where we hoped we would be, are I guess predictably and unpredictably, things like client IT, pipelines, and clients changing plans, and our own internal technology projects to integrate with so many clients all at once, and the interaction of all those factors at once. It's a pretty complicated thing we've been working on for a couple of years, which has required the integration of a lot of technologies, internally from acquisitions, with clients, as well as the integration of all that into it into a single format and platform.

So, we certainly did think we'd be further along. We're no less enthusiastic or certain about the effects of all this in terms of what it's going to do for the online market, and the expansion of the online market for us all, and for our particular share here at QuinStreet. But it's hard when you have on the other side the SureHits business, having issues it's having. Any delay in the roll out of the broader model is -- which is what we're really focused on in auto insurance right now, is having a pretty detrimental near-term effect on results.

I think I covered the questions. Is that --?

Yes, yes. That's great. Thank you very much.

Okay. Thank you, John.

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

Hey, guys. Thanks for taking my questions. First of all, I was looking at your guidance, so as I take the mid-point to the rest of the year, it implies some exaggerated seasonality in the fourth quarter. Is that coming from any particular segment, or is that just you guys being very conservative, given the lack of visibility around some of your products?

Hey, Carter. I wouldn't say that I would characterize it as being very conservative. I would say that we are -- we're trying to be conservative, but I wouldn't say that we're sandbagging either. We are seeing, again, coincidentally issues in auto insurance and education hitting us simultaneously, and it's making it very difficult for us to project.

And, as you've seen from the last couple of quarters, we haven't been hitting what we thought we were going to be hitting. And it didn't mean that we didn't think we were new at what we were doing -- or it didn't mean we changed our budgeting process. We've been pretty good at this for the last 13 years.

So, I'd say it's reflective of the real softness in those verticals right now with some really good stuff coming, but that we don't expect to have a big enough impact to offset the softness in the near term. And it also is reflective, hopefully, of the recognition that there's just an awful lot of uncertainty that we're trying to risk-adjust for, and account for.

Okay. And the mortgage and the card business inside of financial services, did those perform within your expectations?

Cards, yes. It continues to be up nicely year-over-year, certainly on its way. It was the by far and away the largest growth vertical in financial services over the past nine months for this -- this fiscal year with pretty significant growth. We think there's a lot more to come there, but certainly it was a good grower.

Mortgage -- mortgage has been a little bit choppy if flat for a little while now this year, primarily because interest rates are so low. And most of the clients -- most of the clients don't have big demand because interest rates being very low they get a lot of what we might call walk-in leads that they have plenty to deal with. And the housing market, particularly on the purchase side, still is not very robust. So, mortgage met our expectations, but we didn't have real high expectations the last couple quarters.

Okay. And certainly, some things there in the near term, to me in terms of the financial services business where we can see some trends to get excited about, or new products to get excited about. But on the education side of the business, what is the sign that you're looking for that we should be looking for to show that demand is improving?

You guys are clearly doing a lot on your end to continue improving your offering, but at the end of the day, demand has to come online to really drive that business. So, what's it going to take, in other words, for that -- for us to see positive growth out of that again.

That's a good question. We expect growth from two primary vectors. First, and most -- well, let me call it three. First, and most importantly, we think that there's a lot of share to be taken, as the trends in the market that we talked about continue in terms of the clients looking to reduce their exposure to lower quality media sources and partners, and as they really need to work with someone who can deliver better-matched inquiries, that convert at higher rates, despite a lower -- a less productive sales force, or enrollment advisor group, given the new regulatory frameworks.

We think that there's budget to be had from us getting more aggressive in going after that share, and we intend to do that, despite the demand -- overall demand being flat, down, or choppy, depending on how you want to think about it.

We do think demand will increase overall, but we think that's probably a year or more out, a year or so out. I think the CEO of one of our largest clients on their call this past quarter described this period as a transition period, after having had a good growth period for ten years or more before this, and the transition period has been going on now for a couple of years. He expects it will continue to go on for another two years or so.

