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

John Campbell - Stephens Inc. Stephen Ju - Credit Suisse.

Good day ladies and gentlemen. Welcome to the QuinStreet First Quarter Fiscal 2018 Financial Results Conference Call. Today's conference is being recorded. I would now like to turn the conference over to Ms. Erica Abrams. Please go ahead ma’am..

Thank you, Catherine. Good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet’s first quarter fiscal year 2018 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 results to differ materially from those projected by such statements and are not guarantees of future performance.

Factors that may cause the results to differ from our forward-looking statements are discussed in our recent SEC filings, including our most recent 10-K filing made on September 8, 2017. Forward-looking statements are based on assumptions as of today and the company undertakes no obligation to update these statements.

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. Results were strong in the fiscal first quarter. Revenue was up 19% year-over-year, and adjusted EBITDA margin was about 8%.

Improved performance continues to be driven by our new product and media strategies and by the long-term trend of clients shifting more spending to digital media and to performance marketing.

Our marketplaces allow consumers that are in research and compare mode to quickly and effectively find solution providers and our model and technologies make digital performance media measurably more effective and affordable for clients in these high consideration market verticals.

We are still relatively early in the implementation of our new products and media strategies across the business. We are also still relatively early in the shifting of client budget to digital and in the digital channel to our model of best-in-class performance marketing.

In addition to the strong year-over-year growth, this will be highest revenue quarter since the March of 2012 and the highest EBITDA quarter since September of 2013.

Strong momentum in our financial services and home services businesses, which combined and that represent about 75% of company revenue continues to be the primary driver of improved performance. Those businesses grew 28% year-over-year in the quarter.

Trends in our education client vertical continue to improve and revenue there grew year-over-year for the first time in two years. A small decline in U.S. education revenue was offset by strong growth in our International business. About 30% of our education revenue is now either with not for profit or international clients.

Given our strong performance in the first quarter and the momentum we are carrying into Q2, we now expect full fiscal year revenue growth to be in the range of 10% to 15% and net adjusted EBITDA margin will be about 8%. We’ll look at our full year outlook again after reporting fiscal Q2 results. With that, I’ll turn the call over to Greg..

Thanks, Doug. Hello, thanks to everyone for joining us today. We had a strong first quarter overall and are pleased with the momentum and continued improvements and performance driven by our new product and media strategies.

We delivered our best revenue in 5.5 years, record revenues from our financial services client vertical and for the third straight quarter increased adjusted EBITDA and generated strong cash flow from the business. For the first quarter, total revenue grew 19% year-over-year to $87.4 million.

Adjusted net income was $3.5 million or $0.08 per share and adjusted EBITDA was $6.6 million or 8% of revenue. We generated $5.6 million of normalized free cash flow and closed the quarter with $50.4 million in cash equivalents.

Moving to revenue by client vertical, our financial services client vertical represented 67% of Q1 revenue and grew 31% year-over-year to $58.6 million. We had another strong quarter in insurance which grew 35% year-over-year and 15% sequentially.

Our other business in our financial services client vertical, which include mortgage, credit cards, deposits and personal loans grew a combined 24% year-over-year in the quarter further demonstrating the effectiveness of our new products and media strategies.

Our education client vertical represented 21% of Q1 revenue and grew 3% year-over-year to $18.1 million. The trends in education have continued to improve as evidenced by a return to modest year-over-year revenue growth in the quarter. Our U.S. education business was down slightly offset by strong growth in Brazil.

We now have about 30% of our education revenue with not-for-profit or international clients. Our other client verticals represented remaining 12% of Q1 revenue and declined 5% year-over-year to $7.7 million. Our home services business again delivered year-over-year revenue growth.

The growth was offset by headwinds in our B2B technology business as we work through our new product cycle. Moving on to adjusted EBITDA, we remain focused on profitability.

For the quarter, adjusted EBITDA increased to $6.6 million or 8% of revenue, up from $6.1 million in the prior quarter delivering our highest quarter of adjusted EBITDA in four years. Turning to the balance sheet, our balance sheet remains strong closing the quarter with $50.4 million in cash equivalents and no debt.

In the quarter, we generated $2.3 million in operating cash flow. Normalized for cash flow was $5.6 million or 6% of revenue. Most of our adjusted EBITDA drops to normalize free cash flow due to the low capital requirements of our business model.

In summary, we executed well against our priorities in the quarter returning the business to double-digit year-over-year revenue growth delivering a highest revenue quarter in over five years, growing adjusted EBITDA to the highest level in four years and maintaining a strong balance sheet. There is a lot of positive momentum in the business.

We look forward to reporting more progress to you over time. With that, I’ll turn the call over to the operator for Q&A..

[Operator Instructions] Our first question will come from John Campbell with Stephens Incorporated..

Hey guys, congrats on the quarter and the continuous progress, well done. .

Thank you, John..

Thank you, John..

Just want to dig on the expense base for a second.

So guess first, are you guys largely done with the cost base?.

We are – the cost saves are fully implemented, that said we are constantly looking always to improve that cost base..

Okay, that’s helpful and then, any kind of just broad sense for – variable versus fixed within, I guess, within COGS and then maybe within the other operating expense?.

The bulk of our operating expenses, John are, outside of our media cost and COGS are headcount. And so, I would say, I would think about this, the majority of COGS is really media cost, as you know, John, media margin is the first line we always manage in the income statement and in terms of the exact percentages.

We’d have to look at it, but notionally, call it, two-thirds media, one third, other operating expenses which is dominantly headcount but of course there is some other things in there like rent and facilities and those kinds of things.

So, but Greg can get you that when you guys have the after call in the morning, we can get you much more precision there..

