QuinStreet Inc (QNST) 2015 Q2 法說會逐字稿

Good day and welcome to the QuinStreet second-quarter 2015 earnings conference call.

Today's conference is being recorded.

At this time I would like turn the conference over to Ms. Erica Abrams. Please go ahead.

Thank you, Randy. Good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet's second-quarter FY15 financial results.

Joining me on the call today are Doug Valenti, CEO, and Greg Wong, CFO of QuinStreet. This call is been 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 statements 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 filed on September 12, 2014. 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.

Today we will be discussing both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures are included in today's earnings press release and also available on our Investor Relations website. We are doing this because we believe our non-GAAP results present a good representation of our ongoing operating results.

Now I will turn the call over to Doug, CEO of QuinStreet. Please go ahead.

Thank you, Erica. Hello, everyone. Thank you for joining us today as we report financial results for the second quarter of our fiscal year.

We reported revenue of $66.7 million, exceeding the outlook we provided last quarter, and delivering year-over-year revenue growth for the first time in three years. The improved year-over-year results were driven by renewed strength in our financial services client vertical, particularly auto insurance, as well as increasing contributions from new products and markets in education, and continued growth in other client verticals.

Revenue from businesses other than traditional lead generation for US for-profit education clients totaled $53.8 million in the quarter and grew 27% year over year. Revenue from traditional lead generation for US for-profit education clients, our historic business in education, totaled $12.9 million and declined 45% year over year in the quarter.

We are breaking out revenue from traditional lead generation for US for-profit education clients for you because it remains the drag on our overall top-line results. Breaking it out also allows us to better highlight strong progress and performance in the rest of the business.

Summary themes in the business include, one, strong growth in businesses other than traditional lead generation for US for-profit education clients. Growth is being driven primarily by innovation and diversification.

Two, a return to year-over-year growth in the financial services client vertical, driven by auto insurance where we have developed and launched a range of new products that dramatically expand and diversify our footprint and addressable market, increase value to clients in media partners and strengthen competitive advantages.

Three, rapid growth in new products and markets in the education client vertical: these new products and markets represented 45% of revenue in our education client vertical last quarter, or $10.6 million, and grew 69% year over year. We believe revenue from these new products and markets can continue to grow and lead to stabilization of the education business as they offset more and more of the headwinds from traditional lead generation US for-profit education clients.

Four, attractive positive contribution margins from businesses other than onto insurance: we continue to invest aggressively in auto insurance to further develop and ramp new products and media, a growth program that is working in what we believe is our largest addressable markets.

Five, an ability to expand adjusted EBITDA margin to top-line leverage on what we believe to be reasonable assumptions of revenue growth. And, six, a strong balance sheet maintained throughout this period of unprecedented change and challenge to the business. We have funded our aggressive innovation program with internal cash flows and still have $46 million of net cash.

We expect these themes to generally continue in coming quarters and, as a result, that we will continue a successful transition back to overall revenue growth and margin re-expansion. As mentioned on our last call, we have resumed meetings with investors because we believe we are nearing the end of our turnaround process and transitioning to renewed year-over-year growth.

For the March quarter we expect revenue to be generally flat to up 3% from a year ago. The exact outcome will depend more on the precise timing of customer budgets and orders than on any change in the key themes just described.

More importantly, we continue to believe that the trajectory from here is generally up and to the right. Adjusted EBITDA margin next quarter will remain in the low single digits as we continue to invest and focus on revenue growth.

Now I will turn the call over to Greg who will discuss the financials in more detail.

Thanks, Doug. Hello and thanks again for joining us today.

For second quarter of FY15 we posted $66.7 million of revenue and grew 1% compared to the same quarter last year. Adjusted net income for fiscal Q2 was $231,000, or $0.01 per share on a fully diluted basis. Adjusted EBITDA was $2.1 million, or a 3% margin.

Q2 was a solid quarter for QuinStreet. We delivered results above the revenue outlook we provided last quarter and, importantly, delivered year-over-year revenue growth, the first time in over three years. This is a big deal and has been a long time coming.