And then he expects they'll return -- they will return to growth. So, that's one other person's view of overall demand as they return to growth without share gains. That will be a component of growth.

And then the third, I think importantly, is that we are very focused on growing, as I said in the prepared remarks. New areas of growth -- I know I've been talking about this for a while, and they are non-trivial to do, but the cumulative effects of the efforts we're making in growing non-for-profit post-secondary client demand, including not-for-profits, executive ed, management training, we call it here, and international and other areas.

I think those cumulative effects -- we should start seeing some of that this next year, certainly, and probably -- and most certainly, the following year. And we're spending a lot of money, and time and effort, and seeing a lot of good promising results and demand coming online. Of course, it will take a while for it to be materially enough to effect results, given our, and everybody else's, primary reliance on the for-profit, post-secondary.

But in the long term, that represents a pretty significant expansion of our growth footprint into markets where, for the most part, we currently have visitors, and traffic. Most -- we still only convert in our education verticals, because that market has been -- the for-profit [market] has been so demanding, we still convert, on average, 2% to 3% of our traffic.

And so, we don't convert a lot of the traffic that's looking for exactly these other things, and as we do that, that will not only grow revenue, but it will expand our surplus and margin potential. So, we're pretty enthusiastic about where those things go.

So, what we'll be looking for is, and what you should ask us about, is how we do in gaining share through the initiatives that we have to get closer to the clients to have the click products, which is a very important product, and to continue what we've done in terms of improving quality, and conversion, which has made a big difference in our ability to sustain pricing in the midst of a lot of downward pressure in the industry more broadly on pricing.

To watch for the for-profit schools themselves, continue to adapt, and push to return to growth, hopefully, as soon as or sooner than that CEO talked about. And then reports from us on how the new footprint elements are going, and how that's working. But that's a pretty dramatic expansion of our footprint. It won't come super fast, but it is coming, and it will no doubt come. But I think those are going to be the vectors of growth to look at, and look for, and ask us about and to listen for over the next few quarters.

That's all very helpful. Thanks so much, Doug.

Thank you, Carter.

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

Thanks for taking my question. A few things I wanted to ask. First on education -- just if you could provide a little bit more color on the new click product offering, and in particular, what kind of expectations you have there as that rolls out?

And then secondly, you talked about the industry on the education side, which when the dust settles here should emerge much healthier. What kind of timing are you putting broadly around that for the industry overall? And then, just the details on the write-off, the $1.4 million. Is there any chance of seeing any of this money going forward here, and are you getting the same kind of dollars, essentially, from that client going direct, going forward? Thanks.

Sure, Doug. In terms of the click product in education, the idea of the click product is a couple-fold. One is, as I indicated in my remarks, we're seeing clients in the face of increased regulatory scrutiny looking to have more direct control of the entire process of engagement in their marketing programs. We think that's natural, of course, and so one of the ways to do that is to offer a product where they can pay for a placement on our network of websites, still we believe the largest network of online education website in the world.

And have those placements integrated with our traditional kind of lead or inquiry product, so that the client can pay a price to have that visitor click over to their website or their page or their form, rather than fill out their contact information on our website, and become that kind of a qualified or screened lead. It does a number of things, again, it serves that desire for more control on the part of clients, which is a growing desire.

It serves more visitors, because many of the visitors will not fill out a contact form on a third-party website, and therefore, they'll shop, and list, and search on our sites, and then go over to client website. In this case, we get paid for that controlled click over, which we haven't gotten paid for before, and that means we get a lot more visitors to convert, which of course increases our yield, increases our media margin, increases the surplus, increases the quality of everything that we do.

And the third thing is, it's usually managed by a separate group in these larger clients, so its a whole other bucket of budget that we're going after. Our expectations are very high. We did an analysis more than a year ago that indicated that the potential from clicks -- the latent potential from clicks, we believe is larger than it is for leads and inquiries.

