Erica Abrams - Investor Relations Douglas Valenti - Chief Executive Officer Gregory Wong - Chief Financial Officer.

John Campbell - Stephens Inc..

Good day, and welcome to the QuinStreet First Quarter Fiscal 2017 Financial Results Conference Call. Today’s call 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, Keith. Good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet’s first quarter and fiscal year 2017 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’d 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 results to differ materially.

Factors that may 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 was filed today. 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’ll turn over – I’ll turn the call over to Doug, CEO of QuinStreet. Please go ahead..

Thank you, Erica. Hello, everyone, and thank you for joining us. Today, we announced measures to ensure that we meet our commitment to expand adjusted EBITDA margin and to take whatever steps are necessary to maximize long-term shareholder value.

The decision to restructure and review the business portfolio at this time was based on three main considerations.

The first consideration was our commitment, stated on these calls and with shareholders and investors many times over the past couple of years to reexpand EBITDA margin and cash flow as soon as practicable, while still being able to effectively pursue our key growth initiatives.

While we still expect top line leverage to provide most of the lift in coming quarters and years, the restructuring will allow us to accelerate and expand those effects, while also helping to offset near-term deceleration of revenue growth to do challenges in our education and B2B technology verticals.

The second consideration was reaching the end of the heavy investment period of our turnaround efforts. We have largely developed our full line of new generation technology and products and can now be focused more mainly on roll out and execution. We’re farthest along in those efforts in insurance now our single largest revenue vertical.

The third consideration was the continuing divergence of performance between our financial services client vertical and other lines of business, which of course, includes mainly strong growth and margin expansion in financial services, our largest business and challenges in education, our second largest business.

To review what was outlined in our press release today, we have announced a corporate restructuring and other steps to accelerate margin expansion, grow cash flow, and increase shareholder value. The corporate restructuring will reduce fixed costs by approximately $17 million annually, including a reduction in personnel costs of approximately 25%.

The reductions will be across the company, with the greatest percentage of cuts in the education and B2B technology verticals. Benefits from the restructuring will begin to take effect in the December quarter. The restructuring includes the reorganization that streamlines operations and increases focus on key growth products and client verticals.

As part of the reorganization, the leadership of our education and B2B technology verticals has been changed, and all financial services verticals have been consolidated under our successful insurance leadership team.

In addition, we announced the authorization of a stock buyback program, initially limited to offsetting annual dilution due to equity compensation. Dilution due to equity compensation has averaged approximately 1.4% of outstanding shares annually over the past five years. The Board will assess the program on an ongoing basis, as circumstances change.

We also announced that we will undertake a strategic review of our business portfolio to further evaluate resource allocations and investments, and to analyze and explore possible divestitures and strategic partnerships.

The objective of the review will be to identify opportunities to increase shareholder value and to enable greater focus on an investment in our most successful products and businesses, particularly in our financial services client vertical.

We continue to see strong momentum in the financial services client vertical, our largest business in the September quarter for fiscal Q1. Financial services revenue grew nearly 40% year-over-year and that represent over 60% of company revenue.

We also continue to experience challenges in our education and B2B technology client verticals and we are aggressively implementing initiatives in stabilizing and re-growing those businesses. Looking ahead, the education client vertical has been particularly challenging and difficult to project.

With that in mind, we currently forecast that fiscal 2017 revenue will be flat to up low single-digits year-over-year. We expect to generate in excess of $15 million in adjusted EBITDA in fiscal 2017, inclusive of partial year effects from the restructuring. We expect full-year effects from the restructuring in fiscal 2018.

With that, I’ll turn the call over to Greg for a more detailed review of the financials..

Thanks, Doug. Hello, and thanks to everyone for joining us today. For the first quarter, total revenue was $73.4 million, adjusted net income was $631,000, or $0.01 per share, and adjusted EBITDA was $1 million. In the quarter, we generated $1.2 million of operating cash flow.

Revenue for the quarter was below our expectations, as we experienced greater than expected weakness in our education and B2B technology verticals. In addition, we saw some softening in near-term spending by insurance carriers due to high industry loss ratio unrelated to our performance.

Despite this, we grew revenue year-over-year and generated positive adjusted EBITDA in a quarter. Today, we announced several measures designed to expand EBITDA margin and to increase long-term shareholder value. Most notably, we announced the restructuring, which will result in a reduction of approximately $17 million of cost annually.

We will begin to see the benefits from this restructuring in the current quarter with full run rate benefit being realized in the fiscal fourth quarter. Moving to revenue by client vertical. Our financial services client vertical represented 61% of Q1 revenue and grew 39% compared to the year ago quarter to $44.6 million.