The progress we've made with our product, market and media expansion strategies is paying off and outweighed challenges in US for-profit education during the quarter. Excluding revenue from traditional lead generation for US for-profit education clients, we grew 27% year over year in the second quarter.

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 the figures that I'm going to walk you through.

Revenue by client vertical: our education client vertical represented 35% of Q2 revenue, or $23.4 million, a decline of 20% compared to the year-ago quarter. Revenue from traditional lead generation for US for-profit schools represented 55% of our overall education client vertical, and declined 45% compared to the year-ago quarter to $12.9 million. We are breaking out this component for you because it remains a drag on our top-line results, but also allows us to highlight progress with our growth initiatives.

Revenue from new products and markets in education represented 45% of our overall education client vertical, and grew 69% year over year to $10.6 million. We believe that over time continued diversification in our education product mix, and growth from not-for-profit schools in international markets, will eventually return our overall education business to year-over-year revenue growth. Education is a solid profitable client vertical for QuinStreet and we believe this is a great long-term business for us.

Our financial services client vertical represented 44% of Q2 revenue and grew 21% compared to the year-ago quarter to $29.5 million. We are excited to return the financial services business to year-over-year revenue growth.

Specifically in auto insurance, our recently launched suite of complementary products has generated a renewed enthusiasm and momentum to this business. We are pleased with the client adoption, engagement and ramp of these products, and we expect that trend to continue. Client marketing budgets in auto insurance are substantial and we believe this represents our largest addressable market.

Also in financial services, our life and health insurance, credit cards and deposits businesses all experienced double-digit year-over-year revenue growth in the quarter. Our investments in growth initiatives are clearly paying off and we are excited to have turned the corner in this important client vertical.

Revenue from other client verticals represented 21% of Q2 revenue and grew 15% compared to the year-ago quarter to $13.8 million. Continued solid execution from our B2B technology and home services client verticals drove the growth. Both of these businesses experienced solid year-over-year revenue growth in the second quarter, and we expect those businesses to grow again in Q3.

Moving to a discussion of EBITDA, for adjusted EBITDA we delivered to $2.1 million or 3% margin, consistent with our expectations and the outlook provided last quarter. We will continue to invest aggressively in our growth and diversification initiatives as these investments are working. We expect that adjusted EBITDA margin will begin to re-expand gradually over time, with top line leverage, and as we move from a period of heavy investment and growth to optimization.

Turning to the balance sheet, our cash and marketable securities balance at quarter end was $116 million. Total debt decreased to $70 million from $73 million of the previous quarter due to repayments. And we have no new borrowings. Our net cash position is a positive $46 million.

Normalized free cash flow was $1 million in the quarter. This is a testament to our strong business model. Despite aggressive investments in growth initiatives throughout the business we still generated positive normalized free cash flow in the quarter. As always, we look to normalize free cash flow as our primary cash flow metric, as it removes the effects of current quarter working capital account fluctuations to drive the underlying cash flow characteristics of our model after minimal capital requirements.

To summarize, three primary points: one, we delivered results in the quarter that demonstrated real momentum with our growth initiatives. Growth in financial services, other client verticals, and from new product and market diversification initiatives in education outweigh challenges with traditional lead generation from US for-profit schools in our overall results.

Two, we have a fundamentally strong business model which allows us to invest aggressively in any growth initiatives while at the same time maintaining a healthy balance sheet. Three, QuinStreet is a leader in online performance marketing, and we operate the large, attractive addressable markets. With a 15-year track record we believe we have the market expertise and the best competitive assets to capitalize on an enormous market opportunity ahead.

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

(Operator Instructions)

John Campbell, Stephens Inc.

Hi, guys, good afternoon. Congrats on a great quarter.

Could you guys maybe just walk through just some of the drivers of the financial services growth? Obviously that was good coming off the last few quarters of declines.

And maybe just, I don't know if you can specifically break it out, but just trying to get an idea between some of the newer offerings like insurance, leads and clicks, or the click-to-call business. Or is it more of a rebound in that traditional click business?

