QuinStreet Inc (QNST) 2015 Q3 法說會逐字稿

Good day and welcome to the QuinStreet third quarter 2015 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Erica Abrams. Please go ahead, ma'am.

Thank you, Jamie. Good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet's third quarter fiscal 2015 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, which was filed on September 12th, 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 measures. A reconciliation of GAAP to non-GAAP financial 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, and thank you, all, for joining us today. We had a good quarter. We continue to see improving results from the new product market and media initiatives we have been discussing with you for the last several quarters. The main themes of those initiatives have been innovation and diversification.

New products are driving growth in client revenue and visitor conversion. Revenue from mobile traffic continues to grow rapidly. Major new media sources have reached scale and are growing fast. And our client revenue mix is more diverse than at any other time in Company history.

Net, we have a more solid base and a broader footprint and an array of growth factors that we believe have fundamentally changed the risk profile and trajectory of the business. And importantly, we are through the heavy product development phase of these initiatives and are now focused primarily on execution, mainly ramping media and clients.

We reported revenue of $75.3 million for the March quarter, which represented growth of 5% year over year. Adjusted EBITDA margin was 6%. We continued to be cash flow positive. And net cash increased to $50 million.

Revenue from new products and markets in the education client vertical grew strongly, once again, in the quarter, offsetting declines in traditional lead generation to US for-profit colleges and resulting in flat year-over-year revenue performance, our best performance in education in over three years.

We expect those general trends to continue and that revenue in the education client vertical will now grow year over year in the current quarter.

Revenue from our auto insurance business increased 25% year over year, driven by the continued adoption and ramp of new products. We expect to grow auto insurance revenue by 25% or more year over year again in the current quarter.

Total revenue from our financial services client vertical grew 7% year over year in the March quarter. Softness in other businesses there, mainly health insurance, partially offset the gains in auto insurance. Revenue in other client verticals grew 13% year over year in the March quarter.

Turning to our outlook for the June or current quarter, we expect to grow revenue year over year in each of our client verticals, education, financial services, and other, for the first time in over three years.

Total revenue growth should be about 5%. Adjusted EBITDA margin is expected to be in the low single digits, as we will continue to invest aggressively in the strong progress of our growth initiatives.

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

Thanks, Doug. Hello and thanks again for joining us today. We're happy to report our fiscal third quarter results, which highlight strong execution across a broad range of growth initiatives throughout the business.

For third quarter of fiscal 2015, we posted $75.3 million of revenue and grew 5% compared to the same quarter last year. Adjusted net income for fiscal Q3 was $1.4 million, or $0.03 per share on a fully diluted basis. Adjusted EBITDA was $4.3 million or 6% margin.

We delivered year-over-year revenue growth in the quarter and feel we're in the early stages of a new trajectory for our business, which we believe is generally up and to the right. Importantly, we are establishing a foundation that we expect to result in long-term revenue growth and margin re-expansion. So, with that overall context, I'll now discuss the details of our fiscal Q3 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'll now walk you through.

For revenue by client vertical, our education client vertical represented 41% of Q3 revenue and was flat compared to the year-ago quarter at $30.6 million. This included a one-time benefit from the collection of $1.6 billion of revenue deferred from a large for-profit education client in the September quarter.

Our strategies to broaden our products and markets in education are paying off. We again saw strong year-over-year growth from new products and markets in education, which offset declines from traditional lead generation to US for-profit schools in the quarter.

New products include better-matched and qualified leads more suited to the for-profit clients under the new regulations and our recently launched click and call products. New markets include not-for-profit clients and international markets, particularly Brazil.

Overall, it was a really good quarter for education business. We are excited about our improved top-line trajectory and feel very good about our position in this evolving market. We expect our education client vertical to deliver year-over-year revenue growth in the June quarter.

Our financial services client vertical represented 41% of Q3 revenue and grew 7% compared to the year-ago quarter to $30.6 million. We are particularly excited about our auto insurance business, which grew 25% year over year in the quarter.

Our recently launched suite of enhanced product has brought renewed enthusiasm and momentum to this business. Client marketing budgets in auto insurance are substantial and are the reason why we've been investing so heavily in this business over the past few years. We are now in the early stages of seeing those investments pay off.

