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

Jim Goss - Barrington Research John Campbell - Stephens Inc. Robert Breza - Northland Securities Jason Kreyer - Craig-Hallum.

Ladies and gentlemen, hello and welcome to QuinStreet Fourth Quarter and Fiscal Year 2018 Financial Results Conference Call. Today's conference is being recorded. After our prepared remarks, we’ll be opening the floor for your questions. [Operator Instructions]. It is now m y pleasure to introduce today’s first presenter Ms. Erica Abrams.

Please go ahead..

Thank you, David. Good morning, ladies and gentlemen. Thank you for joining us today to report QuinStreet's fourth quarter and 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-Q filings made earlier this morning. 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. With that I will turn the call over to Doug Valenti, CEO of QuinStreet. Please go ahead..

Thank you, Erica. And thank you all for joining us this morning. Our business fundamentals and momentum remained strong in the fiscal fourth quarter. QuinStreet strategies and products are meeting increasing demand for performance marketing, and taking share with clients and in media.

Q4 accounted to be a strong growth, record revenue and expanded margins and cash flow. In Q4 itself, we saw strength across the business. Greg will go over the impressive numbers in more detail in a moment.

As is always the case for QuinStreet, our success was driven by measurable results for our clients and media partners, and those results were enabled by our three key formidable competitive advantages.

One, large client and media networks with deep integrations; Two, industry-leading virtual market place products and technologies; and Three, an unparalleled, steep and expensive to build performance marketing experience curve. We see an enormous long term business opportunity as digital media and marketing continue to grow and scale on importance.

As truly measured performance marketing increases in share of digital and as our competitive advantages enable us to gain share in performance marketing. Net, we expect to be able to continue to increase our share of a large and growing long term market. We are still a small piece of a very big and growing market pie.

In the mean time, current business momentum remains strong. We expect revenue to be up double-digits again in the new fiscal year and that we will further expand EBITDA margins. Turning more specifically to our outlook, similar to last year we plan to provide our outlook for full fiscal year 2019, not for individual quarters.

Also similar to last year, we will set our initial outlook at a level that we believe to be fairly conservative. We then plan to refine or tighten expectations as the year progresses.

So, with that as context, we expect full fiscal year 2019 revenue to be up at least 10% year-over-year, and that full year adjusted EBITDA margin will expand to approximately 10%. With that I’ll turn the call over to Greg..

Thank you Doug. Hello and thanks to everyone for joining us today. As you know from our press release, we had a very strong fourth quarter, which wrapped up an outstanding 2018. Today, I’ll highlight our impressive accomplishments in the fiscal year and then get in to more detail of our fourth quarter results.

For fiscal 2018, we posted record full year revenue of $404.4 million, an increase of 35% year-over-year, our fastest growth rate since fiscal year 2009. We also delivered year-over-year revenue growth in all our reported client verticals.

Adjusted EBITDA for fiscal year 2018 was $34.7 million or 9% of revenue, representing an increase of 189% year-over-year. Adjusted net income was $22.3 million or $0.45 per share. For the fiscal year, we generated $30.5 million of normalized free cash flow or 8% of revenue and closed the year with $64.7 million in cash and equivalents and no debt.

Our financial services client vertical grew 53% year-over-year and represented 70% of total revenue. Our education client vertical grew 7% year-over-year and represented 19% of total revenue. And our other client vertical grew 3% year-over-year and represented the remaining 11% of total revenue in fiscal year 2018.

Turning in to more details on the fourth quarter, for the fourth quarter, total revenue was $111.5 million and grew 37% year-over-year. Adjusted EBITDA was $10.3 million or 9% margin. Adjusted net income was $6.9 million or $0.13 per share on a fully diluted basis.

For the quarter, we generated $8.9 million of normalized free cash flow or 8% of revenue. Looking at revenue by client vertical; our financial services client vertical represented 67% of Q4 revenue and grew 45% year-over-year to $75.1 million. All of our larger businesses and financial services delivered strong double-digit growth in the quarter.

