QuinStreet Inc (QNST) 2016 Q2 法說會逐字稿

Good day, and welcome to the QuinStreet Second Quarter 2016 Earnings Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Ms. Erica Abrams. Please go ahead, ma'am.

Thank you, Tom. Good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet's second 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. Forward-looking statements are based on assumptions as of today, and the Company undertakes no duty to update these statements as a 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. Hello, everyone, and thank you for joining us today. We continued to make good progress with new products, markets, and media in fiscal Q2, diversifying our business base and developing areas of revenue growth. These new areas have helped stabilize revenue over the past few quarters. Looking ahead, we now expect these new products, markets, and media, combined with recently signed partnerships, to result in significantly improved revenue and profitability. Specifically, we expect double-digit revenue growth and expanded adjusted EBITDA margin this quarter and in coming quarters.

We talked last quarter about our strategic initiatives to focus on partnerships, partnerships to leverage our unique technologies and capabilities in performance marketing, to embed us more broadly and deeply in the Internet marketing and media ecosystem, and to diversify and expand our footprint for growth. Recall, these partnerships are with, one, large media and marketing companies where we are able to create or significantly increase performance marketing revenue results and operating efficiencies for the partner, two, not-for-profit schools and their third-party enablers of online programs to provide a wider range of relationships and services [done] in our traditional model in education, then three, clients in all verticals to provide a wider range of services, technologies, and products.

Our just-announced 10-year partnership to be exclusive provider of click technology management for All Web leads, or AWL, is the latest and biggest partnership to date. AWL is the largest customer acquisition company focused on the insurance industry, having recently acquired Bankrate's insurance customer acquisition business. AWL and we intend to leverage our partnership and combined scale to improve the insurance shopping experience online for consumers, and to generate better results for agents and carrier clients. We expect to attract more spending and to grow the channel and our revenue together as a result.

The AWL agreement included a one-time upfront exclusivity payment of $10 million. The expected incremental margin from the partnership will pay that back in less than a year.

Updating progress on other strategic initiatives, revenue in our education client vertical from not-for-profit clients and international grew 66% in Q2 to 34% of education revenue overall. We are enthusiastic about both of those markets and their continued long-term potential. We now serve about 200 not-for-profit education clients.

On the media side, revenue from mobile and social represented 35% of Company revenue in Q2 as we continued to diversify and to emphasize growth from those important sources. Partnerships and other growth initiatives are driving a significant shift in our business mix. Our financial services client vertical is expected to approach 60% of Company revenue in the second half of the fiscal year this quarter and next, while revenue from for-profit education clients is expected to decline to less than 20% of Company revenue in this same period.

Turning to our outlook, we expect revenue to grow in the March and June quarters, our fiscal Q3 and Q4, at double-digit annual rates. We expect EBITDA margin to expand significantly due to top-line leverage. We expect total revenue in fiscal 2016 ending June 30th to grow by approximately 10% over fiscal 2015. And we expect adjusted EBITDA for fiscal 2016 to be higher than in fiscal 2015.

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

Thanks, Doug. Hello, and thanks to everyone for joining us today. For the second quarter, we reported $65 million of total revenue. Adjusted EBITDA was $158,000, and adjusted net loss was $0.03 per share. For revenue by client vertical, our education client vertical represented 32% of Q2 revenue, or $20.6 million. The year-over-year decline was due to an exit from the channel by a large US for-profit education client, a pullback we mentioned last quarter. Excluding that client, our education business grew 3% year-over-year.

As we have talked about in the past, we are progressing well with our efforts to diversify our markets, thereby reducing our reliance on US for-profit schools. Revenue from not-for-profit schools and international markets, particularly Brazil, grew 66% in the quarter and now represents 34% of our overall education revenue, as Doug discussed. Revenue from US for-profit education clients is expected to decline to less than 20% of total Company revenue in the second half of the fiscal year.

