QuinStreet Inc (QNST) 2016 Q1 法說會逐字稿

(Operator Instructions)

Please stand by, we're about to begin. Good day and welcome to the QuinStreet first-quarter 2016 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Erica Abrams. Please go ahead ma'am.

Thank you, Camille. Good afternoon ladies and gentlemen. Thank you for joining us today to report QuinStreet's first-quarter 2016 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 statements involve a number of risks and uncertainties that could cause actual results to differ materially. Factors that could cause the results to differ from our forward-looking statements are discussed in our SEC filings, including our most recent 10-Q filing with the SEC, which will be filed later today, November 9, 2015. Forward-looking statements are based on assumptions as of today and the Company undertakes no duty to update these statements as result of new information.

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, which is available on our Investor Relations website. 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. Our turnaround continued at a good pace in fiscal Q1 with strong growth from new product, market and media initiatives revitalizing our business and offsetting challenges. And leading to a fourth consecutive quarter of year-over-year revenue growth.

Adjusted EBITDA margin came in as planned in the quarter and reflected important investments in growth initiatives and new media partnerships. Throughout this turnaround period, we have made investments in strong progress with new initiatives while keeping cash flow and adjusted EBITDA positive and while maintaining a strong balance sheet.

One area of important progress continues to be partnerships, these efforts continue apace and successfully. Revenue from large media partnerships grew 215% year-over-year in Q1. We expect continued growth and that revenue from such partnerships will reach a run-rate approaching $40 million per year in Q2. These partnerships reduce risk through media diversification away from direct reliance on search engine rankings and affiliates to more stable traffic sources. They also generally improve quality and margin.

Perhaps most importantly, these partnerships validate the strength of our unique technologies and capabilities in performance marketing and embed us more broadly and prominently in the Internet ecosystem. Examples of such partnerships include takeovers of performance marketing functions and technologies for big branded finance and career media properties, backend modernization of unmatched traffic for client buys -- client media buys, and white label products for search engines and other performance marketing platform companies.

Now, let's review our business performance and outlook. Revenue from our financial services client vertical grew 5% year-over-year in fiscal Q1. Auto insurance revenue growth slowed somewhat but still grew at 13% year-over-year, despite well-publicized marketing pullbacks from a number of large carriers in the quarter due to insurance industry loss ratios.

We expect auto insurance to re-accelerate this quarter, or fiscal Q2, as carriers have begun to restore spending. We are also making good progress rolling our product and growth initiatives across our other financial services businesses. As a result, we expect revenue from our financial services client vertical to grow about 20% year-over-year in Q2.

Revenue from our education client vertical 8% year-over-year in the quarter, the fastest rate in recent memory. Growth from new products and markets more than offset declines in traditional lead generation for US for-profit clients. Education also benefited from an easy comp in last year's first quarter.

We expect more growth from new products and markets, particularly not-for-profit clients and international, especially Brazil, going forward. We also expect continued volatility from US for-profit clients. Education revenue will likely be down year-over-year in Q2 primarily due to spending pull-backs from US for-profit clients.

We continue to serve for-profit, post-secondary education clients with new products and approaches that work well under new rules and challenges. But due to ongoing challenges in the industry and growth in other areas, US for-profit education clients are representing a smaller and smaller share of our education revenue and of our total Company revenue. Specifically, revenue from US for-profit education clients was down to 28% of total Company revenue in Q1 and is expected to be less than 20% of total company revenue for the remainder of the fiscal year.

Not-for-profit and international clients represented 24% of education revenue in Q1 and are expected to represent 38% of education revenue in Q2. Revenue from not-for-profit clients grew 71% year-over-year in Q1 and we expect growth of 117% in Q2. International revenue, mainly Brazil, is expected to grow 44% year-over-year in Q2 on a constant currency basis.

To further illustrate our reduced reliance on US for-profit education revenue and the revitalization of the rest of our business, we expect revenue from businesses other than US for-profit education to grow 17% year-over-year in Q2 and for that growth to accelerate in Q3 and Q4 to over 30% per year.

Turning to our outlook, our underlying business trends are strong and we expect a significant acceleration of revenue growth and adjusted EBITDA margin expansion in the second half of the fiscal year as, one, growth initiatives and new partnerships scale and represent an increasing share of our overall mix. Two, we reach the tail end of the heavy investment cycle in auto insurance and, three, we begin to benefit from top line leverage.

We are reiterating our outlook for 10% revenue growth in FY16 and that full-year adjusted EBITDA margin will be higher in FY16 than FY15. With that I'll turn the call over to Greg will discuss the financials in more detail.

