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

John Campbell - Stephens Incorporated Yoni Yadgaran - Credit Suisse.

Good day and welcome to the QuinStreet Fourth Quarter and Fiscal Year 2015 Financial Results Call. Today's conference is being recorded. At this time, I’d like to turn the conference over to Ms. Erica Abrams. Please go ahead Ma’am..

Thank you Melissa, good afternoon ladies and gentleman, thank you for joining us today to report QuinStreet's fourth quarter and fiscal year 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 contemplated by the forward looking statements discussed here. Factors that may cause the results to differ from our forward-looking statements are set forth in today’s press release and in our most recent 10-Q filing with the SEC which was filed on May 7, 2015.

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, which is also available on our Investor Relations website. Now I will turn the call over to Doug, CEO of QuinStreet. Please go ahead..

Thank you, Erica. And thank you all for joining us today. We are pleased to report fiscal year 2015 and June quarter results. Fiscal 2015 was a pivotal year for QuinStreet.

Our initiatives to revitalize the business with new products and with the diversification of media and markets returned the Company to annual growth in the last two quarters of the year. The initiatives also put us on a path that we believe will allow us to sustain renewed growth and re-expand adjusted EBITDA margin.

The June quarter or fiscal Q4 saw a continuation of recent trends with year-over-year revenue growth driven primarily by more stability in our education client vertical, and strong growth in auto insurance and other client verticals.

Education revenue grew year-over-year in the quarter for the first time in 14 quarters, due to increased contributions from new products, from non-for-profit clients, and from international markets.

Stepping back to look at our progress in fiscal 2015, one key area that led to improved performance was media and market diversification enabled and accelerated by partnerships. We entered into a record number of important and impactful new partnerships last year. These partnerships fall into three main areas.

One, partnerships with large high-quality media companies and properties where we have been able to create or significantly increase performance marketing revenue results for the partner.

These partnerships jaw on our uniquely effective technologies and expertise in performance marketing and weave us more broadly and deeply into high-quality stable Internet media sources based on our value add.

Two, partnerships with not-for-profit schools and third-party enablers of their online programs where we provide or manage media and marketing services, and match our large media flows of student prospects to their offerings and in so doing, help scale both their programs and our share of that fast growing new market.

And three, expanded client partnerships across verticals where we are providing a wider range of services and technologies to increase and differentiate value to our clients, and broaden and deepen our relationships with them.

All of these partnerships draw upon and demonstrate the strong value add of QuinStreet's unique capabilities and assets in performance marketing, the largest form of marketing spend on the Internet and they are important initiatives to diversify our media and markets and thus expand our footprint for growth.

We expect to sign even more partnerships this year and that existing partnerships will contribute at an increasing rate in fiscal 2016. Now, highlighting with numbers the progress with partnerships and other strategic initiatives in fiscal 2015.

Revenue in the education client vertical from new products, not-for-profit clients and international markets grew 70% in fiscal 2015 and was 55% of total education revenue in fiscal Q4.

Revenue from auto insurance clients, our second largest business and what we believe to be our largest addressable market, grew 22% in the last three quarters of fiscal 2015 on the strength of new product ramps.

Revenue from new media sources are those not in our traditional search ecosystem grew by over 70% in fiscal 2015 to 20% of total company revenue. These new media sources include partnerships with large media companies, internal call center, owned and operated email and social media.

We expect these new sources to grow by over 50% again in fiscal year 2016 continuing our successful media diversification strategy. Revenue from mobile traffic grew 58% in fiscal 2015, approaching 20% of total revenue.

Revenue from owned and operated media sources, our highest margin media sources, grew slightly in fiscal 2015 reversing the declines of the past few years. We expect revenue from owned and operated media to grow by over 20% in fiscal 2016.

So fiscal 2015 was a year of strong progress with our strategic initiatives and that progress showed up in the turnaround in our top line results. Turning to our outlook, we expect revenue growth to accelerate in fiscal 2016 as we further ramp successful initiatives and roll them across more of our businesses.

We also expect adjusted EBITDA margin to expand particularly in the second half of the fiscal year, driven primarily by top line leverage and as some of our larger partnerships move from early investment and optimization to greater margin contribution.

At this point, we expect revenue growth in fiscal year 2016 to be approximately 10% and that adjusted EBITDA margin in the full year of 2016 will be higher than in fiscal year 2015 with adjusted EBITDA margin in the second half of the year in the mid-to-high single digits.

