QNST - NASDAQ

Good day, and welcome to QuinStreet's Fiscal First Quarter 2026 Financial Results Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference call over to Vice President of Investor Relations and Finance, Robert Amparo. Mr. Amparo, you may begin.

Thank you, operator, and thank you, everyone, for joining us as we report QuinStreet's Fiscal First Quarter 2026 Financial Results. Joining me on the call today are Chief Executive Officer, Doug Valenti; and Chief Financial Officer, Greg Wong. Before we begin, I would like to remind you that the following discussion will contain forward-looking statements. Forward-looking statements involve a number of risks and uncertainties that may cause actual results to differ materially from those projected by such statements and are not guarantees of future performance. Factors that may cause results to differ from our forward-looking statements are discussed in our recent SEC filings, including our most recent 8-K filing made today and our most recent 10-K filing. Forward-looking statements are based on assumptions as of today, and the company undertakes no obligation to update these statements. Today, we will be discussing both GAAP and non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures is included in today's earnings press release, which is available on our Investor Relations website at investor.quinstreet.com. With that, I will turn the call over to Doug Valenti. Please go ahead, sir.

Thank you, Rob. Welcome, everyone. Fiscal Q1 was another good quarter of performance and progress for the company. We delivered record revenue and exceeded our outlook for both revenue and adjusted EBITDA. Auto insurance demand remained strong. Home services continued to grow at double-digit rates, and adjusted EBITDA remained strong, inclusive of heavy investments in new media and product [Technical Issue]. We expect further significant growth in auto insurance revenue and margin in coming quarters and years due to strong product and market fundamentals and to our rapidly expanding product, market and media footprint. Auto insurance carrier results are good. Consumers are shopping and marketing budgets continue their relentless [Technical Issue] but still early shift to digital and performance marketing. While carrier spending is expected to remain strong, uncertainty about tariffs and their eventual impact on claims costs appears to be delaying what we expect to be another significant inflection up from here in carrier marketing spend. In the meantime, we are preparing for the next leg up in auto insurance by investing in new media capacity and in dramatically expanding our product and market footprint to drive growth and expand margins now and into the future. We also expect continued strong growth in our noninsurance non-auto insurance verticals, and we are investing aggressively there as well. Overall, our total addressable market opportunity is already enormous and growing, and we continue to deliberately, contiguously and successfully expand our footprint. We estimate that we are less than 10% penetrated in our current footprint of addressable market. We expect to grow total company revenue at double-digit rates on average for many years to come. We also continue to focus on margin expansion with a near-term next milestone goal of reaching 10% quarterly adjusted EBITDA margin in this fiscal year, which, as you know, ends in June. Our levers to grow EBITDA margin are threefold: one, growing and optimizing media to catch up to auto insurance demand; two, growing higher-margin products and businesses; and three, capturing operating leverage from top line growth and from efficiency and productivity initiatives. Some examples. Auto insurance margins are expected to expand 5 points this fiscal year and are already up over 2 points just since July, with margins in new faster-growing product market areas of auto insurance running at more than twice those of our core click marketplace. Also, margins in big new media areas in auto insurance and across the company are now past breakeven and expanding further as they scale. And our exciting QRP and 360 finance products are expected to grow well over 100% this fiscal year and to nicely contribute to expanded profitability. Another area of current and future investment and excitement is artificial intelligence or AI. We are confident that we are going to be an AI winner. We expect AI to accelerate our already fast-growing markets by improving consumer access, interface and engagement in digital media. We also believe that we will disproportionately benefit from AI due to our structured proprietary data and our over 17-year history of successfully applying AI as a competitive advantage. We have dozens of new AI projects underway across the company and business, and they are already improving consumer satisfaction, client results, media efficiency and productivity. And they are already adding revenue and expanding margins. Finally, before I share our outlook for fiscal Q2 and the full fiscal year, I am pleased to announce that the Board of Directors has authorized a new $40 million share repurchase program. The authorization reflects the strength of our underlying business model and financial position and confidence in our long-term outlook for the business. Turning to our outlook. We expect revenue in fiscal Q2 to be between $270 million and $280 million and adjusted EBITDA to be between $19 million and $20 million. We expect full fiscal year 2026 revenue to grow at least 10% year-over-year and full fiscal year adjusted EBITDA to grow at least 20% year-over-year. With that, I'll turn the call over to Greg.

