QuinStreet Inc (QNST) 2016 Q4 法說會逐字稿

Good day and welcome to the QuinStreet fourth-quarter and FY16 financial results 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, Tanisha. Good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet's fourth-quarter and FY16 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'd 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 may cause the results to differ from our forward-looking statements are discussed in our SEC filings including our most recent 10-K filing with the SEC, which will be filed later this month. 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. And thank you all for joining us today.

Our trend line of accelerating revenue growth and re-expanding adjusted EBITDA margin continued in fiscal Q4. Revenue grew 12% year over year, the fastest growth rate in five years.

Revenue in FY16 grew 6%, the first full year of revenue growth since 2011. Improving results are being driven by the new product, market, and media initiatives we have been executing and describing to you for the past couple of years. Our strategy has been to invest in new products and operating initiatives that expand our footprint, deepen our relationships with clients and media, and strengthen competitive advantages, all in big markets where we already have a presence and considerable scale.

And in so doing: one, diversify our business and offset challenges in US for-profit education; two, reestablish sustainable topline growth; and three, re-expand EBITDA margin. Our strategy has also included a conservative and flexible financial profile, generating positive operating cash flow and maintaining a strong balance sheet which we have done throughout this period of transformation and turnaround.

The strategy is working. Financial Services, our largest client vertical grew 58% year over year in Q4, driven by strength in all of our large businesses there. Financial Services now represents 57% of our total revenue. Revenue from for-profit education continues to fall in the quarter and represented just 19% of total company revenue in Q4, down from 40% two years ago.

We expect the trends of strong revenue growth in financial services to continue and that financial services will continue to grow as a percentage of total revenue as a result. We also expect that for-profit education will continue to be challenging but will have less effect on overall results, as it represents a smaller and smaller percentage of total company revenue. Turning to our outlook in FY17, net of the trends just described, we expect to grow annual revenue by at least 10% and to generate adjusted EBITDA margin of at least 5%.

I want to comment briefly on our partnership with All Web Leads, or AWL, because of its importance and because of its impact on results versus our expectations in Q4. Overall, the direction and potential of our partnership with AWL are exciting. The partnership is already contributing strongly to our insurance business and delivering an exceptional financial return.

Challenges in Q4 with AWL's transition and integration of their recent acquisition of Bankrate's insurance business caused revenue to us from the partnership to be about $5 million lower than we or they expected in the quarter. AWL is working aggressively to restructure the acquired business for improved and more sustainable long-term performance. We, and they, believe that recent speed bumps on that path are the result of necessary steps to a stronger channel into an even bigger, better long-term business for us both in insurance.

Together, we and AWL are improving the quality, performance and capacity of the channel for Internet shoppers, agents, and carriers.

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

Thanks, Doug. Hello and thanks to everyone for joining us today.

Financial results continued to improve in the fourth quarter. We posted 12% year-over-year revenue growth and adjusted EBITDA margin of 4%. Excluding US for-profit education, our business grew 30% year over year in the quarter. For the quarter, total revenue was $79.1 million. Adjusted net income was $1.1 million or $0.02 per share on a fully diluted basis. Adjusted EBITDA was $3 million. The fourth quarter wrapped up an important year for QuinStreet, where our continued strong progress on strategic initiatives resulted in our first full year of revenue growth since 2011.

For the year we reported revenue of $297.7 million or 6% growth overall. Adjusted net income was $743,000 or $0.02 per share on a fully diluted basis. Adjusted EBITDA was $7.9 million. Excluding US for-profit education, our business grew 18% for the full-year.

Turning to revenue by client vertical. Our financial services client vertical represented 57% of Q4 revenue. And grew 58% compared to a year ago quarter to $45.2 million. We saw strong performance pretty much across the board in financial services. Notably, our insurance business grew 63% year over year. Our mortgage business grew 32% year over year and our credit cards business grew 270% year over year in the quarter. We continue to believe that these are very promising businesses for QuinStreet. And that our financial services client vertical overall has significant potential for continued long-term revenue growth.

Our education client vertical represented 25% of Q4 revenue and declined 28% compared to the year ago quarter to $20 million. This year-over-year decline was primarily related to the previously discussed exit from the channel of a large US for-profit education client. We continue to focus on diversifying our business overall and thereby reducing our reliance on the US for-profit education sector. To that end, revenue from US for-profit education clients was 19% of total company revenue in the fourth quarter, down from 30% in FY15 and approximately 40% just two years ago.

