Erica Abrams - Co-Founder and Managing Director Douglas Valenti - Chairman and Chief Executive Officer Gregory Wong - Chief Financial Officer and Senior Vice President.

Hayden Blair Yoni Yadgaran - Crédit Suisse AG, Research Division.

Good day, and welcome to the QuinStreet First Quarter 2015 Earnings 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..

Thank you, Justin. Good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet's first quarter fiscal 2015 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 relate to future events or financial performance and involve risks and uncertainties. QuinStreet's actual results may vary materially from those discussed here.

Factors that may cause the results to differ from our forward-looking statements are discussed in our most recent 10-K filing with the SEC filed on September 12, 2014.

Forward-looking statements are based on current expectations, and the company does not intend to and undertakes no duty to update this information to reflect future events or circumstances. 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. We made good progress with our growth and diversification issues in the quarter and booked revenue of $71 million, in line with the outlook we provided last quarter.

Reported results reflected deferral of $1.9 million of revenue due to concerns about the collectability of receivables from a large for-profit Education client. This represents our largest and total exposure to one of that industry's most troubled big companies. We serve a diverse set of for-profit Education clients.

The majority of which are financially strong. We do not anticipate any further deferrals from for-profit Education clients in the foreseeable future. We believe our further exposure to companies that appear to be financially vulnerable is limited and not material.

We made exceptional progress with growth and diversification issues in our Financial Services and Other Client Verticals in fiscal Q1. The progress was particularly apparent in our Financial Services results, where revenue was up 12% sequentially.

We're seeing strong momentum in auto insurance, what we believe to be our largest addressable market and where we have been investing aggressively in the ramp of new products. Those investments are driving strong new client demand and renewed growth. We expect strong growth momentum to continue in Financial Services in coming quarters.

Revenue there is expected to grow sequentially, bucking seasonal trends and to be up by more than 20% year-over-year in the December quarter. Our investments are paying off, and we have reinvigorated our business in that important client vertical.

In the Education Client Vertical, we continue to grow revenue from new products and markets, particularly clicks, Brazil and not-for-profit clients. We expect revenue from not-for-profit clients and international markets to grow from about 10% of Education revenue last fiscal year to about 20% by the end of this fiscal year.

Overall, we have reached a turning point where we now expect revenue growth in Financial Services and Other Client Verticals and from new initiatives in Education to offset decreases in revenue from for-profit schools in our overall results. This is a big deal.

It's what we've been working toward, and it means that we are now entering a period where we expect overall revenue to be generally up and to the right again versus the declines over the past few years.

We also expect that adjusted EBITDA margins will begin to re-expand with top line leverage and as we move from heavy investments in growth to optimization.

For the December quarter, revenue is expected to be approximately flat year-over-year, at $65 million to $66 million with declines in for-profit education offset by growth from Financial Services and Other Client Verticals as well as from not-for-profits in Brazil in Education.

Looking out a little further, we expect the same trends to result in year-over-year growth in our overall top line results in both the March and June quarters.

Adjusted EBITDA margins is expected to be in the low single digits in the December quarter as we are still in investment mode to sustain the momentum of our growth and diversification initiatives and due to the seasonal loss of top line leverage. So we expect improving financial results going forward.

We also believe that we're in a much better strategic position overall. Our revenue and media footprints are greatly expanded and much more diversified. Our competitive advantages are stronger.

Our products better align with important growth segments, like not-for-profit EDU, higher-performing products in media and auto insurance, data-driven products and decision-making, integrated call centers and call products, social media and mobile.

And our base of working partnerships and collaborations with other companies has been dramatically expanded through our major media partnership program and other initiatives. With much of our transformation now behind us, we look forward to what we believe is a new era of opportunity and growth.

With momentum restored to the business and with our outlook for renewed growth, we plan to begin investor marketing in earnest again in the next couple of months. I am personally excited to get out there and that the business is at the point where we believe these activities will, once again, be productive.

With that, I'll turn the call over to Greg to discuss the financial results in more detail..

One, we ended the quarter with results demonstrating real progress with our growth initiatives and now feel that we have turned the corner. We now expect growth in Financial Services and Other Client Verticals and from new diversification initiatives in Education to offset decreases in revenue from for-profit schools in our overall results.

