Quinstreet, Inc Q4 FY2020 Earnings Call

Good day and welcome to the QuinStreet Fourth Quarter and Fiscal Year 2020 Financial Results Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Erica Abrams. Please go ahead.

Thank you, Todd. Good afternoon, ladies and gentlemen. Thank you for joining us today as we report QuinStreet's fourth quarter and fiscal year 2020 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 results to differ from our forward-looking statements are discussed under the legal notice section in our Form 8-K filed today with the SEC, including disclosure about the effect of COVID-19 and related restrictions on our business and are also discussed in more detail under the Risk Factors section in our SEC filings, including 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 are included in today's press release, which is available on our Investor Relations website. With that, I will turn the call over to Doug, CEO of QuinStreet. Please go ahead.

Thank you, Erica, and thank you all for joining us today. Fiscal Q4 was a successful quarter for QuinStreet. Despite challenges posed by COVID-19's impact on clients, media, and operations, we delivered better-than-expected results on both the top and bottom lines, and we made excellent progress on strategic and operating initiatives. We continue to narrow our focus and investment to our biggest and most attractive opportunities. Also, our reorganization has reinvigorated functional excellence and competitive advantage in product and media and with clients and is delivering better, faster progress and results. Overall, we believe that we are now better positioned for long-term growth and performance than at any time in the past decade. Revenue, excluding divested businesses, grew 3% year-over-year in fiscal Q4. Adjusted EBITDA was 7% of revenue. We generated strong cash flow, ending the quarter with over $107 million in cash. Our financial performance during the pandemic is once again highlighting the strength of our long-term opportunity and advantages and the resilience and strong cash flow generation characteristics of our business model. Results in the Auto Insurance and Home Services client verticals, our two largest businesses and the core of our focus going forward, were particularly strong in Q4. Auto Insurance revenue grew almost 50% year-over-year and Home Services grew almost 30%. The overperformance in those client verticals was driven by strong client demand, good navigation by our team, including shifting efforts to areas less impacted by the pandemic, and excellent execution and progress on big and important long-term product, media, and client initiatives. The strong results in Auto Insurance and Home Services offset weakness in our credit-driven client verticals, personal loans and credit cards, which continue to be negatively impacted by our clients' response to the weakening economic and employment environment. Those businesses declined significantly in the quarter as we had expected. On the strategic front, we acquired Modernize to add to our scale and capabilities in Home Services. The Modernize transaction closed on July 1, just subsequent to quarter end. Additionally, we further narrowed our footprint in fiscal Q4 by divesting our Mortgage assets. A reminder, the objective and expectation of narrowing our footprint and focus is that we will deliver faster and more predictable growth in revenue and EBITDA in the coming quarters and years. QRP continues to progress well. The pipeline for that important new product further strengthened in the quarter. And still in early stages, we are seeing good and growing implementation and usage activity by signed clients. The current quarter, our fiscal Q1, is expected to be the first quarter of meaningful revenue for QRP. Turning to our outlook. It remains difficult to forecast specifics or to look too far ahead in these uncertain times. That said, we expect the general trends of strength in Insurance and Home Services and weakness in credit-driven client verticals to continue in the near term. Our current estimate is that revenue in the current quarter, our fiscal Q1, will be between $125 million and $130 million. We expect adjusted EBITDA margin to again be in the mid-single digits.