Revenue from not-for-profit schools in the international markets grew 16% year over year in FY16. We continue to believe that the not-for-profit international markets are for large long-term growth opportunities in education for QuinStreet. Revenue from other client verticals represented the remaining 18% of Q4 revenue and declined 5% compared to the year ago quarter to $14.2 million. Strong growth in home services mostly offset previously discussed challenges in our B2B technology business.

Moving on to EBITDA, adjusted EBITDA was $3 million or 4% margin. We expect EBITDA margin to expand in FY17 with topline leverage.

Turning to the balance sheet, cash and cash equivalents at year end were $53.7 million. Total debt was $15 million bringing our net cash position at quarter end to $38.7 million. Normalized free cash flow in the quarter was $2 million. Most of our adjusted EBITDA drops to normalized free cash flow due to the low capital requirements of our business model.

In summary, we continued our positive business trends in FY16. We experience accelerated year-over-year revenue growth in the second half of the year up 8% in Q3 and up 12% in Q4, leading to full-year revenue growth of 6%. We expect revenue growth to accelerate in FY17 and that full-year growth will be at least 10%. Growth will be stronger in fiscal Q2 and beyond after we anniversary the prior year's exit from the channel of the large US for-profit education client which occurred in Q2 of FY16. We also expect continued expansion of EBITDA margin to at least 5% in FY17. We remain focused on driving more growth, expanding margins, managing expenses, and maintaining a strong balance sheet.

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

(Operator Instructions)

John Campbell, Stephens, Inc.

Hello, this is Hayden Blair sitting in for John.

Hello, Hayden.

How's it going?

What inning are we in, in the rationalization process for that AWL insurance business? Have we reached a low point there, or is there some more work to do? Maybe you could give us some further color on how that ebb and flow, along with the ramping of the contract itself, is going to impact financial services moving forward?

Sure. We're very close to AWL, as you can imagine, and have had a lot of discussions on that very topic. Their view -- and we've gone through the details with them, and so I think we find their view quite credible and certainly we have confidence in these guys -- is that that rationalization has bottomed, and that they have a pretty clear path to a return to good strong growth from here. The issues that they've had are quite explainable.

They've had to rationalize a lot of lower-quality sources in the mix. And they've also had a lot of integration activities with respect to the two organizations. But again, as we follow that with them and talk to them about that in detail, their view -- and it makes sense given where they are and what they've done and where they're going -- is that it has bottomed and it goes up from here.

As far as how we think it affects us going forward, of course we will have the positive effects. We don't anniversary that deal until the second half of the fiscal year. So there will obviously be positive effects on growth, particularly in the second quarter. They'll be a little bit more exaggerated, as Greg noted, because in the first quarter we still have to anniversary the negative effects of the education client pullout. And then we expect, and we have a lot of plans together, to grow from there considerably.

Not only do we think that we can now start taking advantage of the joint synergies that we did the partnership for and that those can be the main factor rather than the rationalization effects. But we've also expanded quite considerably the footprint of the partnership. And we've added three or four other major initiatives together, not just in insurance but now in other verticals, that we and they both believe are going to be very meaningful and material to our results in the next couple of years.

So I would say that as far as how we think about it for the guide that we've given and for the budget that we've established, we've been quite conservative. We've held the partnership pretty flat in terms of what we expect from them from where they were in the fourth quarter. We are quite hopeful, bordering on confident, that that's a very conservative stance in terms of how we think about the potential of that business.

Thank you for that color.

And then I wonder if you could give us an update on the QuinStreet media platform's impact on the insurance business. Is that continuing to gain traction? Are there any more insurers paying over that seven-figure mark from the last update?

And then maybe if you could just provide some color on the differences in the gross margin impact between that growth and then the impacts of the AWL deal ramp.

I'm sorry, the last part Hayden? I didn't quite get that last part.

Any differences on the growth of the media platforms' impact as that continues to scale? And how that may or may not differ with the AWL contract itself?

As far as QMP, or QuinStreet Media Platform, as you call it -- and that is of course the new product platform that we rolled out a couple of years ago -- initially in insurance that really turned that business around. We continue to see a very positive impact from the product, as Greg noted.

