Erica Abrams - IR, The Blueshirt Group Doug Valenti - CEO Greg Wong - CFO.

John Campbell - Stephens.

Good day and welcome to QuinStreet Third 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 Ma’am..

Thank you, Jamie. Good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet's third 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 which was filed on September 12th, 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. 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 and also available on our Investor Relations website. We are doing this because we believe that our non-GAAP results present a good representation of our ongoing operating results. Now I will turn the call to Doug, CEO of QuinStreet. Please go ahead..

Thank you, Erica. And thank you all for joining us today. We had a good quarter. We continued to see improving results from the new product, market and media initiatives we have been discussing with you for the last several quarters. The main themes of those initiatives have been innovation and diversification.

New products are driving growth in client revenue and visual [ph] conversion. Revenue from mobile traffic continues to grow rapidly. Major new media sources have reached scale and are growing fast, and our client revenue mix is more diverse than at any other time in company history.

Net revenue [Indiscernible] more solid base and a broader footprint and an array of growth factors that we believe have fundamentally changed the risk profile and trajectory of the business.

And importantly, we are through the heavy product development phase of these initiatives and are now focussed primarily on execution mainly ramping media and clients. We reported revenue of $75.3 million for the March quarter, which represented growth of 5% year-over-year. Adjusted EBITDA margin was 6%.

We continued to be cash flow positive and net cash increased to $50 million. Revenue from new products and markets in the education client vertical grew strongly once again in the quarter. Offsetting declines in traditional lead generation to U.S.

for profit colleges and resulting in flat year-over-year revenue performance, our best performance in education in over three years. We expect those general trends to continue and that revenue in the education client vertical will now grow year-over-year in the current quarter.

Revenue from our auto insurance business increased 25% year-over-year, driven by the continued adoption and ramp of new products. We expect to grow auto insurance revenue by 25% or more year-over-year again in the current quarter. Total revenue from our financial services client vertical grew 7% year-over-year in the March quarter.

Softness and other businesses there mainly health insurance partially offset the gains in auto insurance. Revenue in other client verticals grew 13% year-over-year in the March quarter.

Turning to our outlook for the June or current quarter, we expect to grow revenue year-over-year in each of our client verticals, education, financial services and other for the first time in over three years. Total revenue growth should be about 5%.

Adjusted EBITDA margin is expected to be in the low single digits as we will continue to invest aggressively in the strong progress of our growth initiatives. With that, I’ll turn the call over to Greg, who will discuss the financials in more detail..

Thanks, Doug. Hello and thanks again for joining us today. We’re happy to report our fiscal third quarter results which highlights strong execution across a broad range of growth initiatives throughout the business. For third quarter of fiscal 2015 we posted $75.3 million of revenue and grew 5% compared to the same quarter last year.

Adjusted net income for fiscal Q3 was $1.4 million or $0.03 per share on a fully diluted basis. Adjusted EBITDA was $4.3 million or a 6% margin. We delivered year-over-year revenue growth in the quarter and feel we are in the early stages of a new trajectory for our business which we believe is generally up unto the right.

Importantly, we are establishing a foundation that we expect will result in long term revenue growth and margin re-expansion. So with that overall context, I will now discuss the details of our fiscal Q3 results. Please see the supplemental data sheets available for download on the investor relations page of our corporate website.

They provide essentially all of the figures that I’ll now walk you through. For revenue by client vertical, our education client vertical represented 41% of Q3 revenue and was flat compared to the year ago quarter at $30.6 million.

This included a onetime benefit from the collection of $1.6 billion of revenue deferred from a large for-profit EDUCATION client in the September quarter. Our strategies to broaden our products in markets and education are paying off.

We again saw strong year-over-year growth from new products in markets and education which offset declines from traditional lead generation to U.S. for-profit schools in the quarter. New products include better matched and qualified leads or suited to the for-profit clients under the new regulations and/or recently launched click in cold products.

New markets include not for-profit clients and international markets particularly Brazil. Overall, it was a really good quarter for education business. We are excited about our improved topline trajectory and feel very good about our position in this evolving market.

We expect our education client vertical to deliver year-over-year revenue growth in the June quarter. Our financial services client vertical represent a 41% of Q3 revenue and grew 7% compared to the year ago quarter to $30.6 million. We are particularly excited about our auto insurance business which grew 25% year-over-year in the quarter.

