QuinStreet Q3 2024 Earnings Call Transcript

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May 8, 2024

There are 9 speakers on the call.

Operator

Good day, and welcome to QuinStreet's Fiscal Third Quarter 2024 Financial Results Conference Call. Today's conference is being recorded. Following the prepared remarks, there will be a question and answer session. At this time, I would like to turn the conference over to Senior Director of Investor Relations and Finance, Robert Amparo. Mr.

Operator

Amparo, you may now begin.

Speaker 1

Thank you, operator, and thank you, everyone, for joining us as we report QuinStreet's fiscal Q3 2024 financial results. Joining me on the call today are Chief Executive Officer, Doug Valente and Chief Financial Officer, Greg Wong. Before we begin, I would like to remind you that the following discussion will contain forward looking statements. Forward looking statements involve a number of risks and uncertainties that may cause actual results to differ materially from those projected by such statements and are not guarantees of future performance. Factors that could cause results to differ from our forward looking statements are discussed in our recent SEC filings, including our most recent 8 ks filing made today and our most recent 10 Q filing.

Speaker 1

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 is included in today's earnings press release, which is available on our Investor Relations website at investor. Quinstreet.com. With that, I will turn the call over to Doug Filenti.

Speaker 1

Please go ahead, sir.

Speaker 2

Thank you, Rob. Welcome, everyone. Company revenue grew about 40% sequentially in fiscal Q3, fueled by a significant positive inflection in auto insurance carrier spending as we had forecast. The ramp of auto insurance carrier spending continued through Q3 and has extended into the current quarter, fiscal Q4. Auto insurance carrier activity and spending are broad based and continue to be supported by reports of good carrier results.

Speaker 2

We expect the ramp of auto insurance spending to continue in coming quarters as carriers expand their product and market footprints and are enabled by increased rates and improved profitability. Overall, we expect auto insurance revenue to grow for the foreseeable future as the fundamental shift of budgets to digital and performance marketing reasserts itself as the dominant long term trend. Adjusted EBITDA jumped to almost $8,000,000 in FY Q3 due to the leverage from the higher revenue. We expect adjusted EBITDA margin and dollars to continue to grow as revenue continues to ramp. Turning to our outlook for the current quarter or fiscal Q4.

Speaker 2

We expect revenue to be between $180,000,000 $190,000,000 a quarterly record revenue for QuinStreet and implying year over year growth of over 40% at the midpoint of the range. We expect adjusted EBITDA to be between 10 $1,000,000 $11,000,000 implying year over year growth of over 400%. Our fiscal year 2025 begins this July 1. I would point out that the annual run rate of our fiscal Q4 revenue outlook already implies growth of 20% or more over full fiscal year 2024. We are excited about the size of our market opportunities, about the resilience we have demonstrated in our business, about our plans and initiatives to keep growing revenue and profits into the future, and of course, about our continued strong financial position.

Speaker 2

With that, I will turn the call over to Greg.

Speaker 3

Thank you, Doug. Hello and thanks to everyone for joining us today. Fiscal Q3 was another solid quarter for QuintStreet. Total revenue was $168,600,000 Adjusted net income was $3,400,000 or $0.06 per share and adjusted EBITDA was $7,900,000 The significant positive inflection in auto insurance client spending has indeed begun. In fiscal Q3, we saw auto insurance revenue continue to ramp throughout the quarter.

Speaker 3

That said, we are still in the early innings of the re ramp of auto insurance and continue to expect growth for many quarters ahead. Looking at revenue by client vertical, our Financial Services client vertical represented 67% of Q3 revenue and was $112,000,000 Our home services client vertical represented 32% of Q3 revenue and was $54,000,000 a record quarter for that business. Other revenue was the remaining $2,400,000 of Q3 revenue. Turning to the balance sheet. We closed the quarter with $40,000,000 of cash and equivalents and no bank debt.

Speaker 3

A more normal SVO branding cash balance would be approximately $48,000,000 We received a payment of approximately $8,500,000 2 days after quarterend. Moving to our outlook for fiscal Q4, our June quarter, we expect revenue to be between $180,000,000 $190,000,000 and adjusted EBITDA to be between $10,000,000 $11,000,000 As Doug pointed out, the annual run rate of our fiscal Q4 revenue outlook already implies revenue growth of 20% or more over full fiscal year 2024. We also expect adjusted EBITDA to continue to expand faster than revenue. In closing, our outlook on the business has never been brighter. We expect a record revenue quarter in fiscal Q4 and further margin expansion.