Clients continue to shift marketing spend to online from offline media. As this shift is occurring, QuinStreet provides a measurable, sustainable and cost effective result for our clients at scale, which allows them to spend more aggressively and predictably in the world’s biggest shopping channel, the internet.

Our education client vertical represented 22% of Q4 revenue and grew 27% year-over-year to $24.1 million. Although the industry is still in transition, the trends in our education client vertical have improved generally over the last several quarters.

Approximately 60% of our educational revenue now comes from the not for profit or international clients. US for profit education was less than 9% of total company revenue in the fourth quarter. Our client vertical which includes home services and B2B technology represented the remaining 11% of Q4 revenue and grew 14% year-over-year to $12.3 million.

We delivered strong growth in our own services which was offset somewhat by B2B technology in the fourth quarter. That said, we are exiting the fiscal year on a much better trend line for that business overall. Moving on to adjusted EBITDA, we continue to be focused on expanding profitability.

For the fourth quarter, we reported $10.3 million in adjusted EBITDA or 9% of revenue, representing 70% growth year-over-year. Turning to the balance sheet, we grew our cash balance by $17.6 million in the quarter and closed the fourth quarter $64.7 million in cash and equivalents and no debt.

Normalized free cash flow for the quarter was $8.9 million or 8% of revenue. Most of our adjusted EBITDA dropped to normalized free cash flow due to the low capital requirements of our business model. In summary, fiscal 2018 was a very good year for QuinStreet. We delivered all-time record revenue and growth of 35% year-over-year.

We significantly expanded adjusted EBITDA, reporting growth of 189% year-over-year and we increased our cash balance to $65 million with no debt. With that I’ll turn the call over to the operator to open up the Q&A..

[Operator Instructions] our first question comes from Jim Goss with Barrington Research. .

I got a couple of related questions; you made a point that there remains room for a number of competitors to grow without really bumping in to one another at various places along the funnel. I was wondering how long do you think this rising tide lasts.

Is it vertical specific, and maybe specifically to QuinStreet, could you discuss the stage of evolution in your targeted verticals and sub-verticals and the cost involved in your efforts to transform your business?.

Sure Jim. It’s time to put a precise number on it, but I can tell you that as we look at the share wallet both for digital and within digital for QuinStreet with the vast majority of our clients, we are several multiples away from where we believe we can be and in fact where we think that clients should be on a rationally allocated basis.

We make that determination and by the way go through this with all of our verticals, and all of our large clients every year in the planning process.

And the best way for us to make that determination typically is to look at our most advanced clients who usually are the ones that are most sophisticated from an analytics standpoint and from a marketing standpoint. And we look at what their matured portfolio looks like and then we compare that to the other clients.

And today I would say well less than 5% of our clients are at an allocation that we believe is justified by traffic levels and channel performance for digital and specifically for performance marketing within digital.

So a long way of saying, we don’t see the horizon from here, we think that the ceiling is almost non-existent for the foreseeable future. We don’t see us being constrained by allocations to digital or within digital allocations to performance or with a performance by allocations to QuinStreet for a very, very long time.

I can also tell you that if you are own internal planning processes, the leadership teams for example, in just one of our financial verticals that leadership team thinks that they can get to $1 billion in revenue. So it gives you a data point that’s hopefully consistent with a more general comment. .

Do you think that the approach that you tend to take as sort of a partnership and revenue sharing approach helps also keep competitors at bay or do you think the attractiveness of what you’re doing is going to invite that many more participants to with whom you’d have to compete?.

I think there’s a lot of room for a lot of different models in this channel in ways that don’t really constrain us. You’ve heard me talk before about some of the other players who focus more on branded traffic which we don’t really do and that’s a highly complementary positioning relative to us.

You’ve heard us talk about companies that might focus on different forms and medium like advertorial which we don’t participate in, and has a very different profile. And in general most of us can get as much as we can deliver that performs to client metrics over any reasonable cycle time.

I think that said, clients are allowed to work with too many providers because the internet itself is so fragmented and so complicated and they really don’t want to have that many point of integration or interaction.

And so I think one of the advantages we will continue to have and I am not saying some other don’t have a similar advantage, I just think the number of folks is small is that we have big scale, we have existing relationships and integrations and the clients tend to want to work with a relatively small number of folks in that model.