Thanks, Doug. Hello and thanks again for joining us today. For the first quarter we reported $72.4 million of revenue, up 5% compared to the same quarter last year. Adjusted EBITDA was $1.1 million or 2% margin. Adjusted net loss was $0.02 per share.

We continue to execute well on our growth initiatives, growing revenue in our two largest businesses as a result of our differentiated product set, broader media footprint, expanded markets and key strategic partnerships. We expect these initiatives to drive accelerated growth in the second half of FY16. Therefore, where we are reiterating our outlook for approximately 10% growth for the full year.

With that overall context, I'll now discuss our detailed performance in fiscal Q1. For revenue by client vertical, our education client vertical represented 37% of Q1 revenue and grew 8% compared to the year ago quarter to $27.2 million. In this client vertical, new products and markets represented 65% of total education revenue and grew 73% year-over-year as our dependence on sales of legacy products to US for-profit institutions continued to decline. In lieu of legacy products, our new products include better matched and qualified leads which are more suited for for-profit clients under existing regulations as well as our recently launched click and call products.

New markets include not-for-profit and international clients which now make up approximately 25% of our total education business and will become an even larger piece of the mix going forward, as Doug detail. For 2016, we expect to see contribution from US for-profit clients using legacy products continue to decline while new products, not-for-profit clients and international markets, particularly Brazil, continue to grow.

Our financial services client vertical represented 45% of Q1 revenue and grew 5% compared to the year ago quarter to $32.2 million. Auto insurance grew 13% in the quarter and we expect growth to re-accelerate in that business in Q2. We believe we are well-positioned to return financial services client vertical to solid double-digit growth beginning in Q2 as carriers have begun to resource spending and as we ramp strategic partnerships. Revenue from our other client vertical represented the remaining 18% of Q1 revenue or $13.1 million.

Moving to adjusted EBITDA for the first-quarter, we delivered $1.1 million or 2% margin as we invested in new areas of opportunity. We expect to see margin expansion in the second half of the fiscal year primarily for top line leverage.

Turning to the balance sheet, our cash and cash equivalents balance at quarter end was $61 million. Total debt was $15 million and our net cash position was $46 million.

In summary, over the past 2 to 3 years we focused on re-invigorating products, re-establishing our media and investing in key partnerships that leverage the strength of our unique technologies and capabilities in performance marketing and embed us more broadly and prominently in the Internet ecosystem. We've also made important changes in our organization in order to take the business to another level.

We've re-aligned management resources to get the best people focused on the most complex initiatives, restructured organizationally to better align cost with revenue and focused on balance sheet and P&L efficiency. This past quarter we restructured employee compensation to more meaningfully align with shareholder interests. We shifted our entire team, including senior management, to performance-based share grants for FY16 and tied vesting to stock price appreciation. We believe this demonstrates confidence in our ability to grow the business from here and to create meaningful long-term shareholder value.

We are working diligently throughout the business to maintain a healthy balance sheet and return the company to double-digit top line growth and adjusted EBITDA margin. With that I'll turn the call over to the operator to open it up for Q&A.

Thank you, Greg.

(Operator Instructions)

And, our first question is from John Campbell with Stephens Inc.

Hello, guys. Good afternoon.

Hello, John.

So, I'm sure you guys saw the Bankrate announcement on the sale of it's insurance business to All Webs. Just curious your thoughts around that deal. Are you guys going to see positive or negative as far as impacts from that sale?

Yes, I thought the deal made a lot of sense for a Bankrate. I think that, as I understand it from Ken's comments, they want to focus on owned and operated. And, I think that makes sense given their assets and their capabilities.

I think the deal also made sense for All Web Leads. I think it's, there's a lot of overlap and synergies between those two businesses given that they are both really driven by networks of insurance agents and matching to those networks of agents. And All Web Leads has done a phenomenal job really, of managing that network and that business. And I think they'll do a great job with the rate assets and merging that.

I think as it relates to us, I think the consolidation of the channel is a good thing as it allows all of us to do a better job of managing the channel to get better results for the clients. We have a very strong, very close working relationship with All Web Leads. And I so think -- and I think that we're quite complementary to them and again managing the channel for the clients which will draw more budgets to the channel. So I think overall, I think it was a net positive for all the companies involved and I think it's going to be a net positive for QuinStreet

Got it. That a thanks for that color. And then, anything to call out as far as we think about paid marketing or SEM with relation to keywords. Is that, will you guys see a moderate kind of positive impact from just maybe a lower bid at keywords?