We grew insurance 63% year over year in the fourth quarter. That's just continued and is actually strengthening momentum that business at a very good scale. That business is over $100 million a year for us. Well over $100 million -- I think $120 million a year in revenue.

And we're growing at that rate. That really is on the backs of the new product set, which again, we refer to generically, as you indicate, as QMP or the QuinStreet Media Platform. The ability to deliver much finer-grain segmentation, performance tracking, and pricing to clients is something that we are seeing more and more clients value. And we're attracting and able to effectively perform for them with more budgets.

And, yes, I think we now have more insurance carriers than before spending at a seven-figure rate per month with us as a result of the product, to answer that question. I don't have the exact number for you, but it's a much longer list than it's ever been. And a lot more, we are told from clients, to come because of the performance.

We are now in the early stages of rolling QMP out to other verticals. We expect that in a couple of the other financial services verticals where, one, we are very early and the other we are not quite completely rolled out, that the effects are going to be pretty dramatic. Because we're seeing the same dynamics on those verticals with median clients that we saw in insurance. And so we're quite excited about those initiatives, and we should begin to see the effects of those around the second to third quarter of this year in a couple of our other larger financial services verticals.

We already use that product platform in education, and it's made a big difference. Education, as bad as it has been, it could be a lot worse in for-profit education if we hadn't had the abilities that QMP gave us to very quickly rationalize out product and results that were not working for the clients. And to take the lead on products that did work for the clients, even under the new regulations. And so that has allowed us to help offset that.

As far as margin goes, the investment period in insurance really ended about a year ago, which was the bottom of our margins in insurance. Our insurance margins today are up on a variable margin basis about 5X where they were about a year ago. And are continuing to climb and are all very close to historic margins. When I say historic, I mean margins pre the drop in our insurance business a few years ago. And that's inclusive of the AWL deal, which is right in line with averages there.

And thank goodness because with the loss of education leverage, the big climb in insurance margins enabled by the new product set has really allowed us to continue to invest but also to maintain and to begin to expand profitability as that revenue has come.

I think those are the main answers on that one. I'm happy to clarify if any of that did not make sense to you.

No. That was great. Thank you.

Thank you, Hayden.

(Operator Instructions)

It looks like we have a follow-up question from John Campbell's line with Stephens, Inc.

Hello, it's Hayden again. Just one quick follow-up on some of the ancillary financial services verticals.

Some others in this space have seen some pretty strong tailwinds in both mortgages and credit cards. You are clearly benefiting from some of that, but I wonder is a portion of that share taking? And maybe along with that, can you talk about kind of what you're seeing in those markets that make you feel confident that you can continue to take share in those two markets? And maybe what are some of the challenges presented in doing so in those verticals?

Sure. I'll try to stay clear of anything that might be more competitively sensitive and try to answer more generally, if that's okay.

We do think that -- there are two things going on in some of these bigger financial services verticals. One is, there is more spending by clients. And so there is certainly growth in the spend, or the allocation of spend, more accurately, to the Internet. I think because we and others continue to improve the performance of the Internet for those clients.

I think we have also been growing faster than that. And so I think we have been gaining share. I believe what's enabled that has been the things that are enabling growth generally in other areas, including a broadening of our product set. Recall, we've dramatically expanded our footprint in financial services from a business that was driven primarily by clicks just a couple years ago. To now a business in which we sell clicks, leads, and in some verticals, multiple forms of leads, not just multiple quality tiers of leads, as well as calls and in some cases applications or actual sign-ups of customers.

So the broadening of that product set, combined with the broadening of our media footprint. And recall, we've added, over the past couple years, from business again from a business that was predominantly a couple years ago in financial services, third-party website or publisher driven, to a business where that's a component of it. But we also have now a much larger business with major media partnerships, with paid media on our own account in various forms in various places, as well as mobile and social, which are now 36% of total revenue. Up from, gosh, probably high single digits a couple years ago.

So when you combine the effects of those two dimensions of broadening out the footprint in those verticals, what it adds up to is a lot more revenue-generating power related to the ability to track and serve more types of budgets. But also the ability to better monetize existing media because you can pull it out in so many different forms, or activate it in so many different forms for the clients.