Growth in financial services was driven by the success of the roll out and adoption of our enhanced product and technologies. Our education client vertical represented 24% of Q1 revenue and declined 35% compared to the year ago quarter to $17.7 million.

As we continue to be impacted by changes in the for-profit education industry, including exit from the channel by U.S. for-profit education client and disclosures and the discontinuation of certain program all of which have resulted in lower online marketing budget.

The education client vertical remains challenging, but also contributes nicely to cash flow even more so with the restructuring. We also continue to pursue promising opportunities in education that are not yet fully offsetting the legacy business, including right price point, premium leads, and not-for-profit schools and international markets.

Our other client verticals represented the reigning 15% of Q4 revenue and declined 15% prior to the year ago quarter the $11.2 million. Strong growth in home services was offset by continued challenges in B2B technology, where leadership has now been changed and we believe there’s substantial opportunity to improve performance.

Moving on to EBITDA, adjusted EBITDA was $1 million, or 1% margin. We expect the EBITDA margin to expand in the second-half of fiscal 2017, as a result of top line leverage and as we start to realize the full impact of the benefits associated with our restructuring.

In fiscal 2017, we expect to generate in excess of $15 million of EBITDA, inclusive of partial year effect in the restructuring. Turning to the balance sheet, cash and cash equivalents at the end of first quarter were $53.6 million. Total debt was $15 million, bringing our net cash position quarter end to $38.6 million.

Normalized free cash flow in the quarter was $1.3 million. Most of our adjusted EBITDA drops to normalize free cash flow due to the low capital requirements of our business model. In closing, we remain focused, while driving more growth, expanding margin and maintaining a strong balance sheet over the long-term.

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

[Operator Instructions] And we’ll take our first question from John Campbell with Stephens Inc. Please go ahead. Your line is open..

Hey, guys, good afternoon..

Hey, John..

Hey, John..

Hey, on the restructuring efforts just want to dig in on that for a second. Doug, I think, you mentioned that most of the cost save efforts will be in education and B2B.

So within education, is that mainly just from a for-profit side, or is there downside efforts just spending across all of the education?.

It’s across all of education, there’s pretty much the same resources work on both not-for-profit and for-profit. So it does not impact our ability to continue to pursue all of our growth initiatives in the education, including not-for-profits.

But it does allow us – the reason a higher percentage came from education, obviously, is that that business has been challenged and there’s more opportunity to right-size cost with revenue as revenues have down so much over the past year or so..

Okay, that’s helpful.

And then, Greg, on the one-time restructuring cost, you guys called out, is that going to be backed out of the adjusted EBIDTA, or you guys eat that cost thereafter?.

Utilization. We’ll prefer format out of adjusted EBITDA..

Okay. And then you also mentioned the expectation for, I guess, adjusted EBITDA margin expansion in the backup.

I’m assuming, you mean expansion from current levels, is that, I mean, is that just on a sequential basis, or are you talking about year-over-year?.

Yes, I would expect actually both, John. What we’ll see, I think, in the back-half of the year and again, it’s primarily due to top line leverage, but it’s also due to the restructuring or the effects of restructuring..

Okay, that’s helpful.

And then within sales and marketing how much of that is just personnel expense?.

The vast majority of the sales and marketing line is personnel expense. The media line – media, which is the largest single customer from a business model comes out of the gross margin line..

Okay. One more, and I’ll hop back in the queue.

Can you walk through, again, kind of, what’s going on with B2B? Is that an execution issue, or is that more of a macro sales?.

It’s – there’s – there are macro things going on there. We have a competitor in that business. It’s a little bit larger than us, of course, that announced similar issues today. Global technology clients who have been the big drivers of revenue in the Internet marketing channel have cut their budget pretty significantly for a couple of reasons.

One is, the weak dollar has affected their business overseas, which has effected their overall financial models, which has resulted in them looking to cut anywhere they can and a lot of big cuts in marketing spend. That was echoed again by one of our competitor that we have in this space that is also public today.

The other issue is, there’s just some turmoil among the large players who again have historically driven a lot of the marketing spend in terms of divestitures and recombinations, including some of the companies that have reacquired businesses and that’s resulted in some disruptions in budgets. So it’s imperative that.

And so that there are some macro things going on that while we were – they were very good to us and to that business over the last few years have started to act against us become headwinds.

The solutions to that are largely executional, which includes diversifying more quickly into a larger client base of what would be considered midsize technology clients, but a midsize technology client could be a client with billions of dollars in revenue.

There’s a lot of budget opportunity there, and our team is aggressively doing that and has made some good progress lately just not enough yet to fully offset, but very promising.