The other thing and you’ve heard me talk about this and I’ve written about is, our business model and our vertical, our channel is a very difficult and expensive to scale.

You have to spend money to get the information or data you need to know what does and doesn’t work in performance marketing and there are literally millions of permutations of campaign types and variables within those campaign types that you have to sort through.

So it’s very difficult for someone to come behind a QuinStreet and to keep compete with us over any sustained period of time economically, given that we are so far ahead in terms of running up that learning curve and that learning curve is so extraordinarily expensive to build.

I do also thank to your point that the fact that we are willing to be pure performance marketing company, in other words that we right price our results for clients to what it’s worth to them and that we revenue share with our media partners makes it very difficult to compete with us as well.

And we’ve been around 19 years, we’ve gone through a lot of ways at that, and again and in some sort of summary I think our competitive positioning and our competitive advantages today are by far and away the strongest they’ve been in the history of the company.

I don’t think there’s even a close second era, even the glory days of the first decade where we grew 35% to 40% at a compound rate for a decade. We just had a head start then and that head start was formidable but not nearly as deep as steep or as competitive advantage enabled as we have today. .

Just one small nit and maybe for Greg, G&A I thought might pick up a little in the fourth quarter. It didn’t but stayed around low level than it did in the first three quarters.

Is that sort of a run rate we should expect going forward?.

Yes, I think that’s a fair assessment Jim. .

Our next question comes from John Campbell with Stephens Inc. \.

Congrats on a turn out in the year, the 35% growth, 460 bps of margin expansion really good result, and looks like FY’19 setting up pretty nicely, so nice work.

Can you guys talk a little about the progressive growth or just the contributions in the quarter and then how much did catch contribute?.

Progressive, I mean which is of course a great carrying client they grew a little bit slowly year-over-year than the rest of the financial services business. On average all the other financial services clients go to higher rates than they did, but of course they are at higher scale with us.

They still grew quite nicely; they remain obviously an incredibly important client to us and to the industry. But we did see broader strength and as I said on average the financial services clients in grew at a faster rate year-over-year in the quarter. We had great strength across the business last quarter as you heard from Greg’s numbers.

The catch contribution is very difficult for us to estimate at this point, remember that was an asset acquisition and those assets have been fully integrated now for a few quarters.

So I don’t think that we have a good number for you or a number that we would feel comfortable for you in terms of the contributions in the quarter, but let me say if Greg has a better answer. .

I think no, I think that a case if I were to estimate it I would say our organic growth rate, we grew 37% in the quarter, I think our organic growth would have been somewhere in the range of 32% to 34%. .

And then one of your competitors saw a pretty big lift out of personal loans, they had kind of some offsetting pressure in credit cards and mortgage. I believe you guys said you saw a growth across all of the financial services products.

So I guess the quarter is, are you guys seeing a similar kind of pressure in the channel and is some of the growth coming from typical share gains, any color there. .

We saw very strong growth in all of those verticals in the quarter year-over-year. In those two particular vertical cases, they grew faster than overall financial services. So I think it’s – we’re not seeing significant softening. We believe that we are continuing to gain share and pick up momentum and are part of the channel.

That said there are folks that are further long and they are part of the channel, and so we’re trailing a little bit and they’ve already got great scale there. So I’m not saying and I’m not making a direct competitor to competitor comparison saying we’re beating anybody.

I think in our part of the channel we still have a long way to go and we’re continuing to see very strong momentum. But I would recall in the case I think you’re talking about that they are further along in their part of their channel and at higher scale at this point than we are.

But we – to get a more specific answer to your question, no we did not see a slowing or challenges and the momentum in those businesses was quite strong and we grew faster there than we did in overall financial services. .

And then last one from me on the education business, you guys are exited FY’18 with positive growth, I think that’s the first time you guys have actually grown that business since FY’11 I believe. You guys have the US for profit side; I think you said that’s below 9% of revenue now so that’s probably helping.

But just curious about your thoughts on the growth trajectory for FY’19..

