Erica Abrams - IR Doug Valenti - CEO Greg Wong - CFO.

John Campbell - Stephens Inc..

Good day, and welcome to the QuinStreet First Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Erica Abrams. Please go ahead, ma’am..

Thank you, Camille. Good afternoon, ladies and gentleman, thank you for joining us today to report QuinStreet's first quarter 2016 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 involve a number of risks and uncertainties that could cause actual result to differ materially.

Factors that could 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 later today, November 9, 2015.

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, and thank you all for joining us today. Our turnaround continued at a good pace in fiscal Q1 with strong growth from new product, market and media initiatives revitalizing our business and offsetting challenges and leading to a fourth consecutive quarter of year-over-year revenue growth.

Adjusted EBITDA margin came in as planned in the quarter and reflected important investments in growth initiatives and new media partnerships. Throughout this turnaround period, we have made investments and strong progress with new initiatives while keeping cash flow and adjusted EBITDA positive and while maintaining a strong balance sheet.

One area of important progress continues to be partnerships. These efforts continue at pace and successfully. Revenue from large media partnerships grew 215% year-over-year in Q1. We expect continued growth and that revenue from such partnerships will reach a run rate approaching $40 million per year in Q2.

These partnerships reduce risk through media diversification away from driver reliance on search engine rankings and affiliates to more stable traffic sources. They also generally improve quality and margin.

Perhaps most importantly, these partnerships validate the strength of our unique technologies and capabilities in performance marketing and embed us more broadly and prominently in the Internet ecosystem.

Examples of such partnerships include takeovers of performance marketing functions and technologies for big branded finance and carrier [ph] media properties, backend monetization of unmatched traffic per client buys, client media buys and white label products for search engines and other performance marketing platform companies.

Now let's review our business performance and outlook. Revenue from our financial services client vertical grew 5% year-over-year in fiscal Q1.

Auto insurance revenue growth slowed somewhat, but still grew at 13% year-over-year despite well-publicized marketing pullbacks from a number of large carriers in the quarter due to insurance industry loss ratios. We expect auto insurance to reaccelerate this quarter or fiscal Q2 as carriers have begun to restore spending.

We're also making good progress growing our product and growth initiatives across our other financial services businesses. As a result, we expect revenue from our financial services client vertical to grow about 20% year-over-year in Q2.

Revenue from our education client vertical grew 8% year-over-year in the quarter, the fastest rate in recent memory. Growth from new products and markets more than offset declines in traditional lead generation for U.S. for-profit clients. Education also benefitted from an easy comp in last year's first quarter.

We expect more growth from new products and markets particularly not-for-profit clients and international, especially Brazil, going forward. We also expect continued volatility from US for-profit clients. Education revenue will likely be down year-over-year in Q2 primarily due to spending pullbacks from US for-profit clients.

We continue to serve for-profit post-secondary education clients with new products and approaches that work well under new rules and challenges.

But due to ongoing challenges in that industry and growth in other areas, US for-profit education clients are representing a smaller and smaller share of our education revenue and of our total company revenue.

Specifically, revenue from US for-profit education clients was down to 28% of total company revenue in Q1 and is expected to be less than 20% of total company revenue for the remainder of the fiscal year. Not-for-profit and international clients represented 24% of education revenue in Q1 and are expected to represent 38% of education revenue in Q2.

Revenue from not-for-profit clients grew 71% year-over-year in Q1 and we expect growth of 117% in Q2. International revenue, mainly Brazil, is expected to grow 44% year-over-year in Q2 on a constant currency basis. To further illustrate our reduced reliance on U.S.

for-profit education revenue and the revitalization of the rest of our business, we expect revenue from businesses other than U.S. for-profit education to grow 17% year-over-year in Q2 and for that growth to accelerate in Q3 and Q4 to over 30% per year.

Turning to our outlook, our underlying business trends are strong and we expect a significant acceleration of revenue growth and adjusted EBITDA margin expansion in the second half of the fiscal year as; one, growth initiatives and new partnership scale and represent an increasing share of our overall mix; two, we’ve reached the tail end of the heavy investment cycle in auto insurance; and three, we begin to benefit from top line leverage.

We are reiterating our outlook for 10% revenue growth in fiscal year '16 and that full year adjusted EBITDA margin will be higher in fiscal year '16 than fiscal year '15. With that, I will turn the call over to Greg who will discuss the financials in more detail..

