QuinStreet Inc (QNST) 2017 Q1 法說會逐字稿

Good day, and welcome to the QuinStreet first-quarter FY17 financial results conference call. Today's conference call is being recorded. At this time I would like to turn the call over to Ms. Erica Abrams. Please go ahead, ma'am.

Thank you, Keith. Good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet's first-quarter FY17 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 may 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 was filed today. 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 announced measures to insure that we meet our commitment to expand adjusted EBITDA margin, and to take whatever steps necessary to maximize long-term shareholder value. The decision to restructure and review the business portfolio at this time, was based on three main considerations.

The first consideration was our commitment, stated on these calls, and with shareholders and investors many times over the past couple of years, to re-expand EBITDA margin and cash flow, as soon as practicable while still being able to effectively pursue our key growth initiatives. While we still expect top-line leverage to provide most of the lift in coming quarters and years, the restructuring will allow us to accelerate and expand those effects, while also helping offset near-term deceleration of revenue growth due to challenges in our education and B2B technology verticals.

The second consideration, was reaching the end of the heavy-investment period of our turnaround efforts. We have largely developed our full-line of new generation technology and products, and can now be focused more leanly on rollout and execution. We are furthest along in those efforts in insurance, now our single largest revenue vertical.

The third consideration was the continuing divergence of performance between our financial services client vertical and other lines of business. Which of course, includes mainly, strong growth and margin expansion in financial services, our largest business, and challenges in education, our second largest business.

To review what was outlined in our press release today, we have announced a corporate restructuring and other steps to accelerate margin expansion, grow cash flow, and increase shareholder value. The corporate restructuring will reduce fixed costs by approximately $17 million annually, including a reduction in personnel costs of approximately 25%. The reductions will be across the Company with the greatest percentage of cuts in the education and B2B technology verticals.

The benefits from the restructuring will begin to take effect in the December quarter. The restructuring includes, a reorganization that streamlines operations, and increases focus on key growth products and client verticals. As part of the reorganization, the leadership of our education and B2B technology verticals has been changed, and all financial services verticals have been consolidated under our successful insurance leadership team.

In addition, we announced the authorization of a stock buyback program, initially limited to offsetting annual dilution due to equity compensation. Dilution due to equity compensation has averaged approximately 1.4% of outstanding shares annually, over the past five years. The Board will assess the program on an ongoing basis, as circumstances change.

We also announced that we will undertake a strategic review of our business portfolio to further evaluate resource allocations and investments, and to analyze and explore possible divestitures and strategic partnerships. The objective of the review will be to identify opportunities to increase shareholder value and to enable greater focus on an investment in our most successful products and businesses, particularly in our financial services client vertical.

We continue to see strong momentum in the financial services client vertical, our largest business in the September quarter, or fiscal Q1. Financial services revenue grew nearly 40% year over year, and now represents over 60% of company revenue. We also continued to experience challenges in our education and B2B technology client verticals, and we are aggressively implementing initiatives into stabilizing and re-growing those businesses.

Looking ahead, the education client vertical has been particularly challenging and difficult to project. With that in mind, we currently forecast that FY17 revenue will be flat, to up low-single digits, year over year. We expect to generate in excess of $15 million in adjusted EBITDA in FY17, inclusive of partial-year effects from the restructuring. We expect full-year effects from the restructuring, in FY18. With that, I'll turn the call over to Greg for a more detailed review of the financials.

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

For the first quarter, total revenue was $73.4 million. Adjusted net income was $631,000 or $0.01 per share, and adjusted EBITDA was $1 million.

In the quarter we generated $1.2 million of operating cash flow. Revenue for the quarter was below our expectation, as we experienced greater than expected weakness in our education and B2B technology vertical. In addition, we saw some softening in near-term spending by insurance carriers, due to high industry loss ratios unrelated to our performance. Despite this, we grew revenue year over year, and generated positive adjusted EBITDA in the quarter.

Today, we announced several measures, designed to expand EBITDA margin and to increase long-term shareholder value. Most notably, we announced the restructuring, which will result in a reduction of approximately $17 million of cost annually. We will begin to see the benefits from this restructuring in the current quarter, with the full run rate benefits being realized in the fiscal fourth quarter.

Moving to revenue by client vertical, our financial services client vertical represented 61% of Q1 revenue, and grew 39% compared to the year-ago quarter to $44.6 million. Growth in financial services was driven by the success of the rollout and adoption of our enhanced products and technologies.