Our financial services client vertical represented 50% of Q2 revenue and grew 10% compared to the year-ago quarter to $32.3 million, due primarily to the strength in our insurance and mortgage client verticals. We expect growth in financial services to significantly accelerate beginning in Q3 as strategic partnerships like AWL ramp. We also expect financial services revenue to approach 60% of total revenue in the second half of the fiscal year.

Revenue from other client vertical represented the remaining 18% of Q2 revenue, or $12.1 million. Other client vertical revenue was down 13% year-over-year as we saw some softness in B2B technology marketing spend. Adjusted EBITDA for the second quarter was $158,000. We expect adjusted EBITDA margin to expand significantly in the second half of the fiscal year through top line leverage.

Turning to the balance sheet, cash and cash equivalents at quarter-end were $51 million. Total debt was $15 million, and our net cash position was $36 million. During the quarter, we made a one-time payment of $10 million to All Web Leads in connection with our 10-year partnership agreement. That payment will be amortized by us at $1 million per year on a straight-line basis over the life of the agreement. Excluding that one-time payment, we remained net cash neutral in the quarter.

In summary, the second quarter marked an important step in our progress to diversify and reinvigorate our business. Over the past few years, we have worked to broaden and enhance our product set, resulting in increased media yield and better quality results for both consumers and clients. We've expanded our media footprint to reduce reliance on search engines and affiliates, and have successfully penetrated new markets, such as not-for-profit schools and international, particularly Brazil.

We have also established strategic partnerships that leverage our unique products, technologies, and capabilities to facilitate better monetization for us and for our partners alike. We are now at an important turning point where these efforts and investments are beginning to yield accelerated revenue growth and EBITDA margin expansion through top line leverage.

Today's announcement of our partnership with All Web Leads is an important milestone for QuinStreet, and a proof point of the strength of our new products. In this partnership, QuinStreet is the exclusive click [monetization] provider to AWL. We expect this relationship will generate tens of millions of dollars of new revenue annually.

Accordingly, for the second half of fiscal 2016, we expect to post double-digit revenue growth and achieve approximately 10% revenue growth for the full fiscal year. We also expect adjusted EBITDA margin to expand significantly in fiscal Q3 and Q4 due to top line leverage.

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

Thank you, sir. (Operator instructions.) John Campbell, Stephens.

Hey, guys, good afternoon.

Hey, John.

John.

Hey, congrats on the All Web Lead deal. That seems like a good opportunity for you guys. But Doug, just back to some of the moving parts of guidance, I think you said financial services expected to be about 60% of total rev. Is that right?

That's correct, in the second half, John.

In the second half of the year.

Just for the second half of the year, okay. So, I mean, I think that just doing the math there, that implies I think about a 60%-plus type year-over-year growth rate just for the financial services business in the back half. Does that sound about right?

Yes, that sounds about right.

Okay, good. And then, Greg, I mean, I think you mentioned the one-time payment that you guys are amortizing. So, did that $1 million hit in this quarter?

No, it's a straight line across the year for the life of the agreement. So, it's $1 million a year, straight line through the 10 years.

I got it. Are you guys backing that out of your adjusted EBITDA number?

No.

Okay, got it. And then, just a little bit more color on the All Webs deal. I think, Greg, you said a couple million or so rev contribution. How exactly is that going to be structured?

I'm sorry, John, I didn't quite understand the question.

So, if we think about the revenue contribution from that deal, is that going to be -- I mean, is it going to follow the typical seasonality we see with the insurance business? Is that all coming on pretty evenly spread? How should we think about kind of modeling that in?

It'll follow what you would typically see in an insurance annual curve to extend their seasonality in that, which there is some. It should follow just about that.

And John, we expect the partnership to generate tens of millions of dollars of new revenue annually.

Got it, got it, okay. And then last one from me, just on the macro front, just on the insurance channel, can you guys give us an update on carrier spend? I know when Bankrate sold the business originally to All Webs, I know that there was some fluctuations in the market and whatnot, but it seems like the carrier spend comes in and out. Where do we kind of stand now, and kind of what you guys are expecting for the back half of the year?