Thanks, Doug. Hello, and thanks again for joining us today. For the first quarter, we reported $72.4 million of revenue, up 5% compared to the same quarter last year. Adjusted EBITDA was $1.1 million or 2% margin. Adjusted net loss was $0.02 per share.

We continue to execute well on our growth initiatives, growing revenue in our two largest businesses as a result of our differentiated product set, broader media footprint, expanded markets and key strategic partnerships. We expect these initiatives to drive accelerated growth in the second half of fiscal 2016.

Therefore, we are reiterating our outlook for approximately 10% growth for the full fiscal year. With that overall context, I'll now discuss our detail performance in fiscal Q1. For revenue by client vertical, our education client vertical represented 37% of Q1 revenue and grew 8% compared to the year-ago quarter to $27.2 million.

In this client vertical, new products and markets represented 65% of total education revenue and grew 73% year-over-year as their dependence on sales of legacy products to US for-profit institutions continued to decline.

In lieu of legacy products, our new products include better matched and qualified leads which are more suited to for-profit clients under existing regulations as well as our recently launched click and call products.

New markets include not-for-profit in the international clients which now make up approximately 25% of our total education business and will become even larger piece of the mix going forward as Doug detailed. For 2016, we expect to see contribution from U.S.

for-profit clients using legacy products continue to decline while new products, not-for-profit clients in the international markets, particularly Brazil, continue to grow. Our financial services client vertical represented 45% of Q1 revenue and grew 5% compared to the year-ago quarter to $32.2 million.

Auto insurance grew 13% in the quarter and we expect growth to reaccelerate in that business in Q2. We believe we're well positioned to return financial services client vertical to solid double-digit growth beginning in Q2 as carriers have begun to restore spending and as we ramp strategic partnerships.

Revenue from our other client vertical represented the remaining 18% of Q1 revenue or $13.1 million. Moving to adjusted EBITDA for the first quarter, we delivered $1.1 million or 2% margin as we invested in new areas of opportunity. We expect to see margin expansion in the second half of the fiscal year primarily through top line leverage.

Turning to the balance sheet, our cash and cash equivalents balance at quarter end was $61 million. Total debt was $15 million and our net cash position was $46 million.

In summary, over the past two to three years we have focused on reinvigorating products reestablishing our media and investing in key partnerships that leverage the strength of our unique technologies and capabilities in performance marketing and embed us more broadly and prominently in the Internet ecosystem.

We've also made important changes in our organization in order to take the business to another level. We’ve realigned management resources to get the best people focused on the most complex initiatives, restructured organizationally to better align costs with revenue and focused on balance sheet and P&L efficiency.

This past quarter, we’ve restructured employee compensation to more meaningfully align with shareholder interests. We shifted our entire team including senior management to performance-based share grants for fiscal 2016 and tight vesting [ph] the stock price appreciation.

We believe this demonstrates confidence in our ability to grow the business from here and to create meaningful long-term shareholder value. We're working diligently throughout the business to maintain a healthy balance sheet and returning the company to double-digit top line growth and adjusted EBITDA margin.

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

[Operator Instructions] And our first question is from John Campbell with Stephens Inc. .

Hey, guys good afternoon. So I am sure, you guys saw the BankRate announcement on the sale of its insurance business to All Webs.

Just curious, your thoughts around that Doug, you guys see anything positive or negative as far as impacts from that sale?.

Yeah, I thought the deal made a lot of sense for BankRate. I think that as I understand it from Ken’s comments, they want to focus on owned and operated, and I think that make sense given their assets and their capabilities.

I think the deal also made sense All Web Leads, I think it’s – there is a lot of overlap and synergies between those businesses given that they are both clearly driven by networks of insurance agents and matching to those networks of agents and All Web Leads has done a phenomenal job really of managing that network and that business, and I think they will do a great job with the rate assets in merging that.

I think as it relates to us, I think the consolidation of the channel is a good thing as it allows all of us to do a better job of managing the channel to get better results for the clients who have a very strong, very close working relationship with All Web Leads and so I think – and I think that we’re quite complementary to them and again managing this – the channel for the clients, which will draw more budgets to the channel.

So I think overall, I think it was a net positive for all the companies involved and I think it’s going to be a net positive for QuinStreet. .

Got it. Thanks for the color. And then anything to call out as far as – I mean, as we think about paid marketing or SCM with relation to keywords.

I mean, is that – will you guys see a moderate kind of positive impact from just maybe a little [ph] better keywords?.

Again, I think one of the benefits of consolidation is that you do get a little more rationalized competition for specific media sources, which SCM keywords are a very big and very important media source for everybody.

