QuinStreet Inc (QNST) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the QuinStreet second-quarter fiscal 2014 financial results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Erica Abrams of Blueshirt Group. You may begin.

Thank you, and good afternoon, ladies and gentlemen Thank you for joining us today as we report QuinStreet's second-quarter fiscal 2014 financial results. Joining me on the call today are Doug Valenti, CEO, and Greg Wong, CFO of QuinStreet. 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. These are statements that relate to future events or financial performance and 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-K filing with the SEC completed on August 20, 2013.

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. Please go ahead.

Thank you, Erica. Hello, everyone, and thank you for joining us today. Revenue in the quarter was $66 million, just below the outlook range we provided due primarily to unexpected changes in client budgets at year end. Adjusted EBITDA was 10% of revenue, consistent with our outlook.

Importantly, that EBITDA margin reflects aggressive investment in a wide range of initiatives to navigate current market challenges and to diversify our products, media and markets in ways that we are confident will drive future growth.

Our balance sheet and cash flow remained strong, as they have throughout this period of transition, providing a solid, safe foundation for our operating efforts. We are making more progress faster on more important initiatives than at any time in Company history.

That progress is not yet driving top-line growth because of the large-scale and persistence of the market challenges we are facing and working to offset and due to the naturally earlier stage and smaller scale of the growth initiatives. But our efforts have significantly dampened the effects of the challenges.

Our overall business mix has shifted approximately 30% over the past year with areas of growth largely offsetting declines in lead demand from for-profit schools still adapting to new regulations and drops in auto insurance clicks caused by market changes and competitive challenges.

We are more confident than ever that our initiatives, which are addressing big market opportunities, will eventually more than offset the headwinds and lead us back to growth.

Here are updates on the progress of some of our growth initiatives in the quarter. Auto insurance policy revenue, an important component of our strategy to diversify our auto insurance products, grew 69% year over year. Revenue for calls and clicks in education, both key new products in that important client vertical, grew 356% and 43% respectively year over year.

Our education revenue in Brazil, the focus of our near-term international expansion efforts, grew 123% year over year. Revenue in education from not-for-profit postsecondary schools grew 67% year over year. We are focused on serving not-for-profit schools, particularly their online programs, as that fast-growing market ramps.

Not-for-profit colleges represent some 85% of the overall post secondary market though they have historically had a small footprint in online programs and low marketing spend relative to the for profits. That is changing.

Online searches for not-for-profit school brands recently surpassed those for for-profit colleges for the first time in memory as they pushed to ramp their online programs and marketing efforts. Not-for-profit schools represent a huge, but still early market, that represents an enormous growth opportunity for us as it continues to develop.

Also in education, we continue to gain share among for-profit schools where we have been historically underpenetrated. Even as the overall for-profit market remains challenging and at best volatile. Revenues among that targeted underpenetrated group of for-profit clients grew 52% year over year.

Finally, and very importantly, our revenue from mobile traffic grew 56% in the quarter year over year. Mobile traffic continues to grow rapidly online and consequently in the mix for our programs.

We continue to focus aggressively on better engaging and serving visitors on mobile devices. Our revenue per visitor for mobile traffic is now essentially on par with desktop, a hugely important milestone and driver of continued progress.

The above initiatives alone delivered over $20 million in total revenue last quarter. We are compounding rapid growth in these areas on a still early but increasingly material base and against big market opportunities.

Now I'd like to talk in more detail about our efforts and progress in auto insurance, the largest of our vertical market opportunities and the main focus of our diversification and development efforts and investments over the past three years.

During that time auto insurance marketing online has undergone dramatic structural changes and increased competition, while online marketing approaches and products in the important third-party segment, which includes us, have been stagnant. Our investments in new products are key to breaking us out of that jam and to driving new growth for us and the channel.

The new product development and launch efforts have been long, difficult and expensive, frustratingly so, especially with respect to pace and timing. But the progress has also been sure and we believe it will have been well worth the effort and the wait.

In addition to big investments in product development I have had to make big changes to our organization, including significant flattening and even running auto insurance directly for an extended period in the past year, in order to affect complicated but necessary innovations at a faster pace.

Now, finally, as of this quarter our full range of complimentary new products and auto insurance will all be launched including recoded, more flexible and usable policy flows, new competitive lead products, expanded call and call center capabilities and an important new version of our historically core click product.