The other – another executional opportunity or challenge, if you want to think about it is that, clients have begun in B2B to do some of the same things that we saw them shift to in insurance and other verticals over the past few years, and that is to want to move from a less focus, or from a focus on, kind of average quality and average pricing to more of a focus on segmentation, performance tracking, and right pricing.

The business model – models in that business have pretty much been arrayed against the previous model, because as for [ph] the clients wanted. As they begin to shift more aggressively to the new model, you have to retool a little bit and I’m not trying to put a whole lot of lipstick on a pig here. But the fact is, that’s really good for us.

We know how to do segmentation, performance tracking and right pricing, that’s where we’ve been shifting all of our businesses. So while there will be a period of retooling to get there, because you have to shift and we and also shift obviously comes a little bit – with a little bit delay after the clients.

We know how to do that and we’re quite enthusiastic about that direction and the new leadership of B2B is – comes from our core business, and she knows how to do that. So those are the sorts of – it’s a mix of macro things that are causing us to have to – causing some headwinds, but their execution of trail out of it, and that’s what we’re on..

Thank you. [Operator Instructions] And we can take a follow-up from John Campbell. Please go ahead. Your lines open..

Hey, guys, thanks.

On AWL, can you give us just a brief or maybe just kind of trust sizes up and how far is AWL running, kind of, under original forecast?.

I think, AWL has still been good for us. Our financial services business would have grown about 24%, if not for AWL, AWL was made up the difference between 24% to 39% that we’ve gone to. So still a good strong contributor for that opportunity.

In terms of how far under forecast, I mean, I’m a little reluctant to say too much, because again, they’re a private company.

And I don’t want to give out information that that would be considered private and confidential to them, but I can tell you that they have made pretty – have had to make pretty dramatic cuts in the acquired business because of some issues that they had.

A bigger factor in financial services this past quarter and this quarter versus where we thought we would be, again, let’s be sure, I acknowledge, it grew 39% year-over-year in our big business, so it did pretty well, but didn’t do as well as we thought it would.

The bigger factor although maybe it will be somewhat of a factor because of what we’ve seen in terms of their performance of the acquired assets. That was largely in our forecasts.

What wasn’t in our forecast are the industry loss ratios among some of the big carriers caused by – some of the carriers were telling it’s just 30-years issues – like once every 30-year issues in loss ratios due to low gas prices causing more driving due to a hailstorm believe it or not in Texas, which did a lot of damage due to the hurricane in Florida and due to pirate incidents, due to things like distracted driving.

So a lot of the carriers in 2016 have had to adapt to those factors and when they have to adapt that usually means they have to pull out of markets, pull down pricing, reestablish pricing, relaunch products and then start spending again.

And so what happens is you get bigger loss in marketing spend, we are – that’s been a bigger effect versus our forecast for this year in financial services has been the AWL things, which again was baked in. The good news is they are making those adjustments.

We still grew 39% financial services and we’ve gotten very, very strong indications that in January when loss ratios reset – because they reset on an annual basis, the loss ratio targets for these carriers that they expect to reaccelerate and re-expand spending..

And then just last one for me, on the impacts from last micro election, clearly a president in office that maybe supports for-profit education to extent, just curious about your thoughts there, any kind of impacts from the regulatory environment might – how that might impact you guys?.

I know you’ve some reaction in education stocks today and some analyst reports – some of the education analysts today that indicate they believe that there is going to be pretty dramatic effect on what has been a very negative regulatory environment, pretty dramatic positive effect and depending on your perspective – from our perspective a positive effect on what has been a very negative regulatory environment obviously for for-profit education.

That makes a lot of sense to us.

We are not industry prognosticators but again I’ve seen some analyst reports today including out of Credit Suisse and a report they put out under RAI [ph], which going to some detail the rationale for upgrading some of those stocks based on some very real relief they expect from the regulatory pressures which have been so devastating to those clients over the past number of years.

That’s – it’s about time something positive came out for education. So we certainly will be tracking that closely and we still have a very robust and strong presence in education and – are working hard to serve those clients and if they get a little relief and a little bit more fairness in how they are treated, that can only be a good thing..

Certainly, and then I might have missed this.

What percent of total rev U.S.-for-profit?.

In the teens..

Yeah..

I don’t have it right in front of me, but – Greg, teens?.

Yeah, it was probably high-teens..

Okay, great. Thanks, guys..

Thanks, John..

[Operator Instructions] And it appears we have no further questions..

Ladies and gentlemen, this will conclude the Q&A portion of our call and also conclude today’s teleconference. We thank you for your participation. You may now disconnect and have a great day..