Speaker 3

We remain well positioned to benefit from the re ramp of auto insurance client spending and are seeing continued momentum in our non insurance client verticals. We expect strong total company revenue growth and adjusted EBITDA expansion driven by our diversified portfolio of client verticals. With that, I'll turn it over to the operator for Q and A.

Operator

Thank you. Your first question is from the line of John Campbell from Stephens. Please go ahead.

Speaker 4

Hey guys, good afternoon.

Speaker 2

Hey John.

Speaker 4

Hey. So over the last year, you guys have talked to getting back eventually the 10% EBITDA margins. I guess as the insurance channel just normalizes and you kind of rebuild the top line scale. I'm not asking you to really pinpoint exactly when all that comes together, but just based on the fixed cost base you guys have now and what you're the plans you have to grow it from here, I'm hoping you guys can maybe outline the level of it or the degree of revenue you need to get back to those kind of low double digit EBITDA margins?

Speaker 2

Got you. I'd say hard to pinpoint the exact level of revenue, John, because it depends so much on the mix. As you can see, we'll get up into the mid to high single digits in terms of percentage next quarter. And we have a lot of growth beyond that, that we can see coming given the demand that we're seeing and the initiatives that we have. So again, I have a hard time giving you the exact number because in terms of revenue, but it's not too far off, if that's helpful.

Speaker 2

I would say it's likely to be very likely to hit next year, next fiscal year is my opinion, but we'll have to wait and see what the mix looks like in the planning and the forecast. And of course, we'll give you a more precise view of that in our next call as we look out to fiscal 2020 5.

Speaker 4

Okay. That's totally fair. And then, Doug, if you take your guidance, the high end, which you guys have pretty consistently outpaced your high end of your guidance, I mean that puts you well above consensus for next year. Obviously, that's annualizing that on a kind of an early cycle or early stage of the cycle recovery for insurance. And I think it's helpful for investors to maybe kind of size up where we're at as far as that recovery cycle.

Speaker 4

You guys mentioned early that can be defined in a couple of different ways. But maybe if you can start off with like the progression like month to month increases. I don't know if you want to get granular to the percent increase, but just maybe broadly the acceleration throughout the month, whether that's continued in April. And then as you look out past couple of years, where we are coming today versus past prior

Speaker 1

peaks? No,

Speaker 2

it's a great question. We did see growth throughout the quarter. February was bigger than January. March was bigger than February. April was bigger than March.

Speaker 2

We expect May to be bigger than April and June to be only because it has fewer days in it, pretty consistent with May maybe a little bit higher. And then we as we look out, we've done the early looks at our forecasting for next year. Despite historic seasonality, we expect next fiscal year that we will have sequential growth every quarter. So every quarter will be higher than the quarter before, despite the fact that as you know, we often have seasonality in both the December June quarters. So we will overcome we will be a lot better than seasonality this quarter over last quarter and then we expect that to continue throughout next year.

Speaker 2

So it's a pretty relentless ramp. We have extraordinary activity and demand from the clients. And we are all ramping our media into recover and you regrow it out of the more dormant period we've been through as fast as we can. So just a lot of vectors going up into the right. And so, yes, the notion of annualizing the 4th quarter is just to kind of give you what we were perceived to be a floor.

Speaker 2

We have a lot more coming, not just in auto insurance, certainly in auto insurance, which I know is what you're asking about, but a lot more coming from the other businesses as well next fiscal year. I think there was another part of the question though in terms of where we are that the in terms of the re ramp to the previous peaks maybe, as part of I think part of your question. We're about 60% back, from where we bottomed to the previous peak. So that also gives you a sense for why we are so bullish about what's coming in the future. And by the way, despite that, we grew we've now listened to the calls from the folks in our space, of course, and we grew much faster in auto insurance sequentially than anybody else.

Speaker 2

We were well over 100%. And we in our forecast is embedded the assumption. And again, we've listened to the others and looked at their numbers. We will once again grow much faster in auto insurance than they will in the current our fiscal Q4 or calendar Q2. So we're doing very well with the ramp and there's a lot more to come.