Thank you, Doug. Hello, and thanks to everyone for joining us today. Q4 wrapped up another record revenue year for QuinStreet, despite significant headwinds in the second half of our fiscal year due to COVID-19. For the fourth quarter, total revenue was $117 million, a decrease of 4% year-over-year. Revenue, excluding divested businesses, grew 3% year-over-year. Adjusted EBITDA was $8.4 million or 7% of revenue. Adjusted net income was $7.4 million or $0.14 per share. Looking at revenue by client vertical, our Financial Services client vertical represented 76% of Q4 revenue and decreased 3% year-over-year to $88.6 million. During our fiscal fourth quarter, we divested our Mortgage business. Excluding divested businesses, our Financial Services client vertical was about flat year-over-year. Auto Insurance, our largest business, delivered record revenue and grew 47% year-over-year. This growth reflects strong spending from a broad range of major carrier clients and excellent progress on a number of long-term growth initiatives in the quarter. Our credit-driven personal loans and credit cards businesses declined significantly year-over-year as expected due to COVID-19 driven economic and employment conditions. Our Home Services client vertical represented 12% of Q4 revenue and grew 29% year-over-year to $14.4 million, a record quarter for that business. In the quarter, we executed well at shifting our efforts to better performing, less impacted areas of our Home Services business, delivering exceptional revenue growth despite these unprecedented times. On July 1st, just subsequent to our fiscal year-end, we acquired Modernize to add to our scale and capabilities in Home Services. Total consideration was $67.5 million, which included an upfront cash payment of $40 million and notes payable of $27.5 million, which will be paid in equal annual installments over the next five years. Modernize is expected to add $50 million to $60 million to fiscal 2021 revenue, and margins are expected to be accretive to company EBITDA.

Our Education client vertical represented the remaining 12% of Q4 revenue and decreased 8% year-over-year to $13.9 million. The decrease in revenue reflects the divestiture of our Brazil education business in the March quarter. Excluding that divestiture, our Education client vertical grew 3% year-over-year. Adjusted EBITDA in the quarter was $8.4 million or 7% of revenue. Turning to the balance sheet. We began the quarter with $97.2 million in cash. Big cash movements in the quarter include the generation of $13 million in operating cash flow and $3.3 million from the sale of our Mortgage business, offset by outflows of $4.6 million for seller notes issued in connection with prior acquisitions and $1.3 million for CapEx. We closed the quarter with $107.5 million of cash and equivalents.

Turning to our full fiscal year 2020 performance. We posted record revenue of $490.3 million and grew 8% year-over-year. During the fiscal year, we made good progress on our strategic initiatives to narrow our footprint to our best-performing and fastest-growing businesses. We divested our B2B, Mortgage, and Brazil operations during the year. Excluding the divested businesses, total revenue increased 15% year-over-year. Our Financial Services client vertical represented 75% of fiscal 2020 revenue and grew 12% year-over-year to $370.1 million. Financial services revenue, excluding divested businesses, grew 19% year-over-year. Our other client verticals, which included Home Services and B2B, represented 12% of revenue and grew 5% year-over-year to $59 million. We divested our B2B business in February of 2020. Our Home Services business alone grew 24% year-over-year to $49.9 million in fiscal 2020. Our Education client vertical represented the remaining 12% of fiscal 2020 revenue and declined 11% year-over-year to $61.2 million. Education revenue, excluding divested businesses, declined 7% year-over-year. In summary, we are pleased with our financial performance in the fourth quarter, particularly given tough economic conditions. We delivered record revenue from both Insurance and Home Services that more than offset expected softness in our credit-driven client markets, meeting our expectations and outlook for the quarter. For fiscal 2020, we made good progress narrowing our footprint to our best-performing fastest-growing businesses. Revenue in the year from our go-forward core Financial Services and Home Services businesses was $416.2 million, representing a 3-year compound annual growth rate of 32%. Despite current challenges related to COVID-19, we believe that we are on the path to faster, more predictable revenue growth and expanding margins. With that, I'll turn the call over to the operator for Q&A.

We'll take our first question from John Campbell with Stephens Incorporated.

Hey guys, good afternoon and congrats on a great quarter.

Thank you, John.

Sure. So really impressive results out of the Auto Insurance business. Just looking across the space, as best as we can see it, I mean you guys pretty handily outpaced your peers. Any sense for what triggered that outperformance? I don't know if it's maybe a relative exposure to carriers over agents or, I don't know, maybe better or less affected media coming out of COVID. Any sense for what drove that outperformance?