Obviously, we have to show that that's the case, so we have to merchandise them effectively. It was a very big technology product -- project to integrate clicks in a way that did not overly interfere with the normal, and very successful conversion process we have for inquiries. We think we've now gotten that done.

The technology is done, tested, and we're now ramping it and rolling it aggressively with clients. We have had a couple of pilot clients working on it with great success. Success in terms of the quality of the conversions, and therefore, the effective pricing that were significantly higher than we expected, which is great news, albeit on a hundreds of thousands of dollar a month kind of scale at the pilot level.

And so, in terms of our expectations now, it's a matter of getting out there and representing it to the clients, and getting them to sign up. I would say that our early conversations with the broader set of clients now have gone very well, and I think our COO put it as unanimous enthusiasm amongst all the clients we've had conversations with. We just now have to go through the process of getting the budgets allocated, and getting them launched, and getting that converted, and going through the test cycles and the pilot cycles, and then the ramp cycle.

So, our expectations are that it is going to be very big. Our evidence is that it's a very good outcome for clients. It's a very good outcome for us, because the expansion of the conversion rate of traffic we already have. I think the question is, at what rate it ramps, not just because of the need to get clients to commit and grow, but also because of the nature of the client behavior right now.

None of these -- clients in general and for-profit education are not being very aggressive about anything that has to do with growth. it's just not on the agenda, it doesn't appear to us for most of the clients.

They are still adapting to the regulatory changes, both in terms of compliance, which is a huge focus for them right now, as well as economically. The reduction in conversion rate of student inquiries, largely, or at least let's say in part due to the change in regulations, and their effects on the enrollment advisors, is a very, very big deal for these guys.

And so, they have to adapt to, and get their arms around it. Because what you can't do, is take that big cost base, and have it now be much less productive, and poor, similarly converting, or in some cases, we're seeing less -- even less well-converting inquiries or leads into the system because they want to pay less for them, because the economic effects of that are dramatically negative.

And most of the clients are trying to sustain their business models and their financial metrics, while focusing on transition, and not yet focusing on growth. And even managing expectations, their growth isn't really going to come now for at least another year or two.

So, I think it's really a matter of how we get it on the agenda, and get them to move in a way that's consistent with what we think is the improvement in the offering, and the attractiveness of the offering, given all the other stuff, and all the other alligators that they're fighting right now.

So, two years from now, we think that our market sizing indicates that their market for clicks is very, very large, indeed, and at least tens of millions of dollars to QuinStreet per year in North America, and maybe well beyond that. But in the short term, I think there's just a lot of moving parts, not unlike there are in education more broadly, that make it difficult for us to be very specific about in terms of the ramp.

Again, good client engagement, great client results so far, successful implementation at integration, very compelling offering, very fundamentally sound in terms of what it does for us, and what it does for clients, and the budgets that we're going after. But a lot of fog of war when it comes to exactly what's going on with regulations, and the different things that the schools have on their agenda right now.

In terms of the timing on the industry coming back, I think it's just very difficult for us to tell. We see signs, periodically, of some schools doing very well, and then we see signs of folks continuing to stay back. And overall, the industry as you know is still pretty challenged in terms of its enrollment growth, though most are doing a pretty good job of managing to their financial metrics. But they're all wrestling with the same general trends, for the most part, to the extent you can generalize, the same general trends we talked about.

Again, their estimates are better than ours. And one of the very strong CEOs in the space said on his earnings call this past quarter, he was not ready to call the turn. And his view was that the transition period would extend through 2013, and that he expected to return to growth, I believe he said, in 2014.

Hopefully, that -- if he's willing to say that that means that by then, they're really growing, and everybody's growing. So, hopefully, we'll have -- there will be more progress, at least gradual, and at least among some clients before that, from which we will benefit, while we're also benefiting from the other stuff.