Speaker 4

Great to hear. Thanks for all the color, Doug. Really appreciate it.

Speaker 2

You bet.

Operator

Your next question is from the line of Jim Goss from Barrington. Please go ahead.

Speaker 5

Thank you. This is Pat on for Jim. I was just wondering with the improved trajectory in insurance spending, I'm just wondering if you could provide an update on the development of additional efforts within insurance such as QRP and getting that back into a growth stage?

Speaker 2

Yes. Good question, Pat. QRP was obviously went kind of dormant during the insurance downturn. We talked about that. There just wasn't any product to the agencies.

Speaker 2

The agencies were cut had to cut way back because they didn't have products. So the re ramp and rescaling or getting back on track to scale QRP is going to lag the overall market coming back for those reasons because the agencies now have to get product and they still don't have a full footprint product and they have to restaff and retool and get geared back up. So just a natural lag to it before I think we'll start seeing a return to strong ramp there. That said, we have 2 big clients of QRP, going live. One is already live with a pilot that will be ramping over coming months and another will be going getting live with their pilot and re ramp starting in June.

Speaker 2

And they are 2 of the biggest players in the industry and certainly are 2 biggest clients in terms of their scale in the channel or in the industry. So we expect that we will return. We'll get back on track. We'll get back on the ramp. Been delayed obviously and it's going to lag a little bit, but we're excited.

Speaker 2

We're as excited as we've ever been about that product and what it represents the future for the future of the channel. And we're super excited to have 2 big clients beginning their activities again in a pretty earnest way beginning in June.

Speaker 4

Okay.

Speaker 5

And sort of building off of the prior question on EBITDA and margins, I was wondering if you are seeing anything in terms of media costs or talent retention that kind of limit some of the flow through versus historical trends?

Speaker 2

No, not really. Again, as I told John, it's really going to depend on the mix that we're still fully staffed in auto insurance because we want to take full advantage of that industry coming back, which I indicated when I gave you the numbers on how we're doing versus others, we are taking full advantage, but we're only 60% back. And then you've got a different mix of different in the other businesses. So but there's nothing structural or fundamental that would indicate that we're not going to have all the top line leverage that we would have had historically and that you would expect from us.

Speaker 5

Okay. And just last one for me. Within home services, when you launch new service availability, I guess, is there any sort of like ramp up like startup cost to that for reaching sort of like an initial level of profitability? And how some of those services may differ in consumer and customer profile?

Speaker 2

Yes. It's a great observationquestion. Yes, is the answer. And so we manage that mix pretty carefully. But when you begin to build out a new trade, you're initially quite inefficient from a media standpoint because you just don't have coverage.

Speaker 2

And that's more the case in home services and is in other our other client verticals because home services is such a fragmented industry. And so we have to be kind of step by step build up the client coverage, get more media, then get more client coverage and get more media. But it does create some inefficiencies for the period of time where we're in the ramp because we don't have full coverage yet. So that is that's part of the formula. We still do quite well in terms of our media margin in home services, but it absolutely is the case that when we're in new trades, it they have less media efficiency and then the more mature trades.

Speaker 2

But we manage that and balance that and still maintain very good strong medium margins in Home Services.

Speaker 4

Okay. Thank you.

Speaker 2

Thank you.

Operator

Your next question is from the line of Zach Cummins from B. Riley Securities. Please go ahead.

Speaker 6

Hi, good afternoon. I apologize. I was late joining the call, hopping on from another one. But Doug, could you go into kind of any sort of impact that you saw in the home services vertical in the current quarter? And kind of what are your expectations for what we should be assuming for a sustainable growth rate on that side of the business moving forward?

Speaker 2

Sure. First of all, last quarter was a record revenue quarter in Home Services. And we expect another record revenue quarter in Home Services this quarter. We will return once again to double digit year over year growth again this quarter, fiscal Q4. And we will grow home services in the fiscal year double digits over last year.

Speaker 2

So long way of saying, we still have the same outlook we've always had, which is we think home services gives us a scale and we have the opportunities and the initiatives to grow in double digits on average, because of course last quarter grew 7% year over year in the quarter. For as far as we can see into the future, it is a massive, massive business opportunity. I think we just sized it again at $69,000,000,000 of addressable market. And we are what running now 200 and something million and have a lot of wind at our backs and a lot of demand and a lot of opportunities really more of a making sure we're focusing on the right things in the right ways at the right time than it is any lack of opportunity or capabilities to deliver against that opportunity. So we love that opportunity.