We have client commitments for all of these products and I have personally visited many of our biggest auto insurance clients over the past month to confirm their enthusiasm, strong interest and demand. With these pieces in place we are now able to push forward efforts to ramp our auto insurance business, add scale in earnest.

I do not expect to see much of an inflection and impact on the top-line from those efforts in the current quarter, but I do expect to begin to see it in fiscal Q4 and beyond at what we expect to be an accelerating pace.

Turning to our outlook for the current quarter, we expect to be up seasonally and sequentially this quarter, but the dynamics of the business will be very similar to what we have seen in the past few quarters -- navigating challenges with good progress on a range of important but still early initiatives as described and outlined above.

We expect revenue in the range of $68 million to $72 million and an adjusted EBITDA margin of approximately 10% as we will continue to invest aggressively in growth initiatives particularly in auto insurance. With that I will turn the call over to Greg for a more detailed discussion of our financial results.

Thanks, Doug. Hello, and thanks again for joining us today. For second quarter of fiscal 2014 we posted $66.1 million of revenue, an 8% decline compared to the same quarter last year. Adjusted net income for fiscal Q2 was $3 million or $0.07 per share on a fully diluted basis. Adjusted EBITDA was $6.5 million or a 10% margin.

Our Q2 performance was slightly below what we expected to see on the top-line, largely due to unexpected changes in client budgets as they approached their fiscal year end. That being said, our fundamental circumstance remains the same and we believe we are continuing down the right path for a return to growth.

We continued to make good progress with our primary growth initiatives, those being our product, market and media expansion strategies, while at the same time maintaining a solid balance sheet, adjusted EBITDA margin and cash flow. So with that overall context I will now discuss the details of our fiscal Q2 results.

Please see the supplemental data sheets available for download on 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 45% of Q2 revenue or $29.8 million. The year-over-year decline of 9% was driven by the continued challenges in the for-profit education market as clients in the vertical are still reacting due to the regulatory changes.

To offset the for-profit industry headwinds we're making good progress with our initiatives to diversify our products, markets and media. And we are confident that we will be in an even stronger competitive position once the for-profit industry challenges subside.

To provide some color around our strategic initiatives, our product expansion strategy is progressing well. We continue to see nice year-over-year growth with both our relatively new click and call products. These products we believe reduce risk and provide high-quality inquiries to our clients.

While we work hard to diversify our product set, we have a continued focus on optimizing the quality and monetization of our traditional lead business. We are also making good progress around our market expansion strategy. We are seeing impressive growth in revenue and our presence with not-for-profit schools, a growing segment of the market, as they are expanding to include online offerings themselves.

As you know, not-for-profits represent the vast majority of post secondary educational institutions. And although this is an early market for performance marketing online, it represents a huge market opportunity for QuinStreet over the longer term.

Our expansion into international markets, particularly Brazil, continues to go well. We are seeing solid revenue growth, and though the numbers are still relatively small, it remains a big strategic long-term growth initiative for us.

As a reminder, our education client vertical is a solid profitable client vertical for QuinStreet; we believe we are the leader in the space in terms of revenue, market expertise and competitive assets. This is a great long-term business for us if challenged in the near-term.

Our financial services client vertical represented 37% of Q2 revenue or $24.3 million. The year-over-year decline of 8% was primarily due to unexpected changes in client budgets as they approach their fiscal year end. And also continued challenges accessing a sufficient amount of high-quality media and acceptable margins due to changes in search engine algorithms, acquisition and media sources by competitors and increased competition in auto insurance.

This continues to be a highly competitive market for online media in auto insurance and our path forward remains the launch and scale of our broader product offerings where the increased monetization from those products will allow us greater media reach.

To provide some context for this client vertical, auto insurance is the largest market in our overall financial services client vertical. Client marketing budgets in auto insurance are substantial and this is an early market for performance marketing online. Our primary growth initiative in auto insurances is the expansion of our products in which we still offer clicks with the addition of leads, calls and [bound] policies.

As Doug mentioned, our full range of complementary products will launch this quarter, which we believe will enable us to scale our auto insurance business and we expect those efforts to drive a meaningful impact in the fourth quarter and beyond.