In terms of the details on the $1.4 million, I think the -- and let me turn that over to Ken. But I think the answer is, I don't think we expect to see it back, and we are doing the same amount of business with them.

That's correct. It's not coming back. It's done. They've done auction assets of the agency, and one of their two secured banks has taken all the proceeds, and only received a partial settlement of what was due them. So, they are truly insolvent, and the money is already gone. So, painfully, we will not see any of that $1.4 million again.

No change in status with the client. It's actually beneficial to be direct, as painful as that write-off was, because we get closer to the client, and understand their metrics better. But certainly, no reduction in that client revenue, and it's probably more promising on a go-forward basis, as we work through it.

Great. Thank you guys.

Thanks, Doug.

Thank you. Our next question comes from Shyam Patil of Raymond James. Your line is open.

Hi, Shyam.

Hi, Doug. Thanks. Just a couple of questions. The first one is, how long do you think the media/traffic issues in the financial services segment are going to last? And is there anything you can do there besides educating your clients that can perhaps kind of speed the process up?

I think the client part is pretty well done. I think what's going to speed that up is our -- well, some things not really too much in our control like the continuing shifts around from an algorithm change. But I think we've seen the biggest hits. I don't think Google's going to -- I'm sorry, I don't think Bankrate's going to buy up a bunch more of our publishers. And I don't think that we're going to see dramatic new effects from the Google algorithm changes. I sized for you what we've seen from that.

I think it's really going to come down to our rolling out the broader model, and then being able to go an make existing and new media sources of traffic work. And we think that we're on track to have that rolling out nicely over the next couple of months, and we would expect that next fiscal year, we're going to see good progress there, and hopefully, good results from that.

So, I would -- our planning process is that that's what solves that problem. And there's a lot of media out there to be had at the -- and expanded into, and to grow for the internet at those increased monetization rates, and we're very close to getting to the tipping point where we can go out and get that done.

Great. And my last question. I know you guys aren't providing guidance for the next fiscal year. Could you maybe talk a little bit about how you guys are thinking about it, whether in aggregate, or by the different segments? Thank you.

Sure. So, we certainly have thought about it. We're in the early to mid-stages of our planning process for fiscal 2013, and it's premature for us to give any real guidance. We're working with real numbers, and market sizing specific opportunities. We do a top-down market opportunity, then a bottoms-up analysis. And it's just too early to say, given especially some of the uncertainty and lack of visibility we've had this last quarter or two. It's been a little bit painful.

So, not wanting to be unhelpful, but we don't have much more we can give you. We will work toward 20% EBITDA as we always do, but we really need to know more ourselves, as the next couple of months go by. And we'll certainly have an update on our next call, along with our plan. And I suspect some more confidence in where exactly we'll be.

But right now, unfortunately, we don't have a lot more to give you beyond this coming quarter.

Okay. Thanks guys.

Sure. Thanks, Shyam.

Thank you. Our next question comes from Nathaniel Schindler of Bank of America. Your line is open, sir.

Hi, guys. I think some of my questions have been asked, but I want to delve a little bit more into the education vertical. And I'm wondering whether or not even once the regulatory environment stabilizes, and the marketing budgets at these firms, these for-profit college stabilizes, is it even possible to again see real growth from this line item, given how sophisticated these advertisers are in performance-based marketing? Are they leaving much on the table at this point by -- and haven't they already figured out how to optimize for ROI?

We think there's a lot of growth to come in for-profit education, Nate. There's -- let me talk about why we think that. I do think, by the way, largely because we have been the leader in this space for the last 12 or 13 years, that this is largely the most sophisticated, at least certainly the vertical we cover, online marketing space, and maybe the most sophisticated and competitive online marketing space on the internet, and we continue to do very well there for a lot of reasons, which we like a lot.

