Q3 2024 Quinstreet Inc Earnings Call

Participants

Robert Amparo; Investor Relations; Quinstreet Inc

Douglas Valenti; Chairman of the Board, Chief Executive Officer; Quinstreet Inc

Gregory Wong; Chief Financial Officer; Quinstreet Inc

John Campbell; Analyst; Stephens Inc.

Zach Cummins; Analyst; B. Riley Securities

Mark Hagen; Analyst; Lake Street Capital Markets

Cal Bartyzal; Analyst; Craig-Hallum Capital Group

Chris Sakai; Analyst; Singular Research

Presentation

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. If at any time during the call you require operator assistance, please press star zero. At this time, I would like to turn the conference over to Senior Director of Investor Relations and Finance, Robert Amparo. Mr. Powell, you may now begin.

Robert Amparo

Thank you, operator, and thank you, everyone, for joining us as we report QuinStreet's Fiscal Third Quarter 2024 financial results. Joining me on the call today are Chief Executive Officer, Doug Valenti, 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 and factors that could cause results to differ from our forward-looking statements are discussed in our recent SEC filings, including our most recent eight K filing made today and our most recent 10 Q filing. 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 dot quinstreet.com. With that, I will turn the call over to Doug Valenti. Please go ahead, sir.

Douglas Valenti

Thank you, Rob, and welcome. Everyone. company revenue grew about 40% sequentially in fiscal Q3, fueled by a significant positive inflection in auto insurance carrier spending as we head for 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 continued to be supported party reports of good carrier results. We expect the ramp of on 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 research itself as the dominant long term trend, adjusted EBITDA jumped to almost $8 million in FYQ. three 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 for fiscal Q4 we expect revenue to be between $180 million and $190 million, 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 million and 11 million, implying year-over-year growth of over 400%. Our fiscal year 2025 begins this July first, 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 and 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.
With that, I will turn the call over to Greg.

Gregory Wong

Thank you, Doug. Hello, and thanks to everyone for joining us today. Fiscal Q3 was another solid quarter for QuinStreet. Total revenue was $168.6 million. Adjusted net income was $3.4 million or $0.06 per share in adjusted EBITDA was $7.9 million. 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. 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. It was $112 million. Our Home Services client vertical represented 32% of Q3 revenue and was $54 million for a record quarter. So that business. Other revenue was remaining $2.4 million our Q3 revenue.
Turning to the balance sheet, we closed the quarter with $40 million of cash and equivalents and no bank debt. A more normalized view of our ending cash balance would be approximately $48 million. We received a payment of approximately $8.5 million two days after quarter-end.
Moving to our outlook for fiscal Q4, our June quarter, we expect revenue to be between $180 million and $190 million and adjusted EBITDA to be between $10 million and $11 million. As Doug pointed out, the annual run rate of our fiscal Q4 revenue outlook already implies revenue growth of 20% or more over a 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. We will remain well positioned to benefit from the re-ramp of auto insurance client spending and are seeing continued momentum in our noninsurance client verticals. We expect strong total company revenue growth and adjusted EBITDA expansion driven by our diversified portfolio client verticals with that, I'll turn it over to the operator for Q&A.

Question and Answer Session

Operator

(Operator Instructions)
Your first question is from the line of John Campbell from Stephens. Please go ahead.

John Campbell

Hey, guys. Good afternoon.
Hey, so over the last year, you guys have talked to getting back eventually to the 10% EBITDA margins. And I guess as the insurance channel just normalizes. I mean, you kind of rebuild the top line scale. And 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 your plans you have to grow it from here. I'm hoping you guys could maybe outline the level of it or the degree of revenue you need to get back to those kind of low double digits EBITDA margins?

Douglas Valenti

Sure.
I I'd say and hard to pinpoint the exact level of revenue, John, because it depends so much on the mix from as you can see, where you will 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 do it where we could see coming or given the demand that we're seeing and the initiatives that we have. So I again, I don't have a hard time giving you the exact number because it varies in terms of revenue, but it's not too far off if that's helpful. I would say it likely to be and 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 of the forecast. And of course, we'll give you more precise. You have that in our next column as we as we look out to fiscal 25.

John Campbell

Okay. That's definitely 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, Ana. I'm kind of an early cycle, 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. You guys mentioned early that can be defined a couple different ways, but maybe if you can start off with like the progression by 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 today versus past prior peaks?