Yes, everybody's pretty much back. There were a couple large clients who had pulled back spend pretty significantly. Those clients are back in the market and spending pretty aggressively with us. We've got a pretty full slate of insurance clients spending at good levels, so we expect a strong second half of the fiscal year in insurance, both at the client level as well as through the partnerships and through media.

Got it, thanks. I'll hop back in queue. Thanks, guys.

Great. Thanks, John.

Stephen Ju, Credit Suisse.

Hey, guys, this is Yoni on for Stephen.

Hi, Yoni.

Hey. So, two questions, if I may. The first is just the basic housekeeping. Is it fair to assume that the amortization of the AWL deal will be flowing through COGS? And secondly, how should we think about gross margins as you guys kind of see some re-acceleration, particularly in financial services, in the back half of the year, specifically with kind of thinking through both the AWL deal, as well as potentially programmatic and things of that sort increasing part of your mix, as well as social?

Well, the answer is yes on the AWL amortization showing up in cost of goods sold, or cost of services certainly well. In terms of gross margin, I'm not sure we're going to see a lot of fluctuation in that. We have the partnerships kicking in, but we also have a lot of other initiatives underway. So, I think -- and again, as you know, we focus primarily on media margin and EBITDA margin, and the main effect is we expect the media margin to be pretty consistent in the back half with the first half, and that's the biggest component of COGS, or cost of services as we don't expect to add much by way of headcount in the second half.

And then, on the EBITDA margin side, given that we are going to be pretty flat on the headcount side, a lot of the incremental media margin from the incremental business, not just from the partnerships but from continued growth in all the other initiatives we've talked about for the past few quarters, a lot of it's going to just drop right at the EBITDA. So, as we said, we expect EBITDA to expand pretty rapidly here this quarter and even faster in the fourth quarter, and then to continue that trend for a while.

Got you. Congrats on the deals, guys. Thank you.

Thank you.

Thank you.

(Operator instructions.) John Campbell, Stephens.

Hey, guys. Just from my notes here, you guys talked about the owned and operated sites. I think you said maybe a couple quarters ago you're expecting the O&O revenue growth to be about 20% or so this year. Are we still on track for that? How's that faring the first half of the year?

I think our forecast for the year is for it to go more like total -- we'd have to look more closely at the forecast. I don't want to give you an answer right now, John, because I don't have the numbers in front of us. But, we've seen good growth of traffic on the organic websites. We've seen continued strong growth in internal e-mail, which has been a big grower for us as a new form of owned and operated.

A lot of our owner and operator's on B2B, and we saw a little bit of softness there, so I guess there's some ups and some downs. And net-net, I'd say that, without looking at the numbers, and Greg will get you the numbers in the after-call, I would say that we don't expect it to be a major driver up or down over the next -- in the second half.

Okay, that's fair. And then just back to O&O, so the gradsource.com, I saw that announcement from you guys, I mean, is that kind of very early stages? And then, maybe if you can just give us an idea about traffic growth, if you guys expect that to drive any type of revenue any time soon?

It's really early stages. We like it a lot. We've learned a lot on how to be more successful in the new Google environment, and that's our first kind of from-scratch site that applies everything we know. The other sites are being -- it's more of a evolution to the new environment. So, we're very hopeful for it, but it's early.

I would say that we still feel very good about our ability now to be more stable and to begin to grow, and that's why we launched GradSource in the new Google environment, and that is not included in any of the forecasting that we just talked about. If that comes, that'll just be that much better for EBITDA.

Got it. Thanks for taking my questions, guys.

Sure, John, thank you.

And there are no further questions left in the queue, so, ladies and gentlemen, a replay of today's conference will be available starting today, February 9, 2016 at seven p.m. Eastern Time, and will be available till seven p.m. Eastern Time February 16, 2016. To access the replay in the United States, dial 888-203-1112 and enter the code 918969.

This does conclude today's conference. We appreciate your participation.