Revenue from our other client verticals, which include B2B technology, home services and medical, represented 18% of Q2 revenue or $12 million. Over time we'd like these verticals in the market opportunity they represent.

Moving to a discussion of EBITDA. For adjusted EBITDA we delivered $6.5 million or a 10% margin, consistent with the outlook we provided last quarter. We are continuing to aggressively spend on initiatives that we believe will drive meaningful and sustainable growth over time.

Moving to the tax front. Our provision this quarter included a one-time charge of $40.2 million to establish a valuation allowance against our deferred tax assets resulting primarily from last year's goodwill impairment. Establishing the valuation allowance was required by GAAP but, to be clear, our deferred tax assets have expiration dates many years out and we expect to be able to utilize them in the future to offset tax liabilities.

To provide some further context, this is a non-cash item and is excluded from non-GAAP results. For your modeling purposes we expect our ongoing rate to be approximately 40%.

Moving to the balance sheet, our cash and marketable securities balance at quarter end was $122 million. You can see the details in the cash flow statement in our earnings release, but the largest items were the generation of $6.5 million of cash flow from operations, capital and tangible expenditures of $6.1 million and payment on debt of $4.2 million.

The vast majority of our capital and intangible expenditures in the quarter were either one time or infrequent in nature. These related to a final payment for licensing and patents, our data center technology infrastructure refresh and expansion of our internal call centers to support our strategic growth initiatives.

Total debt decreased to $85 million from $90 million in the previous quarter due to repayments, we had no new borrowings. Our net cash position is a positive $37 million. Normal (inaudible) cash flow for the first half of the year was $8.7 million or 6% of revenue.

To summarize, we are facing known challenges in our core verticals and those challenges continue to negatively impact our financial results. That being said, we are in a period where there is more innovation and progress within the Company than at any time in our history.

We are now more confident than ever that the progress we're making with our strategic initiatives will eventually overcome industry headwinds and lead us to a return to growth. While we continue to work hard to deliver better results, our balance sheet remains strong and we continue to generate solid adjusted EBITDA margin and cash flow.

We look forward to updating you with our progress on our next earnings call. With that I will turn the call over to the operator to open up Q&A.

(Operator Instructions). Douglas Anmuth, JPMorgan.

Hi, this is Diane Kluger on for Doug. I just wanted to get a little bit more color on next quarter's guidance if you guys could provide some on where specifically within the verticals can you break up some of that? And then just on the newer products saying 4Q will be the first quarter you see some incremental. How do you expect that to ramp whether it is throughout that quarter? Any more color there would be great. Thank you.

Sure, Diana, in terms of the guidance, we really don't break it out by vertical when we provide it, but I think it will be largely more of the same. I don't expect that the mix this quarter will change meaningfully from the mix that we saw last quarter. And so it is going to look a lot like the same mix going forward, so which I guess adds up to a breakdown of the guidance.

In terms of how we expect it to ramp, we expect to have some results from the new products this quarter. I just don't think that will meaningfully affect the top-line as we are going to be very early, but we will be starting in earnest this quarter.

My guess in the fourth -- our best guess in the fourth quarter is that it could certainly be anywhere from hundreds of thousands of dollars a month in incremental revenue on top of where we have been with the kind of core click and early policy product to millions of dollars a month. And I think it kind of depends on how the ramps go.

We feel very good and very strongly about those ramps and we certainly see the opportunity on these paths on the new products in auto insurance to get to many millions of dollars a month in more revenue over future -- over coming periods. The question of at what rate? We would expect the rate to be meaningful in the fourth quarter and begin to be able to see that rate and be able to see it going down that path.

So unfortunately I don't think we are ready, we are only giving guidance one quarter out and we are just not ready yet to say about how much. Obviously when we have the call in what I guess will be April or early May, we will at that point give you a lot clearer view of that and we are excited and anxious to do that, frankly.

Great, so you will be starting to sign contracts in this current quarter?

Oh, we already have signed contracts for most of the products -- for all of the products, actually, in this current quarter. We will be actually -- we will be spending aggressively on the beginning of the ramps on all the products this quarter and expect revenue for each and every one of those products this quarter.

Okay, great. Thank you.

John Campbell, Stephens, Inc.

Can you guys just talk a little bit about the pressure? You guys mentioned the client budgets, if you could maybe just break that out by vertical?