Douglas Valenti

No, no, it's a great question, um, we did see growth throughout the quarter and February was better than January, and March is bigger than So February. April was bigger than March. We expect May to be bigger than April and June and June to be only because it has fewer days and at a pretty consistent with maybe a little bit higher. And then we as we look out, we were done the early looks at our forecast for next year despite historic seasonality. So we expect next fiscal year that we will have sequential growth every quarter. So every quarter will be higher than the quarter before. And despite the fact that E, as you know, we often have seasonality in both the December and June quarters. So we will overcome we will be a lot better than seasonality from this quarter of last quarter, and then we expect that to continue throughout next year. So it's a pretty relentless ramp. We have extraordinary activity and demand from the clients from and where we are all ramping our media and to recover as you regrow at 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 the notion of annualizing the fourth quarter, just to kind of give you what we are perceived to be a floor, some we have a lot more coming, not just enough to ensure certainly in our insurance, which I know is what you're asking about, but a lot more coming from the other businesses as well next fiscal year on.
I think there was another part of your question, though, in terms of where we are that they are in terms of the ranking revamp to the previous peaks maybe found as part of which I think part of your question were about around 60% impact and 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 listen to the calls from the other folks in our space, of course, and we grew much faster auto and auto insurance on sequentially than anybody else. We are well over 100% and we buy in our forecast is embedded. The assumption that again, we've looked at we've listened to the others and looked at their numbers. We will once again grow much faster in auto insurance than they will the exit in the current or our fiscal Q4 or calendar Q2. So we're doing very well with the ramp, and there's a lot more to come here to hear.

Operator

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

Thank you. This is Pat on for Jim, and I'm 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 RP. and getting that back into a growth stage.

Douglas Valenti

Yes, good question. Pakcom QRP. was obviously went kind of dormant during the insurance downturn. We've talked about that just wasn't any product for the agencies. The agencies were cut had to cut way back because they didn't have product. So the re-ramp and rescaling are 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 a a return to a strong ramp there. That said, we have two big clients of QRP on going live ones already live with a pilot that will be ramping over coming months and another will be going getting live with their pilot and reramp starting in June, and they are two of the biggest players in the industry and some certainly our two biggest clients in terms of their of scale in the channel or in the industry. So we expect that we will get will return will get back on track. We'll get back on the ramp. It's been delayed, obviously, that's going to lag a little bit, but we're excited and 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 two big clients beginning their activities, again in a pretty earnest way on beginning in June.

Okay.
And sort of building off of the prior question on EBITDA and margins. I'm just wondering if you're seeing anything in terms of media costs or talent or talent retention that kind of limit some of the flow through versus historical it trends?

Douglas Valenti

No, not really. It's again, I told, John, it's really going to depend on the mix that we're we're we're still fully staffed in our insurance because we want to take full advantage of that. That industry coming back, which I indicated was going to give you the numbers on and 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 code in the other businesses. So 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 we had you would expect from us.

Okay.
Just the last one for me. Within home services, when you launch a new service availability, is there any sort of like ramp-up like start-up cost of that for reaching sort of like an initial level of profitability? And just how some of those services may differing consumer or customer profile.

Douglas Valenti

And it's a great observation slash question. Yes, is the answer. And so we we manage that mix pretty carefully. But when you begin to build out a new new trade on your initially quite inefficient from a media standpoint because you just don't have coverage and that's more the case in home services and is another our other client verticals because HomeServices is such a fragmented industry. And so we have to be kind of step-by-step build up the client coverage, get more media and 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
Yes. So that is that's part of the formula farm. We still do quite well in terms of our media margin and home services. But it absolutely is the case that when we're in new trades on it down, they have less media efficiency and then the more mature trades. And but we manage that and balance that and still maintain very good strong on the margins in home services.

Operator

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

Zach Cummins

Yes, hi, good afternoon. I apologize. I was late joining the call hopping on from another one, but Doug, can you go into kind of any sort of impact that you saw in the home services vertical in the current quarter in 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?

Douglas Valenti

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. So long way of saying we still have the same outlook we've always had, which is we think home services gives us the scale and we have the opportunities and Dean and initiatives to grow at double digits on average. Of course, last quarter grew 7% year over year in the quarter. And for as far as we can see into the future, it is a massive, massive business opportunity. I think we just cited again at $69 billion of addressable market and we are work running now 200 and something million that 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 were focusing on the right things in the right ways at the right time than it is any Enea, any lack of opportunity or capabilities to deliver against that opportunity. So where do we love that? That opportunity? We love that business. We love we're what we have in terms of product footprint and where we're going with it. And we think double digits is that is the right expectation for it many, many years to come.

Zach Cummins

Understood. And just one question for Greg.
And in terms of free cash flow generation, how should we be thinking about that as you start to hit the upcycle 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's already pretty strong?

Gregory Wong

Yes, it's a great question. If you look at it as a 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 in your in your receivables, we could be up like this quarter. We collected in that two days after the quarter end, which we typically would have gotten before the quarter, but didn't when 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 from, I would say, a good model to look at, as you know, $11 million to $15 million a year. So that's kind of how we're thinking about the conversion of EBITDA to cash flow.

Operator

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

Mark Hagen

So I think if you take your questions, I'm just kind of curious if you're seeing any impact on the, let's call it higher for longer rate environment and some of the other financial services business, call it maybe ex auto insurance and and maybe even home services as well.