Overall, financial services growth was moderated by year-over-year declines in some of our smaller financial services businesses, including life and health insurance, mortgage, and credit cards. We are in the earlier stages of rolling out our growth and diversification initiatives in those businesses and believe we're well positioned to return them to year-over-year revenue growth over the coming quarters. We expect our overall financial services client vertical to grow year-over-year again in the June quarter.

Revenue from other client verticals represented 18% of Q3 revenue and grew 13% compared to the year-ago quarter to $14.1 million. Continued solid execution from our B2B technology and home services client verticals drove the growth. This is our fifth consecutive quarter of year-over-year revenue growth from our other client verticals, and we expect that trend to continue.

Moving to a discussion of EBITDA, for adjusted EBITDA, we delivered to $4.3 million or 6% margin. Adjusted EBITDA included a one-time benefit of $1.3 million associated with the recognition of previously deferred revenue discussed earlier. Excluding that benefit, adjusted EBITDA margin was 4% for the quarter. We will continue to invest in our growth and diversification initiatives, as these investments are working. We expect that adjusted EBITDA margin will re-expand over time through top-line leverage.

Turning to the balance sheet, our cash and marketable securities balance at quarter end was $114 million. Total debt decreased to $65 million from $70 million in the previous quarter due to repayments, and we had no new borrowings. Our net cash position grew by over $3 million in the quarter to a positive $50 million.

Normalized free cash flow was $2.4 million in the quarter. Despite continued investments, we're still generating positive normalized free cash flows, and we expect that to continue. As always, we look to normalized free cash flow as our primary cash flow metric, as it removes the effects of current quarter working capital account fluctuations to drive to the underlying cash flow characteristics of our model. Our model requires minimal capital investment.

To summarize, three primary points, one, we delivered results in the quarter that demonstrated real momentum with our new products and markets in education. Revenue in the third quarter was flat compared to the year-ago quarter, our best year-over-year performance in over three years. We expect to deliver year-over-year revenue growth in the June quarter from our education client vertical.

Two, we continue to see solid results from our auto insurance business, which grew 25% year over year in the quarter, driven by the client adoption and ramp of our enhanced product set. We expect revenue growth to continue from our auto insurance business for a long time to come.

And three, we have a fundamentally strong business model, which allows us to invest in new growth initiatives, while at the same time generating positive cash flow, maintaining a healthy balance sheet.

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

(Operator Instructions). John Campbell Stephens Inc. - Analyst

Hey, guys, good afternoon.

Hey, John.

Hey, John.

So, just on the education piece, even ex the deferred rev, we're still looking at I guess about 5% or so year-over-year declines, a pretty good result in our view. If you look at that on a sequential basis, it still jumped 24%. And I think that's the biggest you guys have ever done as far as I can see.

So, just curious, given we're in the calendar year first quarter, you guys probably have brand new budgets from some of your key clients. Just curious, how much of that helped in the quarter? And then how much sustainability or how much is that going to help offset headwinds on the education business throughout the rest of the calendar year?

I'm not -- let me try to answer the question, John. I'm not sure I fully understand it. If I don't, come back and help me cycle it.

We always -- we do always have a good March quarter. I think that's part of your point. Education seasonally is strong in the March quarter. But, in terms of the momentum in the business, that momentum is more driven by fundamentally strong growth in the new products and markets despite or inclusive of the seasonality I guess you might say. And we're seeing that I guess, as indicated, we think the current quarter, whereas last quarter, with both the ability to regain the deferred revenues and seasonality, we were about flat year over year. This quarter, without the one -- the deferred revenue advantage, we expect to actually grow year over year in the quarter.

So, I would say that -- I don't -- I wouldn't say that any of the January effect is really what we're seeing here. It's really a continuation of the trends we've been talking about for some number of quarters, with growth in new stuff, new products and markets, as I mentioned and as Greg elaborated, offsetting continuing declines in the kind of traditional lead gen to the for-profit schools.

So, that trend line, which has been so strong for the past several quarters, continues and actually is accelerating a little bit and is getting big enough that that's offsetting the portion of the business that remains under stress from the for-profit education regulation changes. Does that -- did I answer the question?