Our education plan vertical represented 24% of Q1 revenue, and declined 35% compared to the year-ago quarter to $17.7 million, as we continue to be impacted by changes in the for-profit education industry, including: exits from the channel by US for-profit education clients, campus closures, and the discontinuation of certain programs, all of which have resulted in lower online marketing budgets.

The education client vertical remains challenging, but also contributes nicely to cash flow, even more so with the restructuring. We also continue to pursue promising opportunities in education, that are not yet fully offsetting the legacy business, including: [right-price click], premium leads, not-for-profit schools, and the international markets.

Our other client verticals, represented the remaining 15% of Q4 revenue, and declined 15% compared to the year-ago quarter, to $11.2 million. Strong growth in home services was offset by continued challenges and B2B technology, where leadership has now been changed, and we believe, there is substantial opportunity for improved performance.

Moving on to EBITDA, adjusted EBITDA was $1 million or a 1% margin. We expect EBITDA margin to expand in the second half of FY17 as a result of top-line leverage and as we start to realize the full impact of the benefits associated with our restructuring. In FY17 we expect to generate in excess of $15 million of EBITDA, inclusive of partial year effects from the restructuring.

Turning to the balance sheet, cash and cash equivalents at the end of first quarter were $53.6 million. Total debt was $15 million, bringing our net cash position quarter end to $38.6 million. Normalized free cash flow in the quarter, was $1.3 million. Most of our adjusted EBITDA drops the normalized free cash flow, due to low capital requirements of our business model.

In closing, we remain focused on driving more growth, expanding margin, and maintaining a strong balance sheet over the long-term. With that, I will turn the call over to the operator to open up Q&A.

(Operator Instructions)

John Campbell, Stephens, Inc.

Hello guys, good afternoon.

Hello, John.

On the restruction efforts, I just want to dig in on that for a second. Doug, I think you mentioned that most of the cost/save efforts will be education and B2B. So, within education, is that mainly just on the for-profit side, or is there downside efforts spanning across all of education?

It is across all of education. Pretty much the same resources work on both not-for-profit and for-profit, so it does not impact our ability to continue to pursue all of our growth initiatives in education, including non-for profits. But it does allow us -- the reason a higher percentage came from education, obviously, is that business has been challenged and there is more opportunity to right size costs with revenues, as revenues have come down so much over the past year, or so.

Okay. That's helpful. And then Greg, on the one-time restructuring cost you called out, is that going to be backed out of the adjusted EBITDA, or are you guys going to eat that cost?

It will be. We will pro-forma it out of EBITDA.

Okay, and then you also mentioned the expectation for adjusted EBITDA margin expansion in the back half, I'm assuming you mean expansion from current levels? Is that just on a sequential basis or are you talking about year-over-year?

Yes. I would expect, actually, both, John. What we will see, I think in the back-half of the year, and again, it is primarily due to top-line leverage, but it's also the effects of the restructuring.

Okay. That is helpful. And then, within sales and marketing, how much of that is just personnel expense?

The vast majority of the sales and marketing is personnel expense. The media line -- media, which is the largest single cost component of our business model, comes out of the gross margin line.

Okay, and one more, and I will hop back in the queue. Can you walk through again, what is going on with B2B? Is that an execution issue, or is that more of a macro deal?

There are macro things going on there. We have a competitor in that business, that is a little bit larger than us, of course, that announced similar issues today. Global technology clients, who have been the big drivers of revenue in the Internet marketing channel, have cut their budgets pretty significantly for a couple of reasons.

One is, the weak dollar has affected their business overseas, which has affected their overall financial models, which has resulted in them looking to cut anywhere they can, and a lot of big cuts in marketing spend. That was echoed, again, by one of our -- the competitor that we have in this space, that is also public today.

The other issue is that there is just some turmoil among the large players, who again, have historically driven a lot of the marketing spend. There's divestitures, some recombinations, including some of the companies that have re-aquired businesses. That's resulted in some disruptions in budgets.

So it is imperative that -- and there are macro things going on, that while they were very good to us, and to that business over the last few years, have started to act against us and become headwinds. The solutions to that are largely executional, which includes, diversifying more quickly into a larger client base, of what would be considered midsized technology clients. But a midsize technology client could be a client with billions of dollars in revenue. So there's a lot of budget opportunity there, and our team is aggressively doing that, and has made some good progress lately, just not enough yet to fully offset; but very promising.