A recently launched suite of enhanced products has brought renewed enthusiasm and momentum to this business. Client marketing budgets in auto insurance are substantial and are the reason why we’ve been investing so heavily in this business over the past few years. We are now in early stages of seeing those investments pay off.

Overall financial services growth was moderated by year-over-year declines in some of our smaller financial services businesses, including life and health insurance, mortgage and credit cards.

We are in the earlier stages of rolling out our growth and diversification initiatives in those businesses and believe we are well positioned to return the year-over-year revenue growth over the coming quarters. We expect our overall financial services client vertical to grow year-over-year again in the June quarter.

Revenue from other client verticals represented 18% of Q3 revenue and grew at 13% compared to the year ago quarter to $14.1 million, continued solid execution from our B2B technology and home services client verticals draw [ph] the growth.

This is our fifth consecutive quarter of year-over-year revenue growth from our other client verticals and we expect that trend to continue. Moving to a discussion of EBITDA, for adjusted EBITDA we delivered $4.3 million or 6% margin.

Adjusted EBITDA included a one-time benefit of $1.3 million associated with the recognition of previously deferred revenue discussed earlier. Excluding that benefit adjusted EBITDA margin was 4% for the quarter. We will continue to invest in our growth and diversification initiatives if these investments are working.

We expect that adjusted EBITDA margin will re-expand overtime through topline leverage. Turning to the balance sheet, our cash and marketable securities balance at quarter-end was $114 million. Total debt decreased to $65 million from $70 million in the previous quarter, due to repayments, and we had no new borrowings.

Our net cash position grew by over $3 million in the quarter to a positive $50 million. Normalized free cash flow was $2.4 million in the quarter. Despite continued investments, we are still generating positive normalized free cash flows and we expect that to continue.

As always, we look to normalized free cash flow as our primary cash flow metric, as it removes the effects of current quarter working capital account fluctuations to drive to the underlying cash flow characteristics of our model, our model requires minimal capital investment. To summarize, three primary points.

One, we delivered results in the quarter that demonstrated real momentum with our new products in markets and education. Revenue in the third quarter was flat compared to the year ago quarter, our best year-over-year performance in over three years.

We expect to deliver year-over-year revenue growth in the June quarter from our education client vertical. Two, we continue to see solid results from our auto insurance business which grew at 25% year-over-year in the quarter driven by the client adoption and ramp of our enhanced product set.

We expect revenue growth to continue from our auto insurance business for a long time to come. And three, we have a fundamentally strong business model which allows us to invest in new growth initiatives or at the same time generating positive cash flow, maintaining a healthy balance sheet.

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

[Operator Instructions] And we'll now take our first question from John Campbell with Stephens..

Hey guys, good afternoon..

Hey, John.

Hey, John..

So just on the education piece, I mean even ex the deferred rev, I mean we are still looking at I guess about 5% or so year-over-year declines pretty good result in our view.

I mean if you look at that on a sequential basis I mean it still jumped 24% and I think that’s the biggest you guys have ever done as far as I can see, so just curious you know given we’re in the calendar year first quarter you guys probably have brand new budgets from some of your key clients.

Just curious how much of that helped in the quarter and then how much sustainability or you know how much is that going to help offset headwinds or an education business you know throughout the rest of the calendar year?.

I’m not – let me try to answer the question John, I’m not sure I fully understand it. If I don’t, come back and help me cycle it. We always, we do always have a good March quarter. I think that was part of your point.

Education seasonally is strong in the March quarter, but in terms of the momentum and the business that momentum is more driven by fundamentally strong growth in the new products and markets despite or inclusive of the season now I guess you might say and we’re seeing that as indicated and we think the current quarter versus last quarter with both the ability to reap, regain the deferred revenues and seasonality we are about flat year-over-year.

This quarters without the one the deferred revenue advantage we expect to actually grow year-over-year in the quarter. So I would say that, I don’t -- I wouldn’t say that any of the January effect is really what we’re seeing here.

It’s really a continuation of the trends we’ve been talking about for some number of quarters with growth in new stuff, new products and markets as I mentioned as Greg elaborated offsetting continuing declines in the kind of traditional lead gen to the for-profit schools.