The financial services growth was really driven by the fact that all of the verticals there had a pretty good quarter. But auto insurance went from being down in the teens the previous few quarters year over year to being up about 24% year over year in the December quarter. And that was driven primarily, John, by the new click product.

As you recall, we launched four products -- new versions in some cases and brand-new products in others, back in the March timeframe. One was a brand-new click product platform that we worked very closely with our clients to develop and launch. And most of the growth in the auto insurance business this past quarter and ongoing is being driven by that product.

So it is a combination of the two things. Really, it is a new product but it is a new product that's driving a rebound in our click business.

We did see and continue to see good strong growth with calls year over year and with leads year over year, and continue to see good progress in the policy product. But the bulk of the turn was driven by the new click product.

Got it. Thanks for that.

And then just from a click-to-call, it seems like that's a pretty good opportunity. Is that growth more driven by -- is it same customer growth or are there new clients there?

It is mostly existing clients and then some new clients. But we think that's an enormous opportunity, as well.

And it is driven by a combination of the clients want the calls and we have some great technologies for delivering very well-qualified and targeted and matched calls, which is building a lot of enthusiasm and excitement amongst the clients. And there's a market there already that we are able to enter into and really substitute for or add to products that have not been nearly as effective in terms of its qualification and matching.

And then the third thing that's really an able driver of that click-to-call product is mobile. From a mobile experience standpoint, as we see more and more traffic coming in on mobile devices, a call is a much stronger product offering in conversion tool than is a click on that platform. So, calls are also being driven, have a lot of tail wind from that, as well.

So, we are exceptionally excited about the opportunity in clicks and about our technology and our product there, which we believe is unique. And the clients tell us the same thing. And about, again, how it matches up with both social and mobile. And the reason I say social and mobile is that most social traffic now comes in on a mobile device, as well.

Got it, thanks.

And last question for me, I know you guys don't give guidance outside the next quarter, and I'm not looking for anything specific here. But just, generally speaking, look out two-plus years, if you guys can continue, call it, low single -digit or mid single-digit revenue growth, if we assume some of the investment spend tapers and we get some leverage in the gross margin line, can you guys give us an idea or just maybe a neighborhood where you think margins can head?

We are low single digits now. You guys have done low 20% or so in the past. Could you guys maybe just frame that up for us?

Yes, I think the main answer there is a simple top-line leverage analysis. If you look at a simple top-line leverage analysis -- and I say simple by saying take some simplifying assumptions like current gross margins or current, say, media margins, which, as you know, we primarily focus on, John -- but current media margins, which we think actually is conservative because we believe that the media margins in auto insurance are depressed right now versus where we will be able to walk them because we continue to invest in taking on media and optimizing it up to margin.

But if you just assume that we keep current media margin averages and current headcount. And our headcount today is actually bigger on a total FTE basis than it was when we did over $400 million in revenue. And we're doing that on purpose in order to enable us to invest and roll out these growth initiatives.

So, if you take those two assumptions and then roll out revenue, at about $300 million you get to 5% or 6% of adjusted EBITDA margin. At $350 million you get to around 9% of adjusted EBITDA margin. And at $400 million you're back up to about 15% to 16%.

It's about 13% to 14%.

All right, 13% to 14% -- thank you, Greg -- of adjusted EBITDA margin. That's what the potential is. I don't think that's unrealistic.

We may or may not decide to capture all of that as adjusted EBITDA margin, depending on what we see as opportunities to continue to invest aggressively. But that gives you a good structural insight into the leverage in the business model.

And I would add that if you look at the strong growth we are seeing in all of the business but for that traditional for-profit education lead product, we just don't think it is crazy to think about really good growth rates on average over the next couple of years. And we need to ramp to those because we still have those headwinds to overcome. And I believe we are just crossing over that line.

But, again, the bulk of the business grew 27% year over year last quarter. Traditional lead generation of for-profit education clients was down 45%. So that's a heck of a headwind but it is now down to only $13 million a quarter.

Those lines, at these rates, and we may not be able to sustain that rate consistently, I think we can go up from here, I think we will come down from here, but I think generally, as I said, up and to the right. You can see growth now coming as we keep working our way across and to overcome that for-profit education headwind. And then you can see the leverage that the business model gives us.

