QuinStreet, Inc. (NASDAQ:QNST) Q2 2023 Earnings Call Transcript

QuinStreet, Inc. (NASDAQ:QNST) Q2 2023 Earnings Call Transcript February 8, 2023

Operator: Thank you for joining QuinStreet’s Second Quarter Fiscal 2023 Earnings Call. Today’s call will be recorded. Today we’re joined by QuinStreet CEO, Doug Valenti; and QuinStreet CFO, Greg Wong. Following the prepared remarks there will be a Q&A session. And with that, I’ll pass it over to Laine Yonker .

Unidentified Company Representative: Thank you, everyone, for joining us as we report QuinStreet’s second quarter fiscal 2023 financial results. Joining me on the call today are CEO, Doug Valenti; and CFO, Greg Wong. Before I 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 may cause results to differ from forward-looking statements are discussed in our recent SEC filings, including our most recent 8-K filing made today and our upcoming 10-Q. 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 Valenti. Please, go ahead, sir.

Doug Valenti: Thank you, Laine. Welcome, everyone. Well, first the headline. The anticipated sharp reramp of Auto Insurance client marketing spending has begun. And it looks like it’s up into the right from here. Our Auto Insurance revenue is expected to jump by over 60% this quarter, the March quarter, versus the December quarter. So we are seeing the significant positive inflection we anticipated. Excitingly though, even with the January search and its immediate positive impact on our results, we are so early in the full recovery and reramp of Auto Insurance. We expect much more to come. We’ve been predicting this significant positive inflection in Auto Insurance, our biggest client vertical, for some time and we have been preparing for it.

We believe that we are at the beginning of a ramp that over coming quarters will lead back to Auto Insurance client spending levels seen prior to the inflation challenges of the past couple of years and then, to further strong growth from there, as the share of marketing budgets and consumer shopping, represented by digital media, continues its relentless march up into the right. The return of Auto Insurance marketing spending is due mainly to carrier progress adjusting their products and increasing their rates to offset higher costs and to the resetting of carrier combined ratio targets as of January 1. Consumer shopping, traffic, online fraud insurance is also up as expected, spurred largely by the rate increases. QuinStreet revenue and margins are increasing rapidly, as growth in insurance, combined with already strong momentum and our other two nine-figure annual revenue client verticals, those of course being Home Services and credit-driven Financial Services.

As a result, we expect record total company revenue in the current March quarter and a significant jump in adjusted EBITDA. We expect record revenue again and a further jump in adjusted EBITDA in the June quarter. Looking back at the December quarter, which was our fiscal Q2, results were good, especially given conditions in Auto Insurance and the shifting macroeconomic environment in the quarter. Our business model, once again, demonstrated its resilience. And we, once again, demonstrated our ability to successfully and profitably navigate even the most complicated environment. We grew revenue year-over-year in Q2 and generated positive EBITDA in what is our softest seasonal quarter and despite facing both the bottom of the Auto Insurance market and the shifting macroeconomic environment.

December quarter results also included continued investment spending on exciting long-term growth initiatives and capabilities as promised. And as our positive results demonstrate, we are making those investments with the efficiency and margin and cost discipline you have come to expect from QuinStreet. Our commitment to continue our disciplined investment and long-term initiatives through the transitory challenges in the insurance market is paying off. Revenue and margins are rebounding quickly. We expect them to continue to ramp in coming quarters and that our long-term prospects have never been better. I want to make some brief comments about the macroeconomic environment, which we continue to assess and that we believe is reflected in our outlook.

Most importantly, we expect the reramp of Auto Insurance client spending to be the dominant driver of our performance trends in FY Q3 or the March quarter and likely in quarters to come as carrier spending continues to reramp. Related and in addition, consumer shopping for auto insurance typically increases during periods of economic uncertainty. We would expect that to be another net positive for our insurance results, especially given rate increases. As for our non-insurance client verticals, the majority of our business there is leveraged to homeowners and to prime and near-prime consumers. As you have heard from the banks and credit card companies, the balance sheets, credit and spending levels of those consumers continue to be in good shape.

Turning to our outlook. We expect total revenue in fiscal Q3 to be between $160 million and $170 million, a company record. We expect adjusted EBITDA in fiscal Q3 to be between $7 million and $8 million, reflecting the immediate, significant, but still early impact of top line leverage on reramping insurance revenue. For full fiscal year 2023 ending in June, we expect revenue to be between $610 million and $630 million. And we expect full fiscal year adjusted EBITDA to be between $25 million and $30 million. Our financial position remains excellent with a strong balance sheet with almost $80 million of cash and no bank debt. And we are entering a period that we believe will be represented by ramping revenues expanding margins and strong cash flows.

With that, I’ll turn the call over to Greg.

