Erica Abrams - IR Douglas Valenti - CEO Gregory Wong - CFO.

John Campbell - Stephens Inc. Chris - Credit Suisse.

Good day, and welcome to the QuinStreet Second Quarter 2017 Financial Results 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, Melissa. Good afternoon, ladies and gentlemen. Thank you for joining us today as we report QuinStreet’s second quarter 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 our 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 in conjunction with our release 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 the call over to Doug, CEO of QuinStreet. Please go ahead..

Thank you, Erica. Hello, everyone, and thank you for joining us today. Fiscal Q2 results were generally consistent with our expectations with revenue up 1% year-over-year despite deep cuts in marketing spending in the quarter by insurance clients due to industry loss ratio challenges.

Insurance client spending has bounced back strongly in January as industry loss ratios have improved. Key themes in fiscal Q2 included strong growth in the financial services client vertical, our largest business, driven by the success of our new products and technologies offset by challenges in education and the education client vertical.

We continue to navigate these business shifts while maintaining a strong balance sheet and positive cash flow.

We now expect to be able to rapidly expand EBITDA margins and cash flow due to the cost reductions from our recent restructuring and due to the return of topline leverage as we enter our seasonally strongest quarter and as insurance clients increase spending. We expect continued positive momentum in financial services.

Also, the trends and tone in education are improving at a rate not seen in several years, driven by expectations of a more balanced regulatory environment and enthusiasm for our new products. The new products now account for 80% of our education client vertical revenue.

In summary, the business initiatives and trends shared with you last quarter are on track including our expectations for strong expansion of the EBITDA margin and cash flow in the second half of the fiscal year. We look forward to reporting our progress again to you next quarter.

With that, I'll turn the call over to Greg for more details of the financials for the quarter..

Thanks Doug. Hello and thanks to everyone for joining us today. For the second quarter, total revenue was $65.6 million. Adjusted net loss was $1.7 million or $0.04 per share and adjusted EBITDA was approximately breakeven. We generated $900,000 of operating cash flow in the quarter.

Revenue was in line with our expectation for the quarter, increasing 1% year-over-year and reflecting the typical seasonality that we see in December quarters.

Seasonality is related to reduced budgets that coincide with the client fiscal year ends and lower client staffing levels over the holidays, which reduce our client's capacity to convert inquiries into customers.

Given the dual challenges of seasonality in insurance industry weakness, we were pleased with our adjusted EBITDA and operating cash flow performance in the quarter. This is particularly noteworthy considering that the second quarter did not include full benefits of the recent restructuring, which were put in place later in the quarter.

As you recall, in November we announced several measures including the corporate restructuring designed to expand EBITDA margins and increase long-term shareholder value. We will begin to realize the majority of our cost associated with the restructuring in the current quarter with full run rate benefits to be realized in the June quarter.

In the December quarter, we took a one-time charge of $2.4 million, which represents substantially all costs associated with the restructuring. These costs have been adjusted out for non-GAAP reporting.

Moving to revenue by client vertical, our financial services client vertical represented 60% of Q2 revenue and grew 23% compared to the year ago quarter to $39.7 million.

Growth in financial services was driven by the further roll out and adoption of our enhanced product and technologies, which provide greater segmentation, transparency and right pricing of media for our clients. Our education client vertical represented 25% of Q2 revenue and declined 21% compared to the year ago quarter to $16.3 million.

We continue to be impacted by ongoing changes in the for-profit education industry, however recent industry tones and trends are more encouraging as Doug mentioned. Our other client verticals represented the reigning 15% of Q2 revenue and declined 21% compared to the year ago quarter to $9.6 million.

Strong growth in home services was offset by continued challenges in B2B technology, where we recently changed leadership and are beginning to see early signs of improvement. Moving on to adjusted EBITDA. We reported the loss of $273,000 or approximately breakeven.

We expect adjusted EBITDA to experience significantly in the March and June quarters as we get additional topline leverage and as we begin to benefit more meaningfully from the cost reductions related to our restructuring.

Topline leverage should come from increases in revenue associated with seasonal strength in the March and June quarters, as well as the increase in spending from insurance carriers due to improving industry loss ratios. Turning to the balance sheet, we paid off $15 million of outstanding debt in the quarter.

