QuinStreet Inc (QNST) 2017 Q2 法說會逐字稿

Good day, and welcome to the QuinStreet's second-quarter 2017 financial results conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Erica Abrams. Please go ahead.

Thank you Melissa. Good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet's second quarter 2017 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 our discussion today 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 will be filed tomorrow] (corrected by company after the call).

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, thank you for joining us today. Fiscal Q2 results were generally consistent with our expectations, with revenue up 1% year-over-year, despite deep cuts in marketing spending in the quarter by insurance clients, due to industry loss ratio challenges. Insurance client spending has bounced back strongly in January, as industry loss ratios have improved.

Key themes in fiscal Q2 included strong growth in the Financial Services client vertical, our largest business, driven by the success of our new products and technologies, offset by challenges in education, in the Education client vertical. We continue to navigate these business shifts, while maintaining a strong balance sheet and positive cash flow.

We now expect to be able to rapidly expand EBITDA margins and cash flow, due to the cost reductions from our recent restructuring and due to the return of topline leverage, as we enter our seasonally strongest quarter, and as insurance clients increase spending. We expect continued positive momentum in Financial Services. Also, the trends and tone in education are improving at a rate not seen in several years, driven by expectations of a more balanced regulatory environment and enthusiasm for our new products. The new products now account for 80% of our Education client vertical revenue.

In summary, the business initiatives and trends shared with you last quarter are on track. Including, our expectations for strong expansion of EBITDA margin and cash flow in the second half of the fiscal year. We look forward to reporting our progress again to you next quarter. With that, I will turn the call over to Greg, for more details of the financials for the quarter.

Thanks, Doug. Hello, and thanks to everyone for joining us today. For the second quarter, total revenue was $65.6 million. Adjusted net loss was $1.7 million, or $0.04 per share, and adjusted EBITDA was approximately break-even. We generated $900,000 of operating cash flow in the quarter.

Revenue was in line with our expectation for the quarter, increasing 1% year-over-year and reflecting the typical seasonality that we see in December quarters. Seasonality is related to reduced budgets, that coincide with the client fiscal year ends and lower client staffing levels over the holidays, which reduce our clients' capacity to convert inquiries into customers. Given the dual challenges of seasonality and insurance industry weakness, we were pleased with our adjusted EBITDA and operating cash flow of our performance in the quarter.

This is particularly noteworthy, considering that the second quarter did not include full benefits of the recent restructuring, which were put in place later in the quarter. As you recall, in November we announced several measures, including the corporate restructuring designed to expand EBITDA margins and increase long-term shareholder value. We will begin to realize the majority of our costs associated with the restructuring in the current quarter, with full [runway] benefits to be realized in the June quarter. In the December quarter, we took a one-time charge of $2.4 million, which represents substantially all costs associated with the restructuring. These costs have been adjusted out for non-GAAP reporting.

Moving into revenue by client vertical, our Financial Services client vertical represented 60% of Q2 revenue, and grew 23% compared to the year ago quarter to $39.7 million. Growth in Financial Services was driven by the further rollout and adoption of our enhanced products and technologies, which provide greater segmentation, transparency, and right pricing of media for our clients.

Our Education client vertical represented 25% of Q2 revenue, and declined 21%, compared to the year ago quarter, to $16.3 million. We continue to be impacted by ongoing changes in for-profit education industry. However, recent industry tones and trends are more encouraging, as Doug mentioned. Our other client verticals represented the remaining 15% of Q2 revenue, and declined 21% compared to the year ago quarter, to $9.6 million. Strong growth in home services was offset by continued challenges in B2B technology, where we recently change leadership and are beginning to see early signs of improvement.

Moving on to adjusted EBITDA, we reported a loss of $273,000, or approximately break-even. We expect the adjusted EBITDA to expand significantly in the March and June quarters, as we get additional topline leverage, and as we begin to benefit more meaningfully from the cost reductions related to our restructuring. Topline leverage should come from increases in revenue associated with seasonal strength in the March and June quarters, as well as the increase in spending from insurance carriers, due to improving industry loss ratios.