Even with existing headcounts and media margins, which obviously the headcount thing gets fixed with volume, but the fact is, on the media margin side, we are operating now in one of our largest businesses in areas that we probably will be able to, and have shown internally, we can expand beyond once we get to the point where we are ready to, again, as Greg said, optimize rather than invest heavily.

So, I think that's how I would think about the evolution of the business from here forward.

Excellent, that's great color. Thanks, guys.

(Operator Instructions)

[Yonni Yedgaren].

Hi, guys, congrats on the quarter. A follow up to the last question.

As you try to think about top-line leverage on the gross margin line, particularly around COGS, you were looking at it like you guys have -- the amortization is going to flow through over the next year or two. You guys will get to the point where you are having a high revenue base on that. And, like you mentioned, you have a certain number of people who, with increased volume, will be able to allow you to see more and more dollars flow to the bottom line.

But it's really like the media costs around the auto insurance and financials business, as well as in terms of the click-to-call business. How much of that do you think is variable and are you seeing more efficiencies in that as you guys get to higher revenue volume, whether it is in terms of how much your media costs will cost you as you guys get better at bidding or buying and converting leads. Or, should we think of it as more of a variable base for the media costs that won't really expand a lot but just having a fixed cost base and amortization and head count?

We think it will be both. There is certainly the natural factor of the headcount leverage against a bigger top line. The main area of investment currently in the business, besides having a lots of heads that allow us to grow to a much more significant revenue number without having to add to those operating costs, is media cost in auto insurance.

We continue to be in an investment mode in auto insurance, which means we are taking on media at margins that we don't believe, and particularly initially, in margins that we would not necessarily consider acceptable or attractive for the long term. And then we optimize and allow the clients to price that media appropriately as we work to optimize it. And then we get that media up to what we do consider acceptable margins.

And then we go off and grab another chunk of media and bring it in at too low a margin. But then, again, integrate it with the new product and allow the combination of optimization and client bidding to bring that back up to margin, and then we go grab another piece of media. That process eventually winds itself down to the point where we are able to focus more on optimization and less on heavy investment.

The good news from our perspective this is we still have a but of areas of heavy investment, which means there's a lot of media out there that we still know we can go take and turn into a productive source and channel for our clients. But over time, as we do more and more of that, you are going to see the balance shift from that heavy investment chunk of media to more and more of it that's in optimization mode.

And we expect our media margins in auto insurance, which is going to be a bigger and bigger part of the business, to run up nicely. And we've seen it happen over and over again already over the past six to nine months on pieces of media. So, we are quite confident in that ramp.

But, again, you will see that balance shift to optimization. As that happens we will get a lot of media leverage. And the new products allow us -- the most important thing about the new products is that they allow us to get more out of the media for the clients, which allows the client to pay more, which allows us to pay more or take more margin.

So, that's the virtuous cycle being created thematically across all of our new products, and particularly, of course, in the auto insurance business.

Got it. And one follow-up question, if I may.

For those clients within the auto insurance, you guys are offering these products, are you seeing capped budgets? Or is it more along the lines of they're telling you that we want leads, see how many you can get us as long as an effectively ROI positive price we are willing to pay up.

It is a combination. Some clients are essentially uncapped if we can hit certain performance metrics, which is how a lot of our business works. Some clients are capped in the short term because they just have budget constraints and budget planning that they have to work around. In the longer run almost all of our clients are essentially uncapped as we perform. To the extent we are capped to the short term, it is usually because, of course, they have set an operating budget and an operating plan and they have to adhere to it.

But we have more clients than you might expect that are essentially uncapped against certain performance metrics. And that's how our business has always worked. We tend to get more budget if we perform better and better pricing as we perform better, as well.

Great. Congrats again, guys.

(Operator Instructions)

With no further questions this does conclude today's call. If you'd like to have this recording, it will be available for seven days starting February 10 at 7 PM at phone number 888-203-1112. And when prompted for a code you can use the code 221-5690. Thank you and have a good day.