I think from an educational standpoint, we remain hopeful but cautious. It’s still a market that’s undergoing a lot of change.

We really like it in the long run and seeing enormous market and its well, well suited to digital marketing particularly given the folks have big target and given the very high degree of segmentation it requires to make the media economics work. And we really like our assets and capabilities there.

So, all that said, again I think it’s the best way to characterize it is hopeful but cautious.

I’m not ready to say this thing’s going to get itself back on a steep learning curve on a very predictable basis for a long time to come, but I am ready to say as I said last quarter I am now in a position of being – having a little bit more of a positive bias and negative bias and I think that trend line will continue for as far as the eye can see.

I think it will keep getting better from here, but I believe we’re still at risk of some volatility as we move along just because the industry itself is undergoing so much change and is coming out of such a difficult period that we’ve talked about over and over again.

So hopeful but cautious and slightly positive bias versus as of a couple of quarters gone, but still a slightly negative bias. .

Our next question comes from Robert Breza with Northland Securities. .

Congratulation on a strong quarter and a great year finish. Speak to the deal or guidance or I know you don’t officially guide. But as you think about the puts and takes, as you go through (inaudible) and I know you said in your prepared that you would update us through the year.

But where are those kind of key business levers that you’re looking at that you can kind of trade off with further investments maybe or how are you just thinking about those levers and the business going forward?.

I think that I would generally characterize the guidance as, its early in the year, we are being what we hope is cautious because its early and because there are still a lot of initiatives underway that we can’t yet predict the full outcome from, and because the comps will get tougher as we move along.

So those would be my general characterizations of the guidance.

In terms of levers, we have – the biggest lever that we see – the biggest two levers we always see are the pace of shift of client budgets to digital and within digital to us and those run, some of those we can drive with our own efforts and initiatives and some of those just run on a timing that is completely driven by client internal considerations that often times have nothing to do with us or the channel, but doesn’t make them irrational considerations either.

So there are things going on that – so a lever there is continue to focus where we can and make a difference and having a big portfolio of efforts both in terms of the products and the engagement with clients, so that we get that curve to be as steep as possible or as fast as possible depending on how you want to think about it.

The other major lever that we’re always working on is media and we grow – we have a lot of clients who will provide us, who will shift as much budget as we can meet.

We call them uncapped clients and a lot of our clients run uncapped because of course we’re performance marketers, so if we’re going to deliver the results, we deliver on a measurable basis. Why were they not capped or they not uncapped.

So a lot of our more advanced clients run uncap, so our job day-to-day is developing new media sources and we have lot of initiatives underway to do that, and to get more out of the media we currently have which is really segmentation and optimization exercise where we are constantly readvising reclining the algorithms and the approaches that we are taking with various media.

The good news about that latter one is, in one of our large verticals we recently determined from one client that we could grow or we could serve them almost immediately to the tune of many millions of dollars a month without adding any new media sources.

So that’s segmentation authorization exercise depending on the client, depending on the vertical is quite formidable way to grow our business. So those are the big levers, there are always the big levers. We have a lot of defined initiatives against each of those in every one of our verticals.

And I would say that we’re pulling this as hard as we can on the big ones as fast as we can. We’re not – I don’t believe that we are in any meaningful way investment or resource constrained in those efforts.

If something justifies on its own basis a return or performance improvement that provides a good return on any level of resource or investment they will do it. That’s kind of always been our approach and it continues to be our approach.

So I think as you’ve seen, we’ve got what we’ve been doing is been working pretty well for a number of years quite frankly because you could see the momentum in the financial services business long before you could see it for the company, because we are so masked by the extraordinary pressures on education.

But the specific levers are myriad and there are many of them and they go by vertical, but they are in those two general categories and I don’t think we’re constrained right now by resources or investment. We still by the way, evaluate add-on acquisitions constantly. We have a very high bar for return and for them to be accretive.

We’ll continue to do that and if we see another catch which has been a great opportunity and pickup for us, we’ll certainly do that. So I don’t think we’re constraining ourselves, we’re just working on everything we think we should work on. It clears the hurdle of investment or resources in terms of returns. .

[Operator Instructions] our next question comes from Jason Kreyer with Craig-Hallum. .