Speaker 2

We love that business. We love where what we have in terms of product footprint and where we're going with it. And we think double digits is the right expectation for many, many years to come.

Speaker 6

Understood. And just one question for Greg. In terms of free cash flow generation, how should we be thinking about that as you start to hit the up cycle in auto insurance? What's your typical conversion from adjusted EBITDA to free cash flow? And how are you thinking about putting excess cash to use since your balance sheet is already pretty strong?

Speaker 3

Yes, it's a great question. If you look at it, the general model is the bulk of our adjusted EBITDA less CapEx drops to free cash flow or normalized free cash flow. As you can see, depending on your working capital and your receivables, we could be like this quarter, we collected $8,500,000 2 days after the quarter end, which we typically would have gotten before the quarter. But typically, if you look at our adjusted EBITDA, less CapEx is what drops to free cash flow. So if you look at our CapEx right now, it's going to run anywhere.

Speaker 3

I would say a good model to look at is $11,000,000 to $15,000,000 a year. So that's kind of how I think about the conversion of EBITDA to cash flow.

Speaker 6

Understood. Well, thanks for taking my questions and best of luck with the rest of the quarter.

Speaker 2

Thank you, Zach.

Operator

Your next question is from the line of Mark Hagen from Lake Street Capital Markets. Please go ahead.

Speaker 2

Hi. Thank you for taking my questions. Just kind of curious if you're seeing any impact on the, let's call it, higher for longer rate environment on some of the other financial services business, call it, maybe ex auto insurance and maybe even home services as well? I think it's a mixed bag really, Mark. Higher for longer is not a bad thing for home services because we believe and industry reports suggest that consumers are spending more on their existing home.

Speaker 2

And so I'd tell you sort of vertical by vertical. On credit cards, higher for longer is not a bad thing. Our core credit cards consumer is a prime consumer in our mix. And so those consumers are in very good shape and the higher interest rates for longer actually the banks are making a lot of money on the outstanding balances. They have a lot of money to continue marketing.

Speaker 2

In personal loans, we have seen that the hire for longer is having an effect on the demand for and the underwriting models of the lenders. So I think we've talked about this in past quarters, but we've seen less demand for lending, but more demand for other credit solutions and we are the strongest in the industry at other credit solutions. And we once again this past quarter way outperformed the results reported by everybody else that we know in our industry in that business. And then it doesn't really affect much in auto insurance except that to the extent it puts pressure on consumers at the low end, which it does, we see increased shopping for auto insurance and that continues to be a dynamic we are seeing. There's a J.

Speaker 2

D. Powers puts out a report. They just put out their most recent report on insurance shopping habits a couple of weeks ago and it was the highest level of shopping behavior by consumers for auto insurance they'd ever seen in their history of the report. Not surprising given how far and fast the rates have come up on insurance. And so I guess net net overall pretty good for QuinStreet's profile.

Speaker 2

Fair enough. Thank you, guys. Thank you.

Operator

Your next question is from the line of Jason Kreyer from Craig Hallum. Please go ahead.

Speaker 7

Great. Thank you. This is Cal Bardizal on for Jason. Just to start kind of as this as autos kind of picked up, can you just kind of speak to any pockets where spend is yet to return and how these eventually coming back that expectation contributes to confidence and this being a long duration tailwind of auto resurgence?

Speaker 2

We've got a lot of data points. First of all, we now have more last year, it was pretty concentrated ramp from mainly the biggest player in the channel. And they were, I don't know, 60 something percent, I think, of auto insurance revenue in the 3rd quarter. And we're reporting mid- to high-90s combined ratios. This year, that same client is well under 50% of revenue, although still very strong and it's really because we have more other clients, other carriers now spending over $1,000,000 a month with us than we've had in the history of the company, period.