We saw good progress with the ramp of our new auto insurance products in the quarter and now expect revenue from an overall Financial Services Client Vertical to grow by over 20% year-over-year in the December quarter.

Two, we have a fundamentally strong business model, which allows us to invest aggressively in new growth initiatives as well as maintain a healthy balance sheet; and three, QuinStreet is a leader in online performance marketing, and we operate in large, attractive addressable markets.

With a 15-year track record, we believe we have the market expertise and the best competitive assets to capitalize on enormous market opportunity ahead. With that, I'll turn the call over to the operator to open up Q&A..

[Operator Instructions] The first question will come from John Campbell with Stephens Inc..

This is Hayden Blair sitting in for John Campbell.

Can you talk with me some more about some of the investments going on in the insurance side of the business? Has that been consistent? Or does that kind of tend to fluctuate? And then as far as timing, what's kind of the endgame for insurance? And what point do you guys think you can maybe wind back some spend on that?.

The investments are pretty consistent and that we're spending down -- intentionally spending down to low single-digits EBITDA and spending that money where we see the biggest opportunities. The -- so that's consistent. What's inconsistent is it's not always on the exact same initiatives.

Sometimes, it will be media investments that we need to then ramp and optimize to margin on a call product. Another time, it'll be on the click product. In some cases, it's been on the -- on our policy product as well for Insurance.com site.

So -- it's a -- it can depend on the -- where we are in terms of the ebbs and flows of demand and/or media on a particular product. But we're seeing consistent returns on those investments across all of those products. We now have about $1 million of revenue a month from non-click products, which are all new to us.

We used to only do clicks in auto insurance. And the new -- our new click platform now represents over -- which was only launched in March, now represents well over 60%. It is actually probably closer to 70% now of our click revenue.

And those products, again -- and that product is driving new pricing and new leverage and new media acquisition for us, so it's across the various product sets. It's resulting in strong growth as we indicated.

That strong growth, we saw that sequentially this quarter, and we expect to see it year-over-year in the existing quarter and in future quarters and to see it very strongly this quarter and in future quarters to the tune of more than 25% year-over-year growth in Financial Services, which is, of course, now our largest business vertical, or client vertical and largest business.

In terms of the timing, I would say that we think it's smart to keep making these investments because they're working. We are also able to, when we make the investments, see that we can optimize up to margin, and then we take on new chunks of opportunity and optimize those up to margin.

So we're adding each of these incremental pieces of business and then ramping them to margin. So I think that's the right thing for us to keep doing.

What's going to happen in terms of the margins is top line leverage is going to be about -- it is -- probably represents 2/3 of loss of margin that we've seen because we've kept so much overhead in place to make these investments and to -- in the investments in media.

That top -- as top -- as the top line begins to come, which we now have said we project to be in the March, June quarter, certainly, we'll see EBITDA margin naturally expand. And as we work on more and more of that auto, media being optimized to margin and all of the different products, we expect that to expand.

So we think that margin expansion occurs -- it begins to occur certainly in the March quarter and beyond the rate. We're going to be in much more -- much more focused still on revenue growth.

As long as it's healthy revenue that we can sustain and get to margin on, than we are on margin expansion for the foreseeable future because we have so much growth ramp in front of us.

On one of our products, one of our new products, we are currently delivering maybe about $0.5 million a month, and we have client demand in excess of $1.5 million a month, and that's a -- in a very early version of that product for example.

So we think it's wiser to go invest in delivering on that demand and beyond than it is to worry about margin expansion at this point given that, again, we continue to be positive margin, albeit low positive margin. And of course, we have $40-something million of net cash.

So again, the emphasis is on solidifying, pursuing, extending the growth opportunities in revenue growth rather than on margin expansion in the near term. But that margin expansion is going to come, again, very naturally from top line leverage, and then beyond that, we see -- have seen already the ability to optimize the investments we've made..

And you mentioned the working relationships with some other companies and expanding those. I'm curious, how has the relationship with Bankrate progressed? You talked about it a little bit last call.

And are there any other partnerships like that, that you can give us some color on?.

The Bankrate relationship is -- has been okay, probably not as -- hasn't been as big or productive as we certainly hope it would be. I think it's a good -- it's a sign of a healthier channel, though, that we and they are working together to make sure that we grow the channel with the highest possible quality.