For the September quarter, we expect revenue to grow approximately 8% year-over-year and adjusted EBITDA margin to be in the low single-digits as we invest in some important early new media partnerships and other strategic initiatives to drive continued and long term growth and future margin expansion.

With that, I will turn the call over to Greg who will review the financials in more detail..

Thanks, Doug. Hello and thanks again for joining us today. We are pleased with our results in the fourth quarter, which wraps up a solid fiscal 2015 for QuinStreet. In all, we executed well across our growth initiatives throughout the year and grew revenue each of the last three fiscal quarters.

We are beginning to see the results of our investments over the last two to three years show up in our financials. For the fourth quarter, we reported $70.9 million of revenue, up 5% compared to the same quarter last year. Adjusted EBITDA was $2.9 million or 4% margin. Adjusted net income for fiscal Q4 was $479,000 or $0.01 per share.

For fiscal 2015, we reported $282.1 million of revenue, which was flat compared to the prior year. Through the year, we grew revenue from down 10% in Q1 to up 1% in Q2 to up 5% in both Q3 and Q4. We believe this is the beginning of an up into the right trend that we expect to continue to accelerate in fiscal 2016.

Adjusted EBITDA was $10 million or 4% margin and adjusted net income was $2.5 million or $0.06 per share. Please see the supplemental data sheets available at the Investor Relations page of our corporate website. They provide essentially all of the figures and details on that review.

For revenue by client vertical, our education client vertical represented 39% of Q4 revenue and grew 1% compared to the year ago quarter to $27.4 million. This performance reflects our continued success offsetting declines from traditional lead generation to U.S.

for-profit schools, a strong growth from new products, not-for-profit clients and international markets. These new products and markets now comprise the majority of the overall revenue in education.

In products, included better matched and qualified needs, which are more suited to the for-profit clients under the existing regulations as well as our recently launched click and call products.

For fiscal year 2016, we feel good about our position in the evolving education market and expect year-over-year revenue growth in the September quarter as well as the full fiscal year. Our financial services client vertical represented 40% of Q4 revenue and grew 5% compared to the year-ago quarter to $28.6 million.

We’re particularly excited about our auto insurance business, which grew 19% in the quarter as well as mortgage business, which grew 14% in the quarter.

The growth was offset by a decline in life and health insurance as we are in the earlier stages of rolling out our products and technologies that have already proven successful in auto insurance and mortgage. We believe we’re well positioned to return that business to growth over the coming quarters.

As we’ve discussed in the past, client marketing budgets in auto insurance is substantial and continue to be a focus of our investment dollars as we believe this is our largest addressable market. We expect our financial services client vertical to grow by double digits in fiscal 2016.

Revenue from our other client vertical represent 21% of Q4 revenue and grew 12% compared to the year-ago quarter to $14.9 million. Continued solid execution from our B2B technologies and home services businesses drove the growth. Moving to adjusted EBITDA.

We delivered $2.9 million or 4% margin as we continue to invest in our growth and diversification initiatives. We expect adjusted EBITDA margin to be in the low-single digits in the September quarter as we make a number of significant investments in new media partnerships, which Doug discussed.

That being said, we expect to see margin expansion in the second half of fiscal 2016, primarily through topline leverage and as these partnerships achieve scale. Turning to the balance sheet. Our cash and cash equivalents balance at quarter end was $60.5 million. Total debt decreased to $15 million from $65 million in the prior quarter.

During the quarter, we restructured our credit facility in order to better align with our existing capital needs and to reduce our cash interest expense. In summary, the fourth quarter wrapped up an important year for QuinStreet. It was a year of significant positive change for our business and for our financial outlook.

Three main points include one, we turned revenue around in our education and financial services client verticals. Together with our other client vertical, we’re positioned to accelerate revenue growth in fiscal 2016.

Two, we invested wisely in new products, markets, partnerships and opportunities at the expense of near-term EBITDA but in order to drive growth in the future.

As growth accelerates, new partnerships achieve scale, we expect EBITDA margin to expand in the second half of fiscal 2016, and three, we have a fundamentally strong business model, which allows us to invest in new growth initiatives, while at the same time, maintaining a healthy balance sheet.

We look forward to reporting more progress to you in the coming quarters. With that, I’ll turn the call over to the operator to open up Q&A..

Thank you. [Operator Instructions] We’ll take our first question from John Campbell with Stephens Incorporated..

Hey, guys. Good afternoon..

Hey, John..

Hey, John..

Hey.