In the last quarter?

Yes.

Yes, it was primarily the unintended -- the difference between where we came in and where we had guided was pretty much all budget -- budgets that were stopped unexpectedly by financial services clients. That was all of the difference quite frankly and it was clients that cut spend they told us across the board.

One very large client and big spender with us just frankly ran out of budget, they had overestimated -- or I guess overestimated what they could spend in the quarter and for the year and they ran out of budget and stopped spending in November on what had been a pretty darn high run rate, it would have put us pretty close to the middle of the range had they not done that.

So it was -- that is the difference the primary difference. There are obviously other things happening across the rest of the business. But that is just kind of what happens in any given quarter. But if we are talking about the difference -- the thing that drove the difference between where we came out in the range versus where we thought we would be, it was financial services and budgets there, particularly in auto insurance, where those clients were spending.

Great, thanks for that color. And then just from the conversation you've had with some of those clients, what is the budget looking like for 2014 for some of these guys?

Big. Big indications of budget availability and big indications of willingness to spend with us, particularly as we get the new products live, which they are essentially all live right now but a couple of them are in the final stages of QA and beta. And again, by the end of this quarter they will all be fully live and out of beta and we have many clients signed up for every one of those.

So the indications of budget are very strong, it is going to be a question of at this point with these products, the question would be, at what rate we can ramp the effectiveness of those products and access and leverage those products' monetization into media. And that will assuredly come, it is just a question of at what rate and pace and it is not always a direct straight-line there but it is pretty quick line.

But I would say indications are they want to spend a lot more money in the channel and given the products -- and again, I have had these direct conversations with three of our largest clients, given where the products are and where they are coming out they are indicating that if we can get the media they want to spend that money with us.

Okay, great. And then if I can just get one more here. Given you guys are starting to I guess see the light at the end of that long investment cycle tunnel, what are your plans going forward for future uses of cash?

And it looks like debt reduction has been I guess somewhat top of mind for you guys. It has been a pretty steady decrease quarter over quarter. And then maybe if you can just give us your targeted debt ratio?

Sure. I would say we have -- because of the challenges in operations we have taken a pretty conservative profile, as I think you would expect us to do, with respect to the balance sheet. And so what we have been doing is accumulating cash, paying down debt as necessary as is prudent given it is a pretty low rate. We are not super aggressive about doing that, but we have a schedule that we want to pay it down on.

And we will -- and that has allowed us to generate a good margin of net cash, which again, given the operating challenges we have had despite the fact that we have not gone cash flow negative, we don't expect to. It has allowed us to just be conservative.

I would say that as we come out of this investment cycle and as we are able to ramp auto insurance, which we expect to do, which will allow us to ramp margin back to where we would like to be and cash flow margins back to where we would like to be and closer to where we have historically been.

And just as an aside, you know the margin degradations we have indicated for quarters now is all about the investment in auto insurance, both on the expense side as well as the top-line leverage side as well as the margin side. You put those three things together we get back to any normal scaling of auto insurance at any normal range of media and contribution margins and we are well at our historic EBITDA margin and cash flow margins.

But I would say that we haven't really crossed that bridge yet in terms of what we'll do with cash in the long run. What we'll do with cash is if we can't deploy it against opportunities of whatever nature that allow us to get a good, strong, investment return for the shareholders we will find other ways to deploy it to do so.

And certainly there are lots of things on the table but have been discussed and that we would like to engage in in that way -- in ways to get cash back to shareholders. It is not just something that is on our mind right now.

What's on our mind right now is make sure we keep a really conservative financial profile and invest like crazy in initiatives that, as you have heard, we see tremendous potential and opportunity and actually results from, and continue to scale those. We think shareholders will be best rewarded and paid for us returning to growth and that is really what we are all about.

Great. Thanks for taking our questions, guys.

(Operator Instructions). And as there are no further questions at this time that will conclude our time for questions. Ladies and gentlemen, this conference will be available for replay after 8 PM Eastern Time today through February 10, 2014 at 11:59 Eastern Time. You may access the remote replay system at any time by dialing 800-585-8367 or 855-859-2056 and entering access code 33242918. International participants may dial 404-537-3406. (Operator Instructions).

That does conclude our conference today. Thank you for your participation in today's conference. You may all disconnect. Have a great day, everyone.