Thank you, Doug. Hello, and thanks to everyone for joining us today. Fiscal Q1 was another record revenue quarter for QuinStreet. For the September quarter, total revenue was $285.9 million. Adjusted net income was $13.1 million or $0.22 per share, and adjusted EBITDA was $20.5 million. Looking at revenue by client vertical. Our financial services client vertical represented 73% of Q1 revenue and declined 2% year-over-year to $207.5 million. Auto insurance momentum accelerated in the quarter, growing 16% sequentially versus the June quarter and 4% year-over-year against a very tough comparison. Noninsurance financial services, which included personal loans, credit cards and banking, declined 10% year-over-year as the year ago period included a very large limited time promotional offer that benefited our credit cards vertical. Our home services client vertical represented 27% of Q1 revenue and grew 15% year-over-year to a record $78.4 million. Other revenue has been consolidated into our home services client vertical to more accurately depict the operational structure of that business. Turning to the balance sheet. We closed the quarter with $101 million in cash and equivalents and no bank debt, and we remain in a strong financial position. In the September quarter, we repurchased $7 million worth of company shares and subsequent to quarter end, another $10 million worth of company shares, exhausting our previously authorized share repurchase program. In our October 30 Board meeting, our Board of Directors authorized a new share repurchase program of up to another $40 million. We continue to have a rigorously disciplined approach to capital allocation and continue to prioritize: one, investing in new products and initiatives for future growth and margin expansion; two, accretive acquisitions; and three, share repurchases at attractive levels. We will continue to be measured in our approach and remain focused on maximizing shareholder value. As we look ahead into Q2, I'd like to remind everyone of the seasonality characteristics of our business as I do every year at this time. The December quarter, our fiscal second quarter, typically declined sequentially. This is due to reduced client staffing and budgets during the holidays and end of year period, a tighter media market and changes in consumer shopping behavior. This trend generally reverses in January. Moving to our outlook. For fiscal Q2, our December quarter, we expect revenue to be between $270 million and $280 million and adjusted EBITDA to be between $19 million and $20 million. We expect full fiscal year 2026 revenue to grow at least 10% year-over-year and full fiscal year adjusted EBITDA to grow at least 20% year-over-year. With that, I'll turn it over to the operator for Q&A.

[Operator Instructions] Your first question is from Jason Kreyer from Craig-Hallum.

Wonderful. Doug, just wondering if you can give some more details on the media investments that you made in the quarter, how those are performing. Specifically, you kind of teased out some of the faster growth areas where you're seeing better margin performance. Just curious more details on that.

Sure, Jason. We have been focused on growing our proprietary media campaigns and scaling those pretty dramatically in response to the market demand in auto insurance and in response to the competitive pressures we've seen against scarce media and auto insurance because of the spike in auto insurance demand. And those campaigns have done -- have both scaled nicely over the past few months and have now gotten beyond -- well beyond breakeven and our margins there are expanding and are expanding nicely, but we expect there's a lot more to come. And as I indicated, we've already seen about a 2-point improvement in our auto insurance margins overall since July and expect at least 5 points by the end of the fiscal year. And those campaigns are -- will be a big contributor to that. Other contributors include new products and services in auto insurance beyond our historic click marketplace that are also getting to good scale and also have significantly better margins. I don't want to talk a lot about the details of those, so I don't want to give our competitors a road map to everything we're doing. But suffice to say, they're very contiguous. They're good scale. They're highly effective and proprietary as well, and we expect those to continue to scale and to again, continue to contribute. By the way, those numbers for auto insurance do not include QRP. QRP margins are treated separately from auto insurance. And QRP, as I indicated, also continues to scale very nicely, and we expect to be quite profitable this year to reach profitability and be nicely profitable this fiscal year as well as it gets to quite good scale. It grew last year. Last year, it grew by 294%. This year, we expect to grow at least 70% plus in QRP, while the 360 product on the home services side is going to grow at even faster rates. So -- we're seeing a lot of good scale and expansion from us in new media, incremental products and services in auto insurance, our new breakthrough products, the QRP and 360 and other businesses across the company, including home services that have better and higher margins in auto insurance. So a lot of good things going on, on the margin expansion front.

Yes. Certainly seems promising. I wanted to follow up on your tariff comments. It seemed like last quarter that a lot of the tariff concerns had pretty well abated. Now it sounds like maybe those are back on. I'm curious if there's a new round of tariffs causing concern or if the carriers are kind of reacting more to tariffs in recent months more than they were this summer.

No new tariffs, but no resolution of -- not much by way of resolution of existing tariffs. In fact, some of them went up for some countries affected. We can only go by spending behavior of our clients and by public -- any public statements or public information. Spending behavior-wise, the clients are spending strongly, and we expect them to continue to do so, but they're not yet spending at the rate that we would expect given their very strong financial performance. One of the things that we note is mentioned in the public filings is the risk and difficulty in quantifying the exact impact of tariffs. And so it -- we would say that -- and that's one of the few things that's mentioned when it comes to why they might not be spending more than they are relative to their performance. So we would just point out that, that remains a risk factor that they identify and one that they identify as one that's difficult to quantify the exact impact of, which probably implies that they're being a little bit more conservative than they would be otherwise. And I think as things get more clarified, there'll be -- we would expect, given, again, the engagement we have with them, the performance that they are reporting and the performance that we know that they have with our products, we expect a lot of room for another big leg up from here. And I think those of you that follow anybody else in our space has heard the same thing, I think, from all the others in our space as well. We're getting kind of very similar reads on the market.