This move will save us approximately $40,000 in cash interest expense per month. In addition, we feel confident in our ability to generate EBITDA and cash flow in the March and June quarters. From a cash flow perspective, it was a good quarter overall.

We began the quarter with $53.6 million, paid off debt of $15 million, we purchased the $1 million in common stock and closed the quarter with $37.5 million in cash. This compares to a net cash at the end of the first quarter of $38.6 million.

On an operating basis, we generated $900,000 net of the $1.1 million of cash outflow related to the restructuring. During the quarter, we repurchased 344,000 shares of common stock at a total cost of little over $1 million.

In closing, we remain focused on expanding margins, generating cash flow and managing our balance sheet for the long term, while also investing in areas of growth.

Strong growth in these areas which include financial services home services and specific product initiatives in education and B2B are already offsetting challenges elsewhere and are expected to lead to stronger overall company revenue growth in future quarters and years. With that, I’ll turn the call over to the operator for Q&A..

Thank you, ladies and gentlemen. [Operator Instructions] Our first question will come from John Campbell with Stephens Incorporated. .

Hey, guys, good afternoon..

Hey, John..

Hey, John..

Hey just on the profitability this quarter, I think we might have been looking for little bit more, I think we might have had a little bit more of the cost saves coming in the quarter. But Greg I think you touched on this maybe that was a late quarter event, but can you quantify just the extent of the cost reduction in the quarter.

And then if you're still on pace to hit that original $17 million target?.

Yes, so on the overall $17 million, we are on pace to go and hit that and that was -- and the $17 million was the reductions associated with the restructuring, just to make sure everybody understands what that number is..

Right. And then what's the timing to hit that $17 million..

Again, I think we will see is the majority of the benefit from the restructuring, we'll start to see come through in the March quarter with full benefits happening in the June quarter..

Okay, got it.

And then last call you said -- you guys said the flat to up low single digits in rev for the year, that seems like that's probably still on track, but the EBITDA greater than $15 million, how do you guys feel about that at the stage? Could you see that type of ramp in the back half?.

Yeah, we just re-ran the forecast John and we still do feel good as you said about the revenue flat to up single digit for the year. We are also think we are in very close proximity to the $15 million.

The last when we just ran the latest forecast, we came in with EBITDA for the year between $14 million and $15 million and that does not include a lot of initiatives that we are -- we think could be additive to that. So, we certainly are not in a position where we think it's necessary to change that outlook.

So, it does imply as you point out a pretty strong expansion of EBITDA margin in the second half and a very rapid strong expansion of that EBITDA margin in the second half as you can again to get to $15 million for the year you have to get that and we at this point are seeing that..

Okay.

That's helpful and then if you guys can maybe just help us out, remind us on the seasonality and it does sound like you'll get more of the impact of the costs saves in the final quarter of the fiscal year, but should you naturally see a step function up from 3Q to 4Q?.

Yes. In terms of both -- certainly in EBITDA margin because you get the full benefits from your restructuring in Q4. And then revenues are going to be a little bit higher in Q4 we think than Q3, but not a lot, but a little bit higher, both this quarter should be pretty strong.

We're seeing again as we indicated, we're seeing a very strong return to the market from the insurance clients, which is a big lever in our business as you can imagine that.

What we saw at the end of last year, was kind of a historically bad from their perspective in terms of loss ratios and affected their spend, but they have come back quite strongly in January..

Just last question for me and I will jump back in the queue.

As it relates to that and the insurance spend, can you just talk a little bit about how the typical behavior has been with insurance advertisers in the past? Do you typically see that budget swing month-to-month or is that more like a trend on a quarterly basis? Just trying to get an idea for how sustainable that spike might be in January?.

As you've seen for the past several years, and we have been in the insurance business if you include the predecessor company that we acquired, we’ve been in that business for almost gosh, almost 20 years about 18 years, about 10 years or so here, eight to 10 years here and that’s business that is pretty steady year-to-year and grows as they shift money to the Internet channel, but for the product cycle we hit two, three years ago, which you are familiar with, where we did have to go through a product cycle not unlike we had to go through a lot of these performance marketing as we go from clients being more focused on volume and average pricing and performance to clients, being much more focused on segmentation and accurate performance pricing, which is a play we now of course know how to run well and the play that we ran first in insurance.