That’s purely speculative, John. The other two companies that have reported publicly showed one with a 1% year-over-year growth in Insurance, and the other with a 30% growth in Auto Insurance. In contrast, our Auto Insurance business experienced a 47% growth year-over-year, which is our largest segment, and that clearly stands out. We are gaining market share at a faster rate. However, it's difficult to determine the specific factors that influenced our performance compared to others. Regarding our own results, we have significant momentum with larger carriers, as you pointed out. We are noticing a quick shift of budgets towards online platforms during this time, which is not surprising considering that offline media is currently less prevalent and less effective due to reduced programming and activity. Additionally, those carriers are financially stable because decreased driving has led to fewer incidents and lower loss ratios. Consequently, there is substantial budget available, and consumer activity is robust. Consumers are at home, online, and actively shopping. Unfortunately, many are facing financial pressure, which leads them to look for ways to save money on essential purchases like insurance. We are witnessing strong demand from clients, and budgets are shifting to online platforms and to us specifically, because we tend to deliver the best performance for these carriers. There’s significant consumer shopping happening as well. We are optimistic that the trend towards increasing online budgets represents a permanent change or a significant shift in the long-term direction of online budget allocation. We feel confident that this will be the case, which is excellent news and will support growth in the future. Finally, I want to mention that we are actively pursuing various initiatives as we refocus on our core businesses, particularly in insurance. These initiatives have made a significant contribution in the quarter, including new product launches that generated millions in revenue, new media initiatives that similarly boosted revenue, and client initiatives aimed at assisting them in effectively and productively transitioning more budgets online. Overall, there’s strong momentum and long-term growth potential in our Insurance business.

John, this is Greg. And to be clear, what Doug was referring to in initiatives was he was referring to the core business, not related to QRP.

Okay. Makes sense. And then, just kind of going through the revenue model here and this factoring in the strength from Insurance and Home Services for the quarter, and I'm assuming that Personal Loans and Credit Cards, probably fell somewhere in the tune of like 80% or 90%. Is that about right?

No. I think Credit Cards were down over 70%. And I think Personal Loans are down about 70%. But Greg, I may be confusing.

That's right. So the combined was about 70% down year-over-year in the quarter. So yes, Personal Loans was down just less than 70% in Credit Cards was down over 70%.

Okay. I understand. That seems to align with what we are observing among some of your competitors. Regarding the first quarter guidance for the fiscal year, if you expect the ongoing strength from Insurance and Home Services to continue, and include some of the Modernize revenue, it appears you're anticipating that pressures on personal loans compared to credit cards will continue, though perhaps not to the same extent. Is that correct?

We have only provided guidance for the current quarter and are observing significant weakness in Credit Cards and Personal Loans. Although the Personal Loans business seems to have bottomed out in April or May and we're seeing some positive progress since then, Credit Cards remain quite challenging. Many issuers are returning to the market but with smaller card offerings, stringent qualification standards, and price reductions. As a result, the Credit Cards sector is still under pressure, and we anticipate this will persist for some time as banks work to stabilize their balance sheets and address the impacts of COVID and the related economic issues on consumers and consumer credit. It's difficult for us to look beyond one quarter currently due to the dynamic nature of the situation. We expect the credit-driven businesses to remain weak; however, Credit Cards appear to be stabilizing at a low point, while personal loans have improved slightly from their lows. The future progress of these sectors will likely be closely linked to the overall economy and employment rates.

Okay. That all makes sense. Thanks guys.

Thanks, John.

Thank you. We'll take our next question from Jason Kreyer with Craig-Hallum.

Hey gentlemen, good afternoon.

Hey, Jason.

I'll start out with just the education business.

Jason, please go ahead.

Do you hear me?

I've got you.

We can hear you now.

Okay. Sorry about that. I was asking about Education. Brick-and-mortar education probably not performing well, online education probably performing well, I mean, can you just walk through the puts and takes in the quarter?

Well, you hit it. The online budgets continue to be pretty strong, not dramatically stronger than they had been, but pretty decently strong. Campus budgets, which have represented as much as about 40% of our education revenue over the past year or two, almost completely went away. And so the team in that business actually did a phenomenal job of working to replace a pretty significant drop in demand from campus-based clients, which did represent a pretty significant portion of our revenue in education. But yes, that is the main dynamic, decent though not overly strong online education performance and demand and almost totally gone is the demand for campus education.

Okay. And I joined the call late, so I missed your comments, Doug, so apologies if you addressed this. But just any update on the timeline for QRP contribution? Kind of curious if you're happy with the way things are progressing through the pipeline? Or do you have any pipeline updates there?