Your next question is from

Doug, I was curious if you could just talk a little bit more about the spending trends you're seeing broadly among your auto insurance carriers. I know for a good part of the past 12 to 18 months, a lot of the recovery has really been driven by just a couple of major carriers. But just curious if you've seen any sort of evolution in spending trends here in recent months among your carrier partners?

We've seen a broadening of spending,

Understood. And a follow-up question, Greg, I really appreciate the additional segment detail regarding Q1. Just as we look at the full year guidance and the implied ramp in the second half of the year, anything we should keep in mind in terms of like credit card offers or anything to that extent in the credit-driven verticals that we should be building into our model?

No. I think about the guidance overall,

Your next question is from Patrick Sholl from Barrington Research.

I was just on the -- following up on the credit-driven verticals, have there been any indications in like the current macro environment of any changes in like the monetization of that -- of those categories in terms of like the customer profile that's coming through those media channels?

I would say not -- they are not significant changes, but the trends. And the trends are that the lower-end consumer is under more and more pressure. And so we're seeing very healthy demand for credit and debt-related relief products and also in some cases, personal loan products, which are -- which serve more of that demographic than the upper end of the income spectrum. The middle and upper end of the income spectrum continue to be very healthy. The banks reported it yet again. We're seeing it yet again. The demand for credit cards, credit card debt is at record levels, but delinquencies are not. They're at quite low levels. And so there continues to be trend-wise a bifurcation. Our credit card business is primarily aimed at upper income consumers. So that works for us. And our [ M1 ] financial products business tends to be aimed at helping lower-end consumers. So that works for us there. The only other business that we have in that area is the banking business, which is a source of funds business. And that market is still growing very rapidly. It was kind of dormant during the 0 interest period. And once interest rates came back up, that market really has taken off, and we have very, very strong demand from a very broad range of clients, and we continue to do very well there. And again, the only trend there is that interest rates are more normalized now. Even if they come down a little bit, they're still -- the source of funds accounts are open again. And so -- and banks are utilizing that to raise capital. So those would be the general trends, but nothing significant, no significant changes or inflections that we've seen.

Okay. And then within the Home Services segment, I guess, have you seen any sort of like change in like activity there driven by lowering interest rates? Or is that more going to flow through the financial services sector?

We have not. We see -- we continue to see robust demand for home services. And we have all the business opportunity and market opportunity we can stand and we will have, I think, for decades to come there. It's a massive market. It's healthy. Performance marketing works very well. They're done well, and we do it better than anybody. And our clients tell us that, by the way. And there -- it's a matter of continuing to execute and implement and execute and implement. We're doing that every day. And as you've seen, we're growing at very consistent, very good rates and probably limited only by our capacity to execute, not by market demand. So we're very early in our penetration there. The market is quite healthy. Consumers have a lot of equity. They have a lot of capacity to fund products or projects. And they haven't been relocating as much, which means that there aren't as many new projects associated with moving in, but there are a lot of new projects associated with nesting and fixing up where they are. So on balance, just a super healthy market. Homeowners are in very good financial shape in general, and we're very early in our penetration of that very large market.

[Operator Instructions] And your next question is from Elle Niebuhr from Lake Street Capital Markets.

So first, wondering how we should think about mix shift impacts on gross margin into 2026, especially as the carrier budgets remain healthy.

That's a great question. The carrier budgets are healthy, but we haven't really modeled the next leg up in growth for this fiscal year. So if, in fact, we stay at steady state and then just grow with seasonality as we enter this insurance shopping season in the March quarter, we're likely to see that mix -- where the mix has shifted pretty dramatically to auto insurance over the past 1.5 years or so. They're starting normalizing more and that mix shift trend will soften. And in fact, we may actually see growth of other products and services and businesses faster, [ grow ] faster than auto insurance. If that's the case, that's generally speaking, until and as we get these new media campaigns both for auto insurance, generally speaking, that will expand gross margin. And we indicated, as I indicated in my prepared remarks, we are targeting getting to a 10% adjusted EBITDA in the back half of the fiscal year, which would be, of course, the March or June quarters and that would be a component of that -- a factor in that.

Got you. And then with that margin expansion, do you see that coming from auto mix or operating efficiency? Or where do you see that expansion coming from?

Yes, 3 main areas. One is the mix and initiatives, particularly the new media initiatives in auto insurance continuing to scale and continuing to expand and continuing to help grow our margins there. The growth of our higher-margin businesses, as I indicated just now when we talked about that, either the new products for 360 and QRP or home services, some of our other businesses that are structurally higher margin, growing faster or at least not falling back in the mix. And then certainly efficiency and productivity initiatives, which we have a ton of going on. And just to give you a data point on that, just to make sure that's real, it's real to you. In the past 2 years, we've gone from like $600 million a year in revenue to $1.2 billion a year in revenue. In that period, we have gone from 902 employees to 928 employees. So we've doubled revenue by adding 26 employees. So when I talk about efficiency and productivity initiatives, we really have efficiency and product initiatives and they're working very well.