So I do think it will – I don’t know that it will be a meaningful impact, but I think it’s definitely generally in the right direction.

And there is going to be more consolidation in all of these performance marketing groups and I think as the standards keep getting raised and the bars keeps getting raised in terms of technologies and by the clients, I think we are going to continue to benefit from that consolidation. I think this is definitely an example of that. .

Got it. And then outside of for-profit education and then maybe just a little bit pressure from some of the markets and insurance, I mean it sounds like you got several, several products that are achieving nice growth around share, but do you think particular, I think you said financial services maybe 20% tied year-over-year growth in 2Q.

So can you maybe decouple that if you said out, give us a sense for kind of what’s -- what are the main factors driving that?.

The main driver business wise would be auto insurance which continues the you know just a lot of momentum in that business for us.

As you know and this came up on the BankRate call as well they have been struggling with that a little bit because of pullbacks from clients and where down I think about 20% year-over-year last quarter as we were up 13%, even with those headwinds, those headwinds have subsided and we expect that the auto insurance business will grow well past 20% again year-over-year in the current quarter and then in the back half.

We’re also seeing reacceleration in our other insurance verticals, the non-auto insurance, insurance verticals where we are beginning to rollout the same products and strategies that have reinvigorated our auto insurance into those businesses and we expect a good lift there.

Our mortgage business is actually been up 30% to 40% year-over-year over the past several quarters, on the backs of new products and some new media partnerships that we have there, we expect continued momentum there and that industry has consolidated some and again I think that’s a very good thing and it’s been reflected in our business momentum.

And we do expect that we’re going to be a very important player in personal loans particularly on the affiliate and the more fragmented channel side of that equation that’s an important new vertical for everybody obviously, Ken talked about it, even Doug love to talk about it and seen the effective head on their business.

That’s an important new market where we expect to be a -- as we are in all of these verticals, a very important player particularly as we bring our technologies, performance market platform and technologies to bear on the more fragmented part of the media that non-owned and operated but the SCM, the SCO, the affiliate, the partnership areas, we expect that’s going to be a really big business It’s going very rapidly for us, it’s not a big scale yet, nothing like BankRate said but we do expect that that’s going to be a real strong business.

So if you add all those up, it adds up a lot of momentum in the financial services client vertical in total and that accelerating momentum through this quarter as we indicated to get to about 20% year-over-year growth, we think this quarter and even faster growth in Q3 and Q4 and we look at that and see that coming with quite high content.

And so, those things are all adding up, we got a lot of vectors going in the first direction in financial services..

Got it. That certainly makes sense. Thanks guys..

Thank you, John..

Thanks, John..

[Operator Instructions] We have another question from John Campbell with Stephens, Inc..

Hey, guys. Just one more follow-up here.

Doug, you went through a lot of those growth drivers behind financial services, anything to call out on credit cards, I mean obviously I think there has been some growth in that end market as a whole, are you guys getting a piece of that?.

Yeah. Our credit cards business is up, I think, 30% to 40% year-over-year this quarter and we’ll do that again -- last quarter and I think we’ll do that again this quarter.

It’s just on a relatively small base for us, but that business is coming back for us, it’s just not getting to -- it’s not the scale yet, where it’s going to have an impact on the overall number, but we feel pretty good about where it’s headed and where we can be in that -- what we can do with that business in coming quarters and years.

That’s -- Benesse has gone through a lot of change as you know and a lot of the business got consolidated into a few of the larger media players like BankRate and there’s been a big benefit to BankRate and the rest of us have had to adapt to the new regulations on the new sensitivities on the compliance side and develop some new products and new approaches.

We have one of our best business managers just focused on that, he’s made great progress, we’re very close to the issuers and I would say that we feel, again, we’ve got good strong growth on a percentage basis, it’s just not yet at a scale that is going to make a big difference for us, but I like the trend line, and unlike where we’re heading and I think we’re through the hardest part of the credit card period and I do think that that market is coming back..

Got it. Thanks..

Sure, John..

And thank you for your participation today. That does conclude our Q&A and it does conclude our call. This call was recorded for replay. The replay will be available from 5:45 PM Central tonight until 5:45 PM Central November 26th. To access the replay, please dial 719-457-0820 or toll free, 888-203-1112 and enter passcode 9741166.

Once again, that’s 719-457-0820 or toll free, 888-203-1112 and enter passed 9741166. That does conclude today’s call. You may disconnect..