Again, I think one of the benefits of consolidation is that you do get a little more rationalized competition for specific media sources, which SEM keywords are a very big and very important media source for everybody.

So I do think -- I don't know that I will be a meaningful impact but I think it's that definitely, generally in the right direction. And there's going to need to be some more consolidation in all of these performance marketing groups and I think as a standards keep getting raised and the bars keeps getting raised, in terms of technologies and by the clients, I think we're going to continue to benefit from that consolidation. I think this is definitely an example of that.

Got it. And then, outside of for-profit education and then maybe just a little pressure from some of the in markets and insurance. I mean, it sounds like you've got several, several products that are seeing nice growth ramps there.

But, just in particular, I think you said financial services maybe 20% type year-over-year growth in Q2. So can you maybe decouple that or piece that out, give us a sense for kind of what are the main factors driving that?

Yes, the main drivers of that, the main driver business-wise will be auto insurance which continues to be, just a lot of momentum in that business for us. As you know, and this came up on the Bankrate call as well, they been struggling with that a little bit because of pullbacks from clients and we're down I think about 20% year-over-year last quarter as we were up 13%, even with those headwinds.

Those headwinds have subsided and we expect that the auto insurance business will grow well past 20% again year-over-year in the existing -- in the current quarter and in the back half. We're also seeing the re-acceleration in our other insurance verticals, the non-auto insurance verticals, where we are beginning to roll out the same products and strategies that have re-invigorated our auto insurance into those businesses and we expect a good lift there.

Our mortgage business is actually been up 30% to 40% year-over-year over the past several quarters, on the backs of the new products and some new media partnerships that we have there. And we expect continued momentum there and that industry has consolidated some and again I think that's a very good thing and its for being reflected in our business momentum.

And, we do expect that we're going to be a very important player in personal loans, particularly on the affiliate and the more fragmented channel side of that equation. That's an important new vertical for everybody. Obviously Ken talked about it, you've heard Doug Lebda talk about it, and seen the effects they've had on their business. That's an important new market where we expect to be a -- as we are in all of these verticals, a very important player, particularly as we bring our technologies, performance market platform and technologies, to bear on the more fragmented part of the media, the non-owned and operated but the SEM, the SCO, the affiliate, the partnership areas.

We expect that's going to be a really big business. It's growing very rapidly for us. It's not a big scale yet, not unlike bank rates said, but we do expect that that's going to be a real strong business.

So if you add all those up, it adds up to a lot of momentum in the financial services client vertical in total that and accelerating momentum through this quarter as we indicated, getting it about 20% year-over-year growth, we think this quarter and even faster growth in Q3 and Q4. And, we look at that and see that coming with quite high confidence so those things are all adding up to, we got a lot of vectors going in the right direction in financial services.

Certainly make sense. Thank you guys

Thank you, John.

Thanks, John.

(Operator Instructions)

We have another question from John Campbell with Stephens

Just one more follow up here. Doug, you went through a lot of those kind of growth drivers behind financial services. Anything to call out on credit cards, I mean obviously I think, there's been some growth in end market as a whole. Are you guys getting a piece of that?

Yes, our credit cards business is up, I think 30% to 40% year-over-year this quarter and we'll do that again -- the last quarter, I think we do that again this quarter. It's just on a relatively small base for us, but that business is coming back for us. It's just not getting not the scale yet where it's going have an impact on the overall all number but we feel pretty good about where it's headed and where we can be in that -- what we can look into at that business in coming quarters and years.

That's, that issue has gone through a lot of change, as you know and a lot of the business got consolidated into a few of the larger media players, like Bankrate. And it's been a big benefit to Bankrate.

And the rest of us have had to adapt to the new regulations on the new sensitivities on compliance side and develop some new products and new approaches. We have some of our -- one of our best business managers just focused on that. He's made great progress, we're very close to the issuers. And I would say that we feel again, we have good strong growth on a percentage basis. It's just not yet at a scale that's going to make a big difference for us.

But I like the trend line and I like we're heading and I think we're through the hardest part of the credit card period. And I do think that market's coming back.

Got it, thanks

Sure, John.

And, thank you for your participation today. That does concludes our Q&A and it does conclude our call.

This call was recorded for replay. The replay will be available from 5.45 PM Central tonight until 5:45 PM Central November 26.

To access the replay, please dial e 719 -457-0820 or toll-free 888-203-1112 and enter passcode 9741166. Once again, that is 719-457-0820 or toll-free 888-203-1112 and enter passcode 9741166.

That does conclude today's call. You may disconnect.