General question here on the acceleration that you’ve seen. So second half of 2017 was basically flat, second half of 2018 you’re up ballpark 40%.

Can you handicap where you see that coming from, is this specific customer adds, is this specific new media sources or anything you can give us on that acceleration?.

It’s really both Jason, and I wouldn’t say customer ads in terms of new customers.

It’s more allocations of more budget from existing customers, that’s the biggest driver of that side of the revenue equation, and we love driver because it’s kind of like recurring revenue that’s growing and growing because you are delivering better results for the clients and they are overtime adjusting their allocations on that basis.

So bigger allocations from existing clients in pretty much all the verticals and the only exception to that I would make is to say that we’ve obviously had dealt in relatively new business and personal loans, but even though with a period where we’ve been building that over the past couple of three years, most of the growth now and over the past couple of years which has been pretty fast growth has been coming from clients getting us more as we perform for them.

But again reallocations being the main driver and primarily driven by new allocations and more budget and financial services of course, so that’s our biggest business and it’s also our fastest growing business that we’re seeing very similar trends in the other businesses as we get further along with the new strategies there.

On the other side of the revenue occasion which is the media side, we have added and I’ve talked through the years about new media initiatives and strategies and we have developed pretty good scale in some new media channels to the tune of I think over the past couple of two to three years about $140 million of willing new media channels that we like a lot, and so those initiatives have borne a lot of fruit and are super important of course in our business model.

And they’ve helped us to diversify away from Google risk for example and away from any other risks that there might be within the other form of media, and really broaden our foot print. And so those media initiatives have contributed a lot, they are good quality channels for us; they are good margin channels for us.

I would argue they are all more defensible and sustainable channels for us than some of the historic channels that were affected by say again Google (inaudible) changes. And so we have to work both sides of the equation all the time and we do. That’s really how our market place model works. .

Sticking with media for a second, you’ve obviously seen an acceleration which is driving more growth and more traffic to your affiliate channels.

So, what is your thought process on going back to some of those people and trying to change the rev share, and it’s just something that slants a little bit more on your favor?.

We make these trade-offs continuously. Again it’s a market place model; we have to satisfy three different constituencies. We have to deliver the right economic results for our clients so that they will give us more budget.

We have to deliver adequate media economics to compete with their next best alternative, and we (inaudible) have to drive a good ROI for our capital and our investors. And so we are constantly working all three sides of that triangle and you can bet that we’re highly self-interested when we can be.

I would say that all of that said, we have to satisfy the other two legs of the triangle if we’re going to continue to grow when home position is sustained.

So I think that what we have seen as a generally improving trend particularly in our biggest vertical as we’ve continued to advance the ball on all our initiatives, I think that we will continue to be able to expand adjusted EBITDA margin and cash flow for quite some time, while continuing to satisfy the other folks.

So I think the general trends will be in the exact direction you’re describing whether or not that – the getting more from the publishers or from the partners is a big lever there or not. We’ll be where we need to be while still expanding our own margins and cash flows.

And I think I see that general trend looks like it’s something we can sustain for quite some time, even at current media margins, just through topline leverage effects.

But we do work trying to improve the media margins as well and again we’ve had big effects doing that in financial services over the past few years where we’ve driven those media margins up 2x to 3x where they were just a few years ago. .

Last one from me, just wondering if there is any change in focus on potentially building out products in the auto category focused on the agent size. .

We continue to work on projects there that we’re excited about. That’s pretty greenfield business for us and we’ll update you guys on some of those initiatives that financially come along in future quarters.

But we’re relatively early but we are excited about some of the opportunities and we’ve made very good progress on some of the initiatives we’re working on there that I think will again will add dimensionally to what’s already a pretty big and successful business for us. .

[Operator Instructions] At this time we have no further questions in the queue. Today’s call is being recorded and a replay will be available, you may access that replay by dialing 1-719-457-0820 and when prompted give the passcode 1533-184 followed by the “#” sign. Again that number is 1-719-457-0820 and when prompted access code 1533-184#.

Thank you for joining today, we’ll now conclude the conference..