As far as guidance, I’m not trying to put too [indiscernible] when you guys say, you expect the adjusted EBITDA margin expansion in the back half of the year, is that margin expansion sequentially kind of as you move through the year or are you talking about on a year-over-year basis?.

Both. We expect to see both..

Got it. Okay. That’s helpful.

And then I mean you guys obviously beat our adjusted EBITDA projection this quarter, and I think that was the first year-over-year margin expansion we’ve seen obviously in several quarters, but I think it implies about 34 so percent incremental margin and I know you guys are going to start from a relatively low point in FY1Q, I think you said low single digits, but if we just assume that expense throughout the year and you guys get continued kind of top line growth, is it outside the realm of possibility to kind of hold that 30% to 40% incremental margin throughout FY15?.

We haven’t looked at it that way, John. So I don’t know if that calculation -- I don’t know if that’s a calculation that makes sense to me or not. In general, incremental revenue comes in on average closer to 40% margin.

So if you look at a top line leverage model, which I think we’ve shared with you and others, that’s kind of the number that I would use as incremental revenue coming in at about that margin on pretty close to the same other fixed and semi-fixed cost base and that’s kind of how the leverage model works for us.

It’s a little different angle I think on the same question, but I haven’t looked at the math the way you just described it..

No. I think that’s exactly right. I think that will make sense. A return in top line growth and 40% incremental margins on a carry forward basis, that’s a good recipe. So that’s helpful.

And I jumped on a little late to the call, so I apologize if I missed this, but what was the total insurance growth, did you guys provide that? I heard auto and some other pieces, but did you guys provide what the total insurance growth was year-over-year?.

We didn’t. For the year, John, it was 11% year-over-year over the last three quarters of the year. We grew 22% in auto insurance..

And just to clarify John, you’re asking about auto insurance or are you asking intentionally about auto life and health?.

Total insurance..

All insurance. Greg just gave you the numbers for auto insurance. We don’t -- we did not pull out and we don’t pull out separately just insurance. As you know, we have financial services, which for the year, grew I think about 5%. Greg is looking at the number now. .

6% for the year..

6% overall for the year for total financial services, but we didn’t cluster just insurance in that mix. We certainly could get that and send that out when we report it next time..

Okay, that’s fine. I appreciate it.

And then just last one for me Greg, what type of run rate interest expense should we think about just given the debt reduction?.

It’s about 3%..

Got it. Okay. I appreciate it guys..

Great. Thanks, John..

Thanks, John..

Thank you. We will take our next question from Stephen Ju with Credit Suisse..

Hey, guys. This is Yoni on for Stephen. .

Hey, Yoni..

Hey. So we were hoping you could help us better understand the impetus for restructuring your debt facility.

So we’re wondering if there is any read through with respect to how you guys are thinking about, I don’t know, potentially strategic options, including acquisitions as you go in to ‘16?.

No.

Yoni, if you don’t -- and we’ve talked about this historically, if you look at our business model, we’re still generating a positive normalized free cash flow and so as we evaluated the situation, this new line better fits our existing capital needs, because we are cash flow generative, while at the same time, allows us to save a lot of money and cash interest expense for frankly capital we weren’t going to access or use and that was kind of the main point of the restructuring..

Got it. That makes sense. And I guess as a follow-up, curious, so you guys talked a bit about how O&O grew slightly in fiscal 2015, and you guys expect it to continue to grow again next year. Well, curiously – so obviously O&O has a higher – better margin profile relative to some of your other businesses.

But as we look into new media revenue and some of the growth that you’re seeing there, curious if that’s something that’s accretive or dilutive to gross margins?.

We expect that in combination, it will be pretty neutral to gross margin. I think the thumb rule of altogether the media will come in at an average of – on a weighted average basis of about 40% is probably a pretty good rule of thumb to use on top a pretty stable other cost base. So I think that’s still right.

The owned and operated media does come in at a higher margin though it does also come in with higher demands on other expenses. You have to have more people to do owned and operated than you do to do purely partner.

But the partner revenue will come in lower, obviously media margin to acquire [ph] fewer people, but I think the general rule of 40% on average media margin on top of a flat other fixed and semi-fixed cost base is a safe one and a good one to use, but they are moving parts on that underneath [ph] as I just described.

But that’s still a good rule to use..

Fair enough. Thanks very much guys..

[Operator Instructions] That concludes today’s conference. For replay information of today’s call, please check the company’s website. Again, that concludes today’s conference and thank you for your participation..