Speaker 2

I mean, we've got much broader footprint with much bigger spin from a lot more carriers. And so I mean that and then we have activity wise, every one of those carriers is asking for a lot more than we can actually deliver right now. So we're really more working on the other side of the market ramp, the media ramp than we are the client demand ramp at this point, because our the breadth of our relationships, the breadth of the demand for breadth of our products, and again, as I said, the demand for those clients. So And then you have the combined ratio reporting. Combined ratios being reported this year are in the mid-80s to low-90s, which again, that's lower is better than when you talk combined ratios and insurance.

Speaker 2

And that's from all the significant players who make who report their combined ratio results publicly. So you've got better fundamental underlying economics, a broader footprint with more clients, with more demand from all those clients and higher spending from all those clients and big indications from all those clients for coming quarters years. So we really don't have any indications of anything, but not just sustainability, but acceleration of the ramp going forward.

Speaker 7

Perfect. Thank you. And then it just looked like you guys have been broadening out the home services offering recently with some new verticals. Can you just kind of talk to the ambition for vertical expansion there in home services and what opportunities you're seeing in broadening out this offering?

Speaker 2

Yes. We're in maybe 14 or 15 verticals with some level of presence. We think we can be in dozens. I can't really be more precise than that because we don't it's we have hypotheses about which we can be and we don't really know until we start doing more work and analysis and actually start doing some testing. But of the 14 or so, and I think it's a little bit more than that actually if you count everything that we're in now, Only 2 are at any reasonable scale.

Speaker 2

I wouldn't call either of those even mature. One of them I think represents 40 percent of home services revenue or something in that vicinity. So we're actually relatively concentrated. It happens to be the one we've been in the longest, really, in a meaningful way. And so, the 2 vectors are going to continue to be getting into more trades.

Speaker 2

But right now, we're more focused on scaling the trades we're already in and that scaling is a matter of focusing our efforts and initiatives and teams as well as getting signing more clients, getting more media that can be efficient with that client and then that client base on going and signing more still more clients and getting more media and kind of working our way up that whip. We've got to work both sides of the market. As we talked about earlier, it's and I think it was Pat that asked the question, that there is a sequencing and an iterating aspect to that as you try to work your way up to media efficiency. We don't have any concerns about being able to do that. It just is something that does take some time.

Speaker 2

So one of the reasons you want to have as many a lot of trades going on at once. So you can have different ones at different stages delivering different growth rates and profitability. And we think we're pretty good at that. All right. Very helpful.

Speaker 2

Thank you. You bet.

Operator

Your next question is from the line of Chris Sakai from Singular Research. Please go ahead.

Speaker 8

Hi, Doug and Greg. I just I've got one question. It looks like back in last quarter, you had 2020 4 revenue growth of about 5% to 15%, but now you're guiding for Q4 revenue of $180,000,000 to $190,000,000 which puts the year revenue growth at about 2.5% to 4.5%. So I want to know, I mean, what's going on? Why is there somewhat of a guide lower now for the year revenue growth?

Speaker 8

Please help me understand. Thanks.

Speaker 2

Yes. Hey, Chris. I think, a couple of things. We're pretty pleased with the ramp. First of all, we just grew as fast as we did, sequentially 40% and over 100 percent in auto insurance.

Speaker 2

And we had a record quarter in home service. We had a record quarter in non insurance and we had a rec and we're going to have a record total company revenue quarter this quarter, Q4. We're going to by that way have another record quarter in home services in Q4 as well and another record quarter non insurance in Q4. So we're firing on all cylinders. That said, as we have indicated last couple of quarters, the exact pace of the ramp in auto insurance is really hard to predict because the demand and activity there is just extraordinary.

Speaker 2

But the ability to convert that demand in a very complicated dynamic system and channel is less predictable. So we try to continue to give you guys the full range. And I would say that and we also don't feel the need given how well we're performing to get way out of our skis. So, I'd say that the upper end of the current range gets you to the bottom end of the annual. And maybe we'll see if the slope what the slope actually looks like and if we how we do from there.

Speaker 2

But I wouldn't read anything into that at all. I think what I would remember is we're already pacing at 20% plus faster growth for next year than we are this year and we've got a lot to build on that. So we'll probably do much better than that. And all the record quarter in numbers that I just gave you and all the different businesses, which gives you a full indication of just how well everything's going. But I wouldn't I would not read anything more than that into that number.

Operator

Ladies and gentlemen, there are no further questions At this time, thank you everyone for taking the time to join Queen Street's earnings call.

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