Greg Wong: Thank you, Doug. Hello, and thanks to everyone for joining us today. The December quarter demonstrated the strength and resilience of our business model and client vertical footprint. We delivered solid year-over-year revenue growth of 7% to $134 million despite challenges in Auto Insurance as well as a shifting macroeconomic environment. Our non-insurance client verticals represented 64% of total Q2 revenue and grew 31% year-over-year. Looking at revenue by client vertical. Our Financial Services client vertical represented 67% of Q2 revenue and was $89.3 million approximately flat year-over-year. This was a result of the continued strength in our credit-driven and banking client verticals, which largely offset expected challenges in the insurance — in insurance for the quarter.

Within insurance, carriers continued to limit their marketing spend in the December quarter to manage calendar year 2022 combined ratio targets. That said, as anticipated, we have now seen the significant positive inflection in revenue beginning in January. This carrier combined ratios reset, carriers begin to benefit from rate increases and consumer shopping intensifies in response to higher rates. Most importantly, we expect insurance revenue to continue the ramp up into the right over the coming quarters, as we believe we’re in the early stages of the full recovery of that market. Our credit client verticals of personal loans and credit cards as well as our banking business delivered excellent results in Q2 growing a combined 35% year-over-year.

Revenue in our Home Services client vertical grew 27% year-over-year to $43 million or 32% of total revenue. As we’ve discussed in the past, Home Services may be our largest addressable market and our strategy to drive long-term growth here is simple. One, grow from existing service offerings, like window replacements, solar system sales and installation and bathroom remodeling none of which we believe are anywhere close to their full potential. And two, expand into new service offerings, where we see the opportunity to at least triple the number of these sub-verticals we currently serve. This multi-pronged growth strategy is expected to drive double-digit organic growth for the foreseeable future. Other revenue was the remaining $1.8 million of Q2 revenue.

Adjusted EBITDA for fiscal Q2 was $1 million. Turning to the balance sheet, we closed the quarter with $79.1 million of cash and equivalents and no bank debt. In closing, we are excited about our business and financial model as we head into the back half of our fiscal year. The significant positive inflection we are seeing in insurance combined with the continued strength of non-insurance client verticals is expected, to drive strong total company revenue growth and rapid expansion of both adjusted EBITDA and cash flow in the March quarter. We also expect revenue growth, adjusted EBITDA and cash flow to strengthen again, in the June quarter. With that, I’ll turn the call over to the operator for Q&A.

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Q&A Session

Operator: Thank you. And at this time, we’ll be conducting our question-and-answer session. Our first question comes from Jason Kreyer with Craig-Hallum. Please state your question.

Jason Kreyer: Thank you, gentlemen, just wondering, if you can help us bridge the profitability gap because I certainly appreciate the record revenue that you’re forecasting over the next couple of quarters. But if we go back a couple of years like the back half of 2021 the last time you were kind of at revenues at these levels we were seeing EBITDA margins in kind of the double-digit range. So I’m just wondering, what’s different about it this time. Or do you expect that to maybe, occur a couple of quarters out from now?

Doug Valenti: Yeah it’s a great question Jason. And thank you for it. I’d say and a short answer would be we expect it to come pretty soon. The longer answer is, we are spending on growth initiatives across the company and — including insurance. And we’re doing that because we see big attractive growth opportunities with great incremental variable margins, and because we have the capacity and a surplus to do it. And we are getting great results from it. But we are nowhere near that, to where we expect to get with insurance over the next few quarters. It is still very early in the revamp there. So we’re not getting the kind of top line leverage from insurance or the full top line leverage you would expect because we’re about $20 million a quarter.

Even in the March quarter it will still be about $20 million a quarter short of the pre-downturn peak in insurance. And we’re also not getting the full media margin or variable margin leverage we would be getting, because all the carriers aren’t back which means we have fewer matches for consumers which means our media efficiency and yield are down which means we don’t have that first level margin. So, now all that being said, we’re going to go from about breakeven in the December quarter to about a 5% adjusted EBITDA margin in the March quarter. So you can see that, it’s coming back very rapidly. And all indications are we’re going to keep gaining the top line leverage and that media efficiency. And therefore, you should just continue to see — I know we’ve already told you, we expect to see continued expansion of adjusted EBITDA margin in the June quarter and certainly beyond.

So that’s the — that’s what’s going on. The — but I think we’re spending that money — spending on growth. I think is being done very effectively and obviously disciplined way. Effectively, hey we grew noninsurance work was 31% at great scale in the December quarter year-over-year. And we are seeing a big fast reramp and bounce back as the insurers come back, both in our top line to record levels and adjusted EBITDA as I said from kind of breakeven to 5%. So I think we’re really well positioned for the next cycle and position to take advantage of continuing to scale all of our businesses including insurance as it comes back. And you’ll see — you won’t see any degradation of variable margin. The variable margins we’re driving in noninsurance are very attractive, certainly consistent with it in many cases above our historic levels.