It hasn't -- auto insurance lead gen has not been a really high-quality channel for the consumers or for the clients. We have been working very hard, and I know Bankrate has an objective to change that.

And I think our coordination, although it hasn't resulted in a ton of joint revenue yet, I think contributes to what is a little bit bigger picture, which is the -- causing that channel to be a better place, better and safer place for consumers and carriers.

So that component of it, I think, continues to be super important, but it hasn't generated much by way of incremental revenue. But again, we and Bankrate don't overlap nearly as much as you might think in auto insurance.

Their media channel for lead gen, which they really dominate in auto insurance, doesn't really overlap much anymore with our media channel for our -- all of our products. So I think we continue to be quite more complementary than not.

And again, I think we have neutral strategic objectives given, I think, we're the 2 biggest players in auto insurance marketing online to get the channel cleaned up and make it a better place for everybody. And we're certainly seeing clients respond to that in very positive ways at least on our end. I don't know about on their end.

Other partnerships include -- we have partnerships now with a lot of large search engines and portals on the Internet, where we power product listings in their search results. That's been very successful for us. We expect it to continue to be very difficult for us.

We have new partnerships with large media companies, where we're helping to power new performance marketing revenue streams for them. We have partnerships with large companies that have large active email lists, where we're helping to monetize those lists for them.

I don't think -- I'm not in a position where I want to name names because I didn't get anybody's permission to do that, but I can tell you that, that -- the revenue from those partnerships is well over $1 million a month now and I think it's probably approaching closer to $2 million and on a very steep ramp.

And those are partnerships in places that we used to really not participate. It used to be we participated primarily with small publishers whose traffic was primarily driven by Google, and we participated in our own traffic driven by Google, organic and paid.

And there's a big -- a large number of players in the middle and traffic sources in the middle who have their own traffic, their own brands, their own media, where we really didn't participate, and so having those relationships now -- including some large credit bureaus, too.

That would be another category that I would point to where we have a lot of success, helping monetize their traffic, both through email and on site. So I think the addition of those players gives us a new footprint of volume and quality traffic.

It helps diversify us in a very meaningful way, particularly with the uncertainties and volatility that have been associated with Google-driven traffic sources over the past few years and creates a lot of strategic revenue opportunities and other ways to work closely and collaboratively with other big companies, which create -- and have created for us a number of new projects that we're working on.

So that's the characterization while I -- and categorization, if you will, but I think beyond that, in terms of naming names, I'm probably not comfortable doing that given that I didn't ask anybody's permission to do so before the call..

And then lastly, I'll hop back in the queue after this.

On the Education front, what's your current split for, for-profit and not-for-profit? And can you kind give us a little update on Brazil and how that's kind of shifted over the last quarter?.

You bet. For-profit and not-for-profit split is in the low teens for not-for -- of our total Education revenue. Not-for-profits are somewhere between 12% and 14% I think..

Yes, it will be somewhere right around there..

Greg, and growing because last year, it was 10%, and it had a very high growth curve last year, so it probably started last year at 5%. So we're -- it's a very steep learning -- steep growth curve. It's a big market, and it's developing nicely, and we're getting -- and we have a lot of wins.

We expect not-for-profit Education revenue to grow in the March and June quarters that we're projecting that they'll grow from here another 33%, 34% year-over-year in each of those of quarters, so good strong growth.

And as I indicated in my script, that, combined with international, is going to be about close to 20% of total Education revenue this fiscal -- in this fiscal year versus 10% last fiscal year. Brazil is going very well. We serve all 3 of the 3 largest education companies in Brazil now.

Those companies have combined total of student enrollments of almost 1.5 million students, so they are much bigger than our U.S. clients. We are a very important provider to 1 of the 2 largest and their most strategic Internet marketing partner.

And that business will double this year to about $4 million in total revenue, and we now project that next fiscal year, that business will have doubled again at least to about $8 million in total revenue.

So it's still relatively small but an enormous opportunity, incredibly well developed by the team we have down there and growing at an exceptionally rapid pace.

And I think that market -- if you look at the size of the for-profit education market in Brazil relative to here, it's very easy to see us getting to as big a business in Brazil over the next 5 or so years as we have in the U.S. in Education, and I think that's extraordinarily exciting.