Okay, that’s helpful and then, I mean, I guess, just directionally, it sounds like that lot of the expense base is largely fixed and so, you would expect pretty good margin expansion just as long as you get that revenue growth?.

Yes, we fully expect that top-line revenue is going to be a big part of the story to continue to expand EBITDA margin. Notionally, approximately 30% of $1 revenue ought to drop down pretty much to the EBITDA line. .

Okay, that’s what I was looking for. So, I mean, if I look at incremental margins from the past two quarters relative to the year ago past two quarters, I think it was like 100% incremental margins.

So everything was along through, but I guess, we are lapping those, those cost saves and then going forward, once we lap that you are thinking closer to 30% or so incremental?.

Yes, really it’s the incremental. It’s in the 30s, but probably the low 30s, but it’s really the media margin dollars dropping into pretty fixed cost base is kind of how we think about it and that would be the case now through the next at least $40 million to $50 million of revenue we think. .

Okay, that’s helpful. And then, last one from me, I mean, the education business, that was, I mean, fantastic results. I know you guys have been battling pretty hard over the years there.

I mean, for-profit is still 70% of that, I guess, of that vertical, but getting the modest growth, I mean, you are starting to see the for-profit kind of decline start to flatten out.

Is that fair to say or is it where we are jumping the gun on that?.

It certainly has been a lot more stable lately and that would be expecting a spin-off long time, this – the worst – the schools are in the worst shape. They’ve largely been shaken out.

Those that are left or locked further long in their evolution in their adaptation to the new environment, about, I think, between 80% and 90% of our revenue with the for-profits now is on the new product set and that product set was designed explicitly to work for them in the new environment and then you have of course what we talked about the blending in of the not-for-profits international which are not exposed to that.

So, there is just a lot of factors that are coming together to hopefully continue to make that a more stable place and we are seeing signs of better performance by the schools themselves including those that report publicly for the most part are doing better. So I think there is, there are lot good signs out there.

It’s still a place, so it’s little bit spooky for us because it’s been such a difficult environment.

But I think when you combine all of those factors, we certainly feel like it’s a place that is unlike to get – it’s going to be hard for to get as bad as it was and given the size of it relative to everything else, it’s going to be hard then for it to have a big impact on us..

Okay, that’s helpful. Good to know. I will jump back in the queue. Thanks guys..

Thank you, John..

[Operator Instructions] We’ll go to Stephen Ju with Credit Suisse. .

Hey, thanks guys and our congratulations on the results as well. So….

Thank you, Steve..

Yes, of course. Want to put you in the spot a little bit here, Greg. So you just reported a plus 19 on the revenue growth on this latest quarter that you just reported and you are guiding for a 10% to 15% growth in the balance of the year, with the comps that don’t get measurably all that much tougher for the balance of the year.

So I am just wondering if this is a bit of conservatism given that lot of things that you guys have been through the last couple of years. Thank you..

Yes, Stephen, as you move into the – just as a reminder, as the back half the year, the March and June quarters, we do deal with a lot of more difficult comps in those quarters.

But that said, we are carrying a lot of momentum right now into the second quarter and we expect again pretty good growth in the second quarter, but I would also caution that we are very early in the year, one quarter in right now. And so, we are trying not to get too far ahead of ourselves right now..

Understood. Thank you. .

Thank you. And at this time, ladies and gentlemen, that does conclude today’s conference. Thank you all again for your participation. You may - well [Operator Instructions] We have a follow-up from John Campbell. .

Hey guys, just another question on the comps in the back half of the year with the revenue growth rates, just curious about any kind of impacts from the hurricanes, I don’t know if that’s those enough to alter the marketing spend of carriers.

Anything you are hearing out there?.

Yes, good question, John. It looks like we lost somewhere between $2.5 million and $3 million last quarter due to hurricane-related issues, both in insurance, but also in some of our other verticals, we had – it affected our home services business and affected our education business.

We had a number of clients with – for example enrollment centers down in Florida that got shutdown. So there was an affect. It wasn't that large.

We would expect a similarly small affect as any - this quarter is a little residual, but it looks like a very little impact and so, at this point, based on what we are hearing from clients, based on what we are seeing, we don’t think it’s having a meaningful or material impact on our outlook. .

Okay, but it sounds like you’ve maybe left yourself little bit with a room in case it does?.

I think the – as to Greg said, the back half comps are lot – remember, last year, the first two quarters of fiscal year, we were facing the loss ratio issues in insurance. And that we popped up pretty big in the second half.

So I think if you assume we take, we carried pretty good momentum into Q2 and even grow in the teens, and then in the back half we still grow at about 10%, that’s well within about the middle of the range, we’ve given you a 10% to 15%. So, we are trying to be realistic.

We are certainly not trying to get way over our skis are, but I wouldn't accuse of us sandbagging either. .

Okay, that’s helpful.

And then, the last one from me, on the balance sheet, I mean, obviously, cash balance is growing, not carrying any debt, just, maybe you can just provide us an update with kind of where you are heads are at as far as capital allocation?.

We are – our first priority would be to use it to invest in anything that’s going to help us to continue the momentum and grow the footprint for the future and strengthen our competitive advantages. We are opportunistic about that. We are always looking at either partnership opportunities or acquisition opportunities.

We have a number of big partnership opportunities in play right now at and it number which, if and when they close could be super helpful and meaningful. So that’s always the first priority. We do as you know, we did approve a buyback depending on where the stock is under the 10b5-1plan stock and timing and volumes. There will be some use of that.

It won’t be a huge use, but it will be enough of a use to have a little bit of an impact. But I’d say, those are the only two things right now we are looking at..

Okay, great. Thanks guys. .

Thank you..

Thank you. And then, again with no additional questions in the queue, that will wrap up today's conference. Once again, thank you for your participation. You may now disconnect..