Douglas Valenti

It's a mixed bag, really mark on higher for longer is not a bad thing for Home Services who we believe in Industry reports suggest that consumers are spending more on their existing home. And so I am sorry, kind of vertical by vertical on credit cards higher for longer is not a bad thing. The stick to our core credit cards consumer is a prime consumer in our mix. And so there's consumers are in very good shape. And the higher interest rates for longer is actually the banks are making a lot of money on the outstanding balances. They have a lot of money to continue marketing in personal loans. We have seen that the higher for longer is having an effect on the 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 and other credit solutions. And we once again this past quarter, we outperformed the results reported by everybody else that we know and that it is in our in our in our industry in that business are we endemics and it doesn't really affect much in our insurance except that to the extent it puts pressure on consumers at the low end, which it does own. We see increased shopping and for auto insurance and that continues to be a dynamic we are seeing there isn't a JD Powers per center 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 had ever seen in their distribution. Their report, not surprising given how far and fast foam I and the rates have come up on insurance and so I guess net-net overall, pretty good for QuinStreet's profile.

Operator

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

Cal Bartyzal

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

Douglas Valenti

And we've got a lot of data points on. First of all, we now have more, but last year was pretty concentrated ramp from a mainly the biggest player in the channel, and they were under 60%-something, I think of auto insurance revenue in the third quarter, and we're reporting mid to high 90s combined ratios this year on that same client as well under 50% of revenue from although still very strong. And it's really because we have more other clients. Other carriers now spending over $1 million a month with us and we've had in the history of the Company period. I mean, we've got a much broader footprint with much bigger spend from a log and not more carriers fund. And so and the debt 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 running more rigs working on the other side of the market ramp, their media ramp that 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 then you have the combined ratio reporting on combined ratios being reported this year. Our and the E&O in the mid 80s to low 90s, which again, best grind lower is better than what you thought combined ratios insurance. And that's from all the significant players who make who report their with their combined ratio results publicly. So you've got better fundamental underlying economics or broader footprint with more clients with more demand from all those clients and higher spending from other clients and big indications, smaller clients for coming quarters and years. So we really don't have any indications of anything, but not just sustainability, but acceleration of the rent going forward.

Cal Bartyzal

Perfect. Thank you. And then it just looks 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 and home services and what opportunities you're seeing in broadening out this offering?

Douglas Valenti

We were in maybe 14 or 15 verticals with some level of presence on we think we can be in dozens. I can't be more precise than that because we do it sooner. 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 of book. So of the 14 or so. And I think so but more than that, actually, if you count everything that we're in now only two or at any reasonable scale, I wouldn't go into those even mature from one of them, I think represents 40% of total services revenue or something in that vicinity. So we're actually relatively constant. It happens to be the one we've been in the longest on really a new agency in a meaningful way. And so it is those are the two vectors are going to continue to continue to be getting into more trades. But right now, we're more focused on scaling. The trains were already in that scaling is a matter of focusing our efforts and initiatives and teams as well as on in our growth, getting signing more clients, getting more media that can be efficient with that client and that client base then going sign more, but still more clients are getting more median kind of working our way up that with we've got to work both sides of the market, as we talked about earlier comments, and I think it was Pat that asked the question that there is a sequencing and then iterating aspect to that. As you kind of work your way up to media efficiency. Now we don't have any concerns about being able to do that. It just is something that does take some time. So I wonder if you want to have as many a lot of trades going on at once, so you can know you're going to have different ones have different stages to every different growth rates and profitability. We think we're pretty good at that.

Operator

(Operator Instructions)
And your next question is from the line of Chris Sakai from Singular Research. Please go ahead.

Chris Sakai

Hi, Doug and Greg.
I just got one question on looks like back in last quarter, you had 2024 revenue growth, about 5% to 15%, but now you're guiding for Q4 revenue of $180 million to $190 million, which which puts the year of revenue growth there, about 2.5% to 4.5%. So I want to know I mean, what what's going on why why is there a somewhat of a guide lower now for for the year revenue growth. Please help me understand.

Douglas Valenti

Yes, Chris, I think on a couple of things, but we're pretty pleased with the ramp first of all loan. We just drew as fast as we did sequentially 40% and over 100% non-insurance. And we had a record quarter in home services. We had a record quarter in non-insurance, and we had a record and we're going to have a record total company revenue quarter this quarter, Q4 how we're and by the way, have another record quarter in home services in Q4 as well and another record quarter noninsurance in Q4. So we're firing on all cylinders on that said, as we have as we indicated last couple of quarters, the exact pace of the ramp at interest is really hard to predict because the demand and activity there is just extraordinary, but the ability to convert that demand and in a very complicated dynamic system and channel is less predictive was we tried to continue to give you guys the full range and no, and I would say that and we also don't feel the need given how well we're performing to get way out over our skis. So I'd say that the upper end of the current range gets to the bottom end of the annual, Tom, and maybe we'll see if the slope the slope actually looks like and if we do how we do from there. But I wouldn't read anything into that at all?
I think what I would would remember is we're already pacing at 20%-plus faster growth for next year than that than we are this year. And we've got a lot to build on that. We'll probably do much better than that. And now the record quarter in numbers I just gave in our different businesses where it gives you a full indication of just how well everything Spellman. But I wouldn't I wouldn't I would not read anything more than that into into that number.

Operator

Ladies and gentlemen, there are no further questions at this time.
Thank you, everyone, for taking the time to join in QuinStreet's Earnings Call. Replay information is available on the earnings press release issued this afternoon.
This concludes today's call. Thank you.