I think the real growth comes back because the -- first of all, the overall industry demand for education is not going to go away, and the demand for the education amongst the groups that are best served by the for-profit sector, for a lot of reasons, are not going to shrink, nor is there need for education to improve their [employability] going to go down. It's only going to continue to grow.

So, overall, there's no question in our minds, and in most thoughtful analysts' minds, that this industry is going to exist, and to continue to have a great demand going forward, particularly as the non-profit sector is even more challenged, and has always been poorly structured to serve the communities, primarily minorities, the working poor, and adult-working populations, that the for-profits folks are able to serve, and have grown up to serve. So, overall industry demand is expected to continue to come back.

In terms of the marketing sophistication, it's our experience that the more sophisticated the marketer in education, the bigger part of their mix we are. Why is that? The answer is couple-fold. One is, first of all, the fundamental position we hold in the channel, and that is, in marketing, media is the only cost that matters at scale. It's the dominant cost. None of the other costs really matter. And so, whoever can be the most efficient at media use, or the effective at media use, is going to win.

And in the part of the channel where a visitor is not looking for just a specific school, or doesn't match just for a specific school, because it's not their right geography, not the right program mix, not the right brand name, you name it, and there's all kinds of reasons they don't, we are extraordinarily advantaged when it comes to media yield, because we can match -- as you know, we have hundreds and hundreds of education clients in mapped programs and taxonomy.

So that when a visitor is looking for a program or a geography, we are able to match many, many more of those visitors with a school, so that's one dimension of media or traffic that we have a big advantage in. And in education, in particular, we can match a particular visitor up to three times, because the average visitor or prospect will look at 2.7 programs before committing.

And so, we have two big dimensions of advantage in media yield that a particular client, or one single client, doesn't have on the part of the channel represented by students not looking just for their school or just for their program, which is a very big part of the overall channel.

So, we have a fundamental advantage in the cost that matters media in a big part of the channel. And so, again, our experience is, that the most sophisticated or more sophisticated the client, the larger share we in particular represent, because amongst the group that has the advantages I was talking about, I don't know if anybody would deny that we are the most capable, and most effective, and most attractive partner. I think we've heard that, certainly, from all the big clients, and you guys should have heard that at various times from the various clients as well.

So, we think that the top line returns in for-profit education, and we also think the other elements we talked about return as well -- or grow for us as well.

Okay. Thank you.

Thank you, Nate.

Thank you. Our next question comes from Robert Coolbrith of Think Equity. Your line is open.

Thank you. Good afternoon. In the context of -- I just wanted to return to the context of expanded monetization in auto insurance. In the context of that expanded monetization, could you provide some additional info on how that will work, alongside or integrated with, the existing insurance marketplace?

Does QuinStreet in that model become a bidder, where you're bidding for clicks, and then hoping to, basically, take principal risk, drive higher monetization, and greater margin by actually converting to an inquiry or to a completed -- converted client? Just more detail on how that works practically.

Do you have to bring publishers on? It sounds like that there have been some delays, or it's been a long process getting clients on board. Do you have to get publishers on board in the context of a new product, or they just continue to purchase data SureHits, and hopefully, make more money?

Good question, Robert. Thank you. The way it works is that as the traffic flows come in from whatever the source, those visitors now have the options to either click over to get a direct quote from an application at a client like a SureHits model. Or, they can speak to an agent and be quoted from a number of different carriers, and to have that -- and do comparison quoting from carriers with real-time bindable quotes, because of our integration into those major carriers into their quoting system and their quoting engines.

Or they can fill out their contact information and request to be contacted by an agent from a carrier, or an agent from a particular network, or a particular agency. And they have that option in front of them as they come onto the website, and they can decide which they prefer. And what that does, of course, is it allows more of the visitors at any particular time to find and interact and match with the way they want to convert, and for us to get paid for that. So, we're better serving more visitors, and we're getting paid for it.