Another executional opportunity, or challenge if you want to think about it, is that clients have begun in B2B to do some of the same things that we saw them shift to in insurance and other verticals over the past few years. And that is to want to move from a focus on average quality and average pricing, to more of a focus on segmentation, performance tracking, and right pricing.

The business models in that business, have pretty much been arrayed against the previous model, because that is what the clients wanted. As they begin to shift more aggressively to the new model, you have to retool a little bit. And I am not trying to put a whole lot of lipstick on a pig here, but the fact is that that's really good for us. We know how to do segmentation performance tracking and right pricing. That is where we have been shifting all of our businesses.

So while there will be a period of retooling to get there, because you have to shift -- and our shift obviously comes with a little bit of delay after the client's, we know how to do that and we are quite enthusiastic about that direction.

And the new leadership of B2B comes from our core business, and she knows how to do that. Those are the sorts -- it's a mix of macro things that are causing some headwinds. But there are executional trails out of it, and that is what we are on.

Thank you.

(Operator Instructions)

We can take a follow-up from John Campbell.

Hey guys. Thanks. On AWL, can you give us a brief, or maybe, just try to size this up, but how far is AWL running under original forecast?

AWL has still been good for us. Our financial service would have grown about 24%, if not for AWL. AWL made up the difference between the 24% and 39% that we got to. So it is still a good strong contributer for that opportunity.

In terms of how far under forecast, I am a little reluctant to say too much, because again, they are a private company, and I do not want to give out information that would be considered private and confidential to them. But I can tell you they have made pretty -- have had to make pretty dramatic cuts in the acquired business, because of some issues that they had.

A bigger factor, really, in financial services this past quarter -- in this quarter versus where we thought we would be -- again let's be sure to acknowledge it grew 39% year-over-year in our big business, so it did pretty well, but did not do as well as we thought it would. The bigger factor, although AWL is somewhat of a factor because of what we have seen in terms of their performance of the acquired assets, that was largely in our forecasts.

What was not in our forecasts are the industry loss ratios, among some of the big carriers, caused by what some of the carriers are telling us, is 30-year issues, like once every 30 year issues, in loss ratios, due to low gas prices causing more driving; due to a hailstorm, believe it or not, in Texas which did a lot of damage; due to the to the hurricane in Florida; and due to higher incidents due to things like distracted driving. A lot of the carriers, in 2016, have had to adapt to those factors, and when they have to adapt, that usually means they have to pull out of markets, pull-down pricing, reestablish pricing, relaunch products, and then start spending again. And so what happens, is you get big lulls in marketing spend.

That has been a bigger effect versus our forecast for this year in financial services, than AWL thing, which again, was baked in. The good news is, they are making adjustments and we still grew 39% in financial services, and we have gotten very strong indications that in January, when loss ratios reset -- because they reset on an annual basis, the loss ratio targets for the carriers, that they expect to reaccelerate and re-expand spending.

That is helpful. The then, just last one for me, on the impact from last night's election, clearly a President in office that may be supports for-profit education, to some extent. Just curious about your high-level thoughts there, and any impact from a regulatory environment, and how that may impact you guys?

You have seen reaction in education stocks today, and some analyst reports out of the education analysts today, that indicate they believe there is going to be pretty a pretty dramatic effect on what has been a very negative regulatory environment: a pretty dramatic positive effect, depending on your perspective. From our perspective, a positive effect, on what has been a very negative regulatory environment, obviously, for for-profit education.

That makes a lot of sense to us. We are not industry prognosticators, but again I have seen analyst reports today, including out of Credit Suisse, in report they put out on DeVry, which go into some detail about the rationale for upgrading some of the stocks, based on some very real relief they expect from the regulatory pressures which have been so devastating to those clients over the past number of years.

It's about time something positive came out for education. We certainly will be tracking that closely, and we still have a very robust and strong presence in education, and are working hard to service clients. And if they get a little relief and a little bit more fairness in how they are treated, that can only be a good thing.

Certainly. And then, I might have missed this, what percent of total rev was US for-profit?

In the teens. I do not have it right in front of me. But Greg, teens?

Yes. It's probably high teens.

Okay, great. Thanks, guys.

Thanks John.

(Operator Instructions)

Ladies and gentlemen, this will conclude the Q&A portion of our call, and also conclude today's teleconference. We thank you for your participation.

You may now disconnect, and have a great day.