But above to that cycle pretty steady, the clients come in and out of the market to some extent as loss ratios change particularly in given states, not usually to the extent that we saw in fiscal Q2 or calendar Q4.

That according to our clients was a loss ratio issue to the likes of which several of the large clients that they have not seen in 30 years. They think that they're -- and so you saw some effect on our business, but you also that we still we were able to come in up 1% year-over-year in the overall business and still grow our insurance business.

So, I think we expect that the swings in insurance will be more like historic which are not very -- were not that significant and that there should be pretty steady trend up into the right as it has been for the vast majority of the 18 or so years, that we and the predecessor company have been in that business.

And again, we don’t expect that the product cycle was the only other disruption in that trend, which happened again about two or three years ago.

But we were -- the old product was with incremental was good for about 15 years and we expect the new product given as much more technology levered, much more technology oriented is a much more of a technology roadmap track. We expect that product will be good for quite some time as well..

Okay. Great. Thanks guys..

Thank you..

And next, we’ll go to Stephen Ju with Credit Suisse..

Hi, guys. This is Chris on for Stephen.

First question, Doug so the recent trends in education that you mentioned being kind of more favorable, is this incremental to when you kind of updated us with the guidance in November, it seems like kind of a shift in tone to being more positive there? And then on B2B as well, it seems like you guys are a little bit more upbeat on that segment, may be any color there would be helpful..

Sure, thanks Chris.

I would say yeah there's -- we've seen a pretty strong turn in the engagement and appetites in education associated somewhat not surprisingly with the election and the election results and the in expectation that regulations while they may continue will likely be more balanced to the industry then they saw under the previous administration.

Also, just the general trends in the businesses and many of these education clients have turned more positive over the past couple of quarters.

Trace Urdan at Credit Suisse put in a good piece out a couple weeks ago about the education, for-profit education industry and green shoots in the industry, which pointed out decreasing rates decline in and in many cases, actual positive trends in both searches and enrollments, new enrollments for a number of the key players.

So, we are seeing those same trends among many of the large education clients including several folks who had either pulled out of the market or reduced it substantially, looking to reenter the channel, I said the market, I really meant the channel, our channel.

So, I would say that the change in tone you hear from us is consistent with the change in tone we're seeing from the clients and we're certainly hopeful that's going to translate into a better outlook and better results in that vertical for us because we certainly have -- still have a very strong position there and a good, in fact a better position because so much of the competitive, so many of the competitors have gotten out of that business.

In B2B, I think the reason we are -- and we are, as you pointed we are much more positive on B2B than we were in the last call because we're now through with the assessment of B2B and what we believe we need to get done as well as with some of the strategic review of B2B which has resulted in a couple new partnerships there.

The good news on the assessment is that it's the same play that we've had to run in insurance and in several other businesses where the clients are now ready for us to shift from a volume-oriented model to a segmented right price performance oriented model and again that's a play we know how to run that we've run in several verticals to turn them around is a play that draws more heavily on our strengths and competitive advantages than even the old model.

And we have an executive there that's been with us for 16 years running that play and she has done a phenomenal job of getting her arms around this situation assessing what needs to be done and in getting us running that play and we've had I think 10% sequential growth month-over-month for three straight months as she's begun to do that in that business.

And so, we feel like we see a very clear path to the turnaround of that business and to a revamp of that business on the model that again draws very nicely on what we know how to do it and what we're particularly good at. So, I would say in both cases, we're much more positive than we were and those are the reasons..

Okay. Thanks guys and then Greg sort of housekeeping question, you had a $2.4 million one-time restructuring charge in the quarter. I think I heard you mention that that will be the last one for the year or so.

Just wanted to clarify that there is nothing else that I should expect in the second half of the year?.

Substantial all of the cost associated with the structuring..

Correct..

Okay. Thanks guys..

Thank you, Chris..

[Operator instructions] That does conclude our question-and-answer session today and it also concludes our call for today. Thank you for joining us. You may now disconnect..