And so it's really a matter of what -- getting that combined monetization because of the combined coverage to the point where the rate is such that we can go and access, and activate more media. And so, that's basically the process. And certainly there will be -- from a publisher's standpoint, it can be rolled out in any number of ways, as a way for them to monetize more of their traffic with us.

Great. And to --

I'm sorry. We, in general -- the question -- we don't generally plan to be a bidder on SureHits against our clients. That doesn't mean that there won't be times when there's inventory available that we may be well suited to convert, and that therefore, we'll be representative placements on SureHits by our other offerings.

Great --

So, I think you will see some of that.

Okay. And then in terms of what you're seeing right now on the competitor front, if someone outbids you -- if you had to say on average are they outbidding you by a significant amount in terms of what they're offering to the publisher, and -- where do you think -- how do you think your new model changes in terms of if you had to convert, what you could deliver to a publisher based upon this new emerging inquiry-based or conversion-based model, convert that into an effective CPM?

How much higher would the effective CPM under the expanded monetization model be versus -- or just in terms of what you're thinking could be, versus what you're delivering now, and how does that change the competitive landscape from your prospectus?

It depends on the competitor. But in general, we are -- they are not outbidding us by a ton because where it's important traffic, we don't leave a huge umbrella. We're able to, in our SureHits business, exist on a relatively low split by our historic standards because it is such an automated business, and so technology levered.

And so, there's just not much room for them to go. That's why we say that we think in many of these cases, we have evidence that it's pretty uneconomic for the guy that's doing it, and that that evidence is based on knowing what our monetization rates are, which on our SureHits model we think our monetization rates are still considerably better than theirs. And they're still bidding below a really tight pricing umbrella. And then we have other evidence from other sources that these guys are on an unsustainable path.

The rate of different -- and so it depends on the traffic, and it depends on the publisher, but if you think of our SureHits model as being an $8 per inquiry model, we are not -- we're up the ramp curve, as I said on the new model, and we're, today, averaging somewhere between $25 and $30 in terms of the monetization rate per inquiry.

So, when we talk about improved monetization rates, we're talking massive improvements in monetization rates, which are extraordinarily difficult to replicate and to defend against, as you think about all the parts that we've been able to integrate together to get there. And we think we see a path to pretty substantially higher than where we are today.

So, this is a massive change in the fundamental economic structure of media monetization in that vertical. So, we're -- there's been -- there's a reason why we think it's been worth all this time, all this money, all this effort, but we think it's much more defensible, and we know it is a game changer when it comes to media economics.

And so, just to -- sorry, I'm sure, I'm absolutely sure you've gone over this already, but how far are you away -- how far away are you from having this switch flipped at scale, and what are the key gating factors on getting that flip switched? That switch flipped.

That's a good question. We are in the midst of rolling it out now to broaden the media portfolio, and we expect, our plan suggests that it will be a very meaningful part of our financial services business in the coming quarters, certainly next year.

And one last question. It's obviously very difficult to tell at this point, but do you think that you can achieve positive growth in the coming fiscal year?

I just have to go back to what Ken said. We are not yet due at the planning process for next year, and so we don't feel comfortable giving any kind of indications, even directional at this point, particularly given how disappointing things have been lately, and how uncertain things have been lately.

So, we will -- we do promise to give you more of an update on that as we get further along in our process, but I just don't feel, and we don't feel comfortable even be giving you directional indications until we get further along over the next month -- over the next, I guess, two months.

Okay. Thank you very much.

Thank you, Robert.

Thank you. And, ladies and gentlemen, that is all the time we have for questions at this time. Today's conference will be available for encore playback after 8 pm Eastern Standard Time today through May 6, 2012 at 11:59 pm. You may access the remote replay system at any time by dialing 855-859-2056 and entering the access code 71119897. International participants dial 404-537-3406. Those numbers again are 955-859-2056 and 404-537-3406, access code 71119897.

That does conclude our conference for today. Thank you for your participation in today's conference. You may now disconnect.