So we're very committed down there, great websites, great media, great client relationships, a lot of traction and a lot of success for the clients, which is turning into bigger allocations of budget from those clients..

And next will be Yoni Yadgaran with Crédit Suisse..

So real quick.

In terms of currency impact, have you guys been seeing anything there both in terms of Brazil, which, I guess, is relatively small still, but as well as on the cost line in terms of, I don't know, potentially your third-party or even your own call centers and costs that are kind in the areas, which have depreciated relative to the dollar in terms of currency for Q4 -- or the December quarter?.

Yes. The only significant exposure we have to exchange rates is Brazil, and we have seen about a 10% hit from our Brazil numbers. The numbers I gave you incorporate the current exchange rates, so it is probably been 10% over the past few months.

Whether or not we'll see more from there, I don't know, but the numbers I gave you represent kind of current exchange rates, which, again, I believe, are down about 10% from where they were just a couple of months ago.

Greg?.

Yes, that sounds right..

Perfect. Perfect. And one last question if I may.

In terms of seasonality on some of your newer products as you guys kind of transitioned, for example, in auto insurance to the newer product rollout, have you seen a change in terms of like how we should be thinking about seasonality, whether it's now -- are things now more product driven as you guys try to keep up with your advertiser demand as opposed to the usual, like, budget cycle? Or is there a change in how you guys kind of view the full year in terms of spend by your clients?.

No, it's a great question. We -- our seasonality hasn't really changed much for us. We still see similar seasonality. And the main driver of seasonality for us is, being a performance marketing company, our results are delivered, whether they be a click or a lead or a call typically, are typically delivered to a call center or an agent.

And those call center reps and agents take holidays like everybody else, and so they -- the seasonality is driven primarily by that phenomenon, and that's just the way it is for our -- for performance marketing of course, and by the fact that -- and the second component but a distant second component is that in the December quarter, marketing opportunities to buy media are scarce or rarer because there's so much of a surge in marketing spend by folks that have the opposite seasonality, folks who's -- who have 50%, 60%, 70% of their sales during the Christmas season.

And so it's driven by those 2 factors, and they're pretty fundamental to our business models whatever the particular performance product we're selling..

[Operator Instructions] We'll go back to John Campbell with Stephens..

It's Hayden again. One last question on capital allocation. You still got quite a bit of cash on hand.

Do you have any clear plans as far as capital allocation? And then on debt to cap, what's the comfortable level for you on that?.

Yes -- no, it's a good question. We have a very clear plan on capital allocation. That's to continue to maintain our net cash balance.

We don't see a lot of opportunities to deploy cash in ways that are going to accelerate in a meaningful way our revenue growth, and so we expect that we're going to continue to -- given that we're going to a period of operating adjustment, we're going to continue to stay very conservative on the financial side and maintain a strong net cash balance, which, again, right now is about $43 million.

And as you've seen over the past year or so as we've been intensively investing in the business on the income statement side, we've been very protective of the balance sheet side, and I think that's prudent, and I think that will continue.

In terms of debt-to-cash levels or debt ratios, we don't think of it in that way because we are net cash positive. So we tend to think more of having a lot of net cash so that we have lots and lots of cushion against unforeseen things happening, which I think there's less chance of now that we've kind of completed the bulk of the turnaround process.

But I still think it's prudent while we're in this period, and so we want that cash available, and we don't want to have -- we don't think in terms of debt and cash ratios. I would say that we have a debt level we're very comfortable with because we have so much net cash. We have good coverage of it.

But I would expect us to be aggressive on the balance sheet again until we get to the point we're expanding EBITDA margins again, which we expect to happen over the next -- and now I wouldn't say that we do expect that to happen over the next year or so.

We expect to begin to see certainly moderate and maybe more expansion of EBITDA margins as we get the benefits of the top line leverage, which we now see coming and as we're able to optimize the revenue -- continue to optimize the revenue in media that we've already brought in.

Does that make sense? Does that answer the question?.

Absolutely..

And that does conclude today's conference call. There will be a replay starting at 7:00 p.m. today. If you would like to dial in to the replay, you may do so by calling (719) 457-0820 or (888) 203-1112. The replay will run for 1 week. The confirmation code will be 3596599. Thank you for your participation, and have a wonderful day..