Turning to the balance sheet, we paid off $15 million of outstanding debt in the quarter. This move will save us approximately $40,000 in cash interest expense per month. In addition, we feel confident in our ability to generate EBITDA and cash flow in the March and June quarters. From a cash flow perspective, it was a good quarter, overall. We began the quarter with $53.6 million, paid off debt of $15 million, repurchased $1 million of common stock, and closed the quarter with $37.5 million in cash. This compares to a net cash at the end of the first quarter of $38.6 million.

On an operating basis, we generated $900,000, net of the $1.1 million of cash outflow related to the restructuring. During the quarter, we repurchased 344,000 shares of common stock, at a total cost of a little over $1 million.

In closing, we remain focused on expanding margins, generating cash flow and managing a balance sheet for the long-term, while also investing in areas of growth. Strong growth in these areas, which include Financial Services, Home Services and specific product initiatives in Education and B2B are all ready offsetting challenges elsewhere, and are expected to lead to stronger overall company revenue growth in future quarters and years.

With that I will turn the call over to the operator for Q&A.

(Operator Instructions).

Our first question will come from John Campbell with Stephens Inc.

Hi guys, good afternoon

Hi, John.

Just on the profitability this quarter, I think we might've been looking for a little bit more. I think we might've had a little bit more of a call stage coming in the quarter, but Greg, I think you touch on this, maybe that was a late quarter event, but can you quantify just the extent of the cost reduction in the quarter? And then, if you're still on pace to hit that original $17 million target?

Yes, so on the overall $17 million, we are on pace to go ahead and hit that. The $17 million was the reductions associated with the restructuring, just to make sure everyone understands that number is.

Right and then, what's the timing to hit that $17 million?

Again, I think what we'll see is the majority of the benefit from the restructuring. We'll start to see it come through in the March quarter, with full benefits happening in the June quarter.

Okay, got it. And then, in last call you said, you guys hit the flat to up low single-digits in rev for the year. It seems like that is probably still on track. EBITDA of greater than $15 million -- how do you guys feel about that at this stage? Could you see that type of ramp in the back half?

Yes, we just revamped the forecast, John, and we still do feel good, as you said, about the revenue flat to up single digits for the year. We also think we're in very close proximity to the $15 million.

When we just ran the latest forecast, we came in with EBITDA for the year between $14 million and $15 million, and that does not include a lot of initiatives that we think could be additive to that. So we certainly are not in a position where we think it's necessary to change that outlook.

So it does imply, as you point out, a pretty strong expansion of EBITDA margin in the second half and very rapid strong expansion of that EBITDA margin in the second half. Again, to get to $15 million for the year you have to get that. And we, at this point, are seeing that.

Okay, that's helpful. And then, if you guys can maybe help us out and remind us on the seasonality, and it does sound like you will get more the impact of the cost savings in the final quarter of the fiscal year. But, should you naturally see a step function up from 3Q to 4Q?

Yes. In terms of both -- certainly an EBITDA margin because you get the full benefits from the restructuring in Q4 and then revenue is going to be a little bit higher in Q4, we think, than Q3. Not a lot, but a little bit higher. Both those quarters should be pretty strong.

We're seeing, again as we indicated, we are seeing a very strong return to the market from the insurance clients, which is a big lever in our business, as you can imagine. What we saw at the end of last year, was kind of historically bad from their perspective, in terms of loss ratios and affected their spend. They have come back quite strongly in January.

Just last question for me and I will jump back in the queue. As it relates to that -- the insurance spend -- can you just talk a little bit about how the typical behavior has been with insurance advertisers in the past? Do you typically see that budget swinging month-to-month, or is that more of a trend on a quarterly basis? Just trying to get an idea for how sustainable that spike might be in January.

As you have seen for the past several years, and we have been in the insurance business, if you include the predecessor company that we acquired, we've been in that business for almost 20 years -- about 18 years -- about 10 years or so here -- 8 to 10 years here. It's a business that is pretty steady year-to-year and grows as they shift money to the Internet channel. But for the product cycle we hit two or three years ago, which you are familiar with, where we did have to go through a product cycle, not unlike we've had to go through.