So I think those two things, combined with a little bit of tailwind from certainly some of the client spend pushing to the Internet for various reasons in the various verticals, which we think we will be able to now accelerate or magnify with the rollout of QMP in the coming quarter or so, gives us a lot of confidence. And by the way, we're still pretty small in these massive markets. If you look at credit cards, where we have now a good scale business but still really small relative to certainly some of our competitors and certainly the market or mortgage, where I think we are in the top few. But still very small relative to the opportunity we see in that market and relative to what we can do as we roll out the full product plan.

And then there are some new verticals, like personal loans, where we're really early but extraordinarily excited, given the client base that we have and the products that we're rolling -- the same products -- into that new business too over the next couple of quarters. And we feel very good about financial services. And we think that the insurance results are certainly indicators of that.

But again, we grew overall financial services 57% in the quarter; insurance we grew 63%. And as Greg pointed out, mortgage and credit cards, our second and third largest financial services verticals, grew 32% and 270%, respectively.

So you're already seen a lot of good momentum there, as you indicate, I think for the reasons I talked about. But we see a heck of a lot more runway in both of those, but also in a few others in the financial services industry broadly defined.

Thank you for the follow-up.

Thank you, Hayden.

Steven Ju, Credit Suisse.

Thank you.

Doug, there's been some significant changes to search engine results pages -- both on the desk top and mobile, both on paid as well as the free side. I'm wondering if you can address how some of these changes may be affecting, or not affecting, both you and your competitors from a high level.

Sure, and you're probably talking about the fact they moved more paid up to the top and added local, which has pushed a lot of the organic results down.

Among others.

And others, that's right. We don't have that much of an exposure to our owned and operated SEO anymore. As you know, it's a relatively small part of our business. Therefore, we have not seen a material effect of that on our results.

There have been some effects; but it's been up and down and net pretty immaterial, in terms of the changes on our owned and operated. The dominant portion of our owned and operated SEO exposure now is in our B2B technology group. And those sites tend to not be affected very much by changes to Google algorithm or to page layouts anyway. Because they are driven predominantly and primarily by returning visitors, who are coming to these sites frequently to check for updated content and latest news and latest information on technology changes.

Other than sites in our, say financial services and education verticals, which are more transactional and tend to be driven almost exclusively by one-time visitors come through SEO or through Google. But even in that second group, what I said is -- so in the first group, the technology sites, we've seen very little, if any, effects. And the second group, we've seen more effects; but again, it's not that big a part of our business. And the effects have been relatively immaterial.

As far as the effects on competitors, I do know that some of those folks are much, much more heavily reliant on SEO results than we are. And I have only heard the same things you have heard in terms of the effects of layout and other changes in SEO. And I expect that, and that makes sense to me based what we've seen.

And as I think you know, we have taken a little bit different direction. And our view is that sites that tend to be more transactional and SEO-driven on a transactional basis, we tend to now shy away from. Because it's been proven over the past few years that's just not reliable traffic because you don't directly control it. And it's subject to changes.

And what we're seeing is more frequent changes on shorter and shorter cycles by the folks that actually do control the traffic, most dominantly Google, who has their own objectives in mind as far as what they want to create for their visitors and in their business.

And so we have gone really a different path, which is to make sure we're focused on the best technologies for delivering the best results for clients out of media, wherever comes from. And making sure we're applying that quite broadly to the media sources on the Internet. So we're pretty indifferent to who wins the SEO wars because whoever who that is, its likely, if they're in one of our verticals, to want to work with us so they can make the most money out of their traffic in performance marketing.

So we pivoted, as you know, away from a strategy that had a much more SEO in it a number of years ago because it worked great. But once that ecosystem changed dramatically and got what I would consider to be destabilized -- and it's kind of destabilized on an ongoing basis. It wasn't a one-time event; its a constant challenge. We really turned our attention and our strategy elsewhere, and its working quite well for us.

Again, as Greg pointed out, if not for for-profit education, which we all know is a very, very challenged vertical, our overall business grew 30% year over year last quarter. And that's really driven by the new products and new product strategy and the broadening of the footprint that I just talked about.

Thank you.

You bet.

Thank you, and it does appear that we have no further questions at this time. We'd like to thank you for your participation. Have a wonderful day. You may disconnect at any time.