So that trend line which has been so strong for the past several quarters continues and it’s actually is accelerating a little bit and is getting big enough that that’s offsetting the portion of the business under stressed from the for-profit education regulation changes.

Did I answer the question?.

Yes I think that’s good color. The main thing I was -- I guess I was curious about as you guys talk with you know your key clients and as they go into the budget planning cycle for the full year, I would imagine as most clients over the last several years have probably come and saying that they are continuously trimming marketing budgets.

I just didn’t know if you guys you know just given the big sequential jump that you saw in the quarter, I didn’t know if as you guys had this conversations with some of those key accounts maybe they are coming in and saying, hey you know we are finally able to expand our budgets, hey we are going to buy some of your new offerings.

I just didn’t know if that was the case..

I think that’s a great question. I would say a couple of things, one is probably more than half our education clients were not on our calendar fiscal, so that’s not generally a big effect, its more – the seasonality is more driven by education cycles and then media availability in the January time frame.

And again I don’t think there is a – I think the theme is more and more of the client say in full profit are buying into the new product sets which are really are very well suited to them under the new regulations, that work much better for them under the new regulations and took a lot of effort for us to develop that range of products to do that.

But also a lot of momentum in growth with not for profit clients and continued strong momentum in growth with Brazil. And so those three factors are just adding up to give us that improved trend line and education..

Got it. Okay. That’s helpful. And then, Greg, on the gross margin really good improvement on a sequential basis, I think that was up 400 bps or so.

And I know you guys you had about, I think you said $1.3 million or so deferred rev add back, so I’m sure that probably helps a little bit but is all of that falling in the gross margin or maybe you can help such that what the truth kind of gross margin expansion was? Thanks..

Hey, John, it was $1.6 million of the top line, $1.3 million benefit to gross margin. And there so EBITDA effect was our gross margin..

That’s right..

Got it. Okay. That’s helpful. Thanks guys..

Thank you, John..

[Operator Instructions] And we’ll take the question from John Campbell of Stephens..

Excellent. Looks like I get to monopolize the call here..

Great..

Okay, okay, okay, quick question on CapEx, its running pretty light just kind of relative to last year.

Is there anything you guys are planning over the next year too or that might move that higher?.

No. Typically John, from a capital investment standpoint our model just doesn’t require a whole lot. We do every so often, I’ll call out every five years or so, we’ll do kind of IT refresh to our data centers and technology refresh. We got through that cycle about a year ago, so this is kind of our normal run rate if you look historically..

Got it. And then on Brazil, I might have missed this.

How much that grew on a year-over-year basis?.

I think the quarter I don’t have the numbers in front of me. It’s 50 something percent..

Yes..

So, I think 55% year-over-year which by the way was suppressed a lot but exchange rate. I think if you took the exchange rate effects out of that from last year to this year that business would have grown closer to 80 plus percent, so that we continue to see good strong momentum in the Brazil business..

Got it. Got it. And then on the debt, you guys.

I guess you would be paying about $4 or $5 million a quarter pretty sustainable over the last few years, where do you guys want to see or is there a debt to cap level that you kind of manage to?.

I think we’re just paying it down as the schedule permits. We’re not paying it down on an accelerated basis because its so an expensive. So, I’d say that we – we don’t foresee the need for lot more capital so I would be surprised if you saw us increase of borrowings under the line.

There is not a lot of incentives to pay it off a lot faster because it is so in expensive. So I think we’re just kind of paying it down on schedule and not borrowing more because we’re generating cash. We have $50 million dollars of net cash of our own, so we’re, I think that’s the dynamic that sort of governing there..

That’s exactly Doug and as you’ve seen John throughout this period of investment was continued to grow their net cash balance so we feel pretty good about our capital structure..

Got it. That’s helpful. Thanks guys..

Thanks John..

[Operator Instructions] And at this time it appears there are no further questions over the phone. And so that does conclude our question and answer session. I will turn it back to our host for any additional comments or....

No, Jamie, we’re good Thank you all for joining us and we appreciate you taking time with us and we’re completed. We’re done..

Thank you..

Thank you for participation. This does conclude today’s call..