A lot of these performance marketing verticals, where we go from clients being more focused on volume and average pricing and performance, to clients being much more focused on segmentation and accurate performance pricing, which is a play we now, of course know how to run well, and the play that we ran first in insurance. But for that cycle, pretty steady -- the clients come in and out of the market, to some extent, as loss ratios change, particularly in given states -- not usually to the extent that we saw in fiscal Q2 or calendar Q4.

That, according to our clients, was a loss ratio issued, the likes of which several of the large client said they have not seen in 30 years. You saw some of the effect on our business, but you also saw that we still were able to come in up 1% year-over-year in the overall business, and still grow our insurance business.

So, I think we expect that the swings in insurance will be more like historic, which were not that significant, and that there should be a pretty steady trend up into the right, as there h as been for the past majority of the 18 or so years that we and the predecessor company have been in that business.

Again, we don't expect that the -- product cycle was the only other disruption in that trend, which happened again about two or three years ago. But the old product was -- with incremental improvements -- was good for about 15 years and we expect the new product, given it's much more technology-levered, much more technology-oriented, and is on much more of a technology roadmap track. We expect that product will be good for quite some time, as well.

Okay, great, thanks guys.

Thank you.

And next, we'll go to Stephen Ju with Credit Suisse.

Hi guys, this is Chris on for Stephen. First question, Doug, so the recent trends in education that you mentioned being kind of more favorable, is this incremental to when you updated us with the guidance in November? It seems like, kind of a shift in tone to being more positive there. And then, on B2B as well, it seems like you guys are a little bit more upbeat on that segment. Any color there would be helpful.

Sure thanks, Chris. I would say yes. We are seeing a pretty strong turn in the engagement and appetites in education, associated somewhat, not surprisingly, with the election -- the election results. And the expectation that regulations while they may continue, will likely be more balanced to the industry than they saw under the previous administration. Also, just the general trends in the businesses of many of these education clients have turned more positive over the past couple of quarters.

Trace Urdan at Credit Suisse put a good piece out a couple of weeks ago about the for-profit education industry and Green Shoots in the industry, which pointed out decreasing rates have declined, and in many cases, actual positive trends in both searches and new enrollments for a number of the key players. So, we are seeing those same trends among many of the large education clients, including several folks who had either pulled out of the market or reduced it substantially, looking to reenter the channel. I said the market, I really meant the channel -- our channel.

So, I would say that the change in tone you hear from us is consistent with the change in tone we are seeing from the clients. And we're certainly hopeful that's going to translate into a better outlook and better results in that vertical for us, because we certainly still have a very strong position there. In fact, a better position, because so much of the competitive -- so many of the competitors have gotten out of that business.

And B2B, I think the reason we are, and we are, as you pointed out -- we are much more positive on B2B that we were on the last call, because we're now through with the assessment of B2B and what we believe we need to get done, as well as with some of the strategic review of B2B, which has resulted in a couple of new partnerships there.

The good news on the assessment is that it's the same play that we've had to run in insurance, and several other businesses, where the clients are now ready for us to shift from a volume-oriented model to a segmented right-price performance-oriented model. And again, that's a play we know how to run, that we've run in several other verticals, to turn them around. It's a play that draws more heavily on our strengths and competitive advantages, than even the old model. And we have an Executive there that's been with us for 16 years running that play, and she has done an phenomenal job of getting her arms around the situation, assessing what needs to be done and getting us running that play.

And we've had, I think, 10% sequential growth, month-over-month, for three straight months, as she's begun to do that in that business. And so, we feel like we see a very clear path to the turn-around of that business and to a re-ramp of that business on a model, that again, draws very nicely on what we know how to do and what we're particularly good at. So I'd say, in both cases, we're much more positive than we were, and those are the reasons.

Okay, thanks guys. And then, Greg, one last housekeeping question. You had a $2.4 million one-time restructuring charge in the quarter, I think I heard you mention that will be kind of the last one for the year, so I just wanted to clarify that there's nothing else that I should expect in the second half of the year.

I'd substantiate all of the costs associated with the restructuring.

Correct. Okay, thanks, guys.

Thank you, Chris.

(Operator Instructions)

That does conclude our question-and-answer session today and it also concludes our call for today. Thank you for joining us, you may now disconnect.