Yes. Yes, I think that's good color. The main thing I was -- I guess I was curious about, as you guys talk with your key clients and as they go into the budget planning cycle for the full year, I would imagine some of those clients over the last several years have probably come in seeing that they're continuously trimming marketing budgets.

I just didn't know if you guys, just given the big sequential jump that you're -- that you saw in the quarter, I didn't know if, as you guys have those conversations with some of those key accounts, maybe they're coming in and seeing, hey, we are finally able to expand our budgets. Hey, we're going to buy some of your new offerings. I just didn't know if that was the case.

That's a great question. I'd say that -- couple things. One is probably more than half our education clients are not on a calendar fiscal. So, that's not generally a big effect. It's more -- the seasonality's more driven by education cycles and then media availability in the January timeframe.

And again, I don't think there's a -- I think the theme is more and more of the clients, say, in for profit are buying into the new product sets, which really are very well suited to them under the new regulations and work much better for them under the new regulations and took a lot of effort for us to develop that range of products to do that, but also, a lot of momentum in growth with not-for-profit clients and continued strong momentum in growth with Brazil. And so, those three factors are just adding up to give us that improved trend line in education.

Got it. Okay. I think that's helpful. And then, Greg, on the gross margin, really good improvement on sequential basis. I think that was up about 400 bps or so. I know you guys had about, I think you said, $1.3 million or so of deferred rev add-back. So, I'm sure that probably helped a little bit. But, is all that falling into gross margin, or maybe if you can help suss out what the true kind of gross margin expansion was?

Yes, hey, John, it was $1.6 million to the top line, $1.3 million benefit to gross margin.

And so, the EBITDA effect was all gross margin.

That's right.

Got it. Okay. That's helpful. Thanks, guys.

Thank you, John.

(Operator Instructions). John Campbell, Stephens Inc.

Excellent. Looks like I get to monopolize the call here.

Great.

Quick question on CapEx, that ran a pretty -- it's running pretty light, just kind of relative to last year. Is there anything you guys are planning over the next year or to or that might move that higher?

No, typically, John, we -- we're -- from a capital investment standpoint, our model just doesn't require a whole lot. We do every so often -- I'll call it every five years or so -- we'll so kind of an IT refresh or to our datacenters and the technology refresh. We got through that cycle about a year ago. And so, this is kind of our normal run rate if you look historically.

Got it. And then on Brazil, I might've missed this. How much did that grow on a year-over-year basis?

I think, in the quarter, and I don't have the numbers in front of me, it's 50-something percent.

Yes.

I think around 55% year over year, which by the way was suppressed a lot by the exchange rate. I think, if you took the exchange rate effects out of that from last year to this year, that business would've grown closer to 80-plus percent. So, that -- we continue to see good strong momentum in the Brazil business.

Got it. Got it. And then on the debt, you guys -- I guess you've been paying about $4 million or $5 million a quarter pretty sustainably over the last few years. Where do you guys want to see that, or is there a debt-to-cap level that you kind of manage to?

I think we're just paying it down as the schedule permits. We're not paying it down on an accelerated basis because it's so inexpensive. So, I'd say that we are -- we don't foresee the need for a lot more capital. So, I would be surprised if we -- if you saw us increase our borrowings under the line. There's not a lot of incentive to pay it off a lot faster because it's so -- it is so inexpensive. So, I think we're just kind of paying it down on schedule and not borrowing more because we're generating cash. We have $50 million of net cash of our own. So, we're -- I think that's the dynamic that's really governing there.

That's exactly it, Doug. And as you've seen, John, throughout this period of investment, we continue to grow that net cash balance. So, we feel pretty good about our capital structure.

Got it. That's helpful. Thanks, guys.

Thanks, John.

(Operator Instructions). And at this time, it appears there are no further questions over the phone.

And since that does conclude our question-and-answer session, I will turn it back to our hosts for any additional comments or -- .

-- No, Jamie, we're good. Thank you, all, for joining us. And we appreciate you taking time with us. And we're completed. We're done.

Thank you.

Thank you for participation. This does conclude today's call.