We are pleased with the progress being made through the pipeline. It has strengthened again this quarter. We are gaining excellent momentum with carriers, agency clients, and partners, who are aiding in promoting the product within the channel. We believe the opportunity is as substantial, if not larger, than previously discussed. Our excitement about this opportunity is at its peak. This quarter will mark the first significant revenue generation for QRP, which is expected to increase by approximately 4,000% compared to last quarter. However, it's important to note that the revenue will still be in the hundreds of thousands of dollars, indicating we are still in the early stages. Nevertheless, the progress is encouraging, and the engagement, outlook, and value proposition are resonating well with clients. We are receiving significant support from key players in the channel, including carriers. What remains uncertain, as it has been in the past, is the precise trajectory of the ramp-up. We haven't experienced this before, but we are focused on managing the pipeline, monitoring metrics, and observing client progression. We can see that clients are implementing the product and getting active, and initial agents in testing are showing positive results, with some agency clients now committed to expanding the product to all their agents. The flow through the pipeline remains strong, and the feedback has been positive. No clients have dropped out, and everyone acknowledges that this product is superior to what they are currently using, with the pricing aligning with the value being offered. While we are not exactly sure how the ramp-up will unfold, we will continue to update on our progress. The key takeaway this quarter is that we will generate revenue, which, while not life-changing, reflects a significant improvement from the previous quarter. We can now see actual usage from those who have signed on, and they are implementing, testing, and starting to utilize the product, for which we will receive compensation.

Perfect. For my last question, we've previously discussed the credit repair service within your Personal Loans offering. Is it contributing to offsetting the weakness in the current market? Or do you believe it could become a more beneficial product when we start to see a recovery? I'm looking for more information on that.

Yes, there is significant demand for credit repair and management services right now, which we are experiencing in our Personal Loans segment. The acquisition of M1 has enhanced our ability to connect consumers with high-quality credit repair and debt settlement service providers. As a result, part of the increase we observed after the dip in April or May in Personal Loans can be attributed to the heightened demand for these services. We are focused on this area, and I anticipate that it will enable us to maintain growth following the downturn in the early spring. Additionally, I believe this will be a strong business that can counterbalance the challenges we face with lenders in the near future.

Thank you.

Thank you, Jason.

Thank you. We'll take our next question from Jim Goss with Barrington Research.

Good evening. This is Pat standing in for Jim. I was curious if you could provide more detail about how carriers are supporting your rollout of QRP and their overall perception of your customer acquisition strategy in relation to that rollout.

The carriers have been supportive of QRP from the start, indicating there was a significant opportunity for this product in the channel. We collaborated with them to define and develop the product in a way that their agency partners would find most effective. They continue to support us by serving as references for the product and working with us to enhance integrations. Currently, we believe we have the most comprehensive end-to-end integrations with carriers for accurate quoting in the country and are expanding our pipeline with additional integrations involving more carriers in various states, with a dedicated team in India working on this full time. Furthermore, carriers have committed to utilizing the pre-work in their organizations since most carriers have cost centers that often leave some consumers unserved if they do not meet specific criteria. A significant portion of our pipeline consists of carriers that are adopting QRP in their call centers to address the needs of consumers who would otherwise fall through the cracks in traditional cost center operations. We are receiving broad support for the promotion and reference of the product, which includes integration assistance, resulting in more accurate end-to-end rates and a commitment from carriers to embrace the product.

Okay. There are many factors affecting the top line. At the midpoint of your Q1 guidance, what would that indicate for the year-over-year growth rate specifically for the businesses that were divested and those that were acquired?

Greg, do you have that? I don't have that in front of me.

I don't have that in front of me right now.

Okay. That was all I had. That was great. Exceptional quarter. Great guys.

Thank you, Pat.

Thank you. We'll take our next question from Chris Sakai with Singular Research.

Hi, Doug and Greg.

Hey, Chris.

Hi, I had a question about Modernize. I wanted to know if revenue from the acquisition will be recognized in the next quarter and what the ramp-up time for Modernize will be.

We won't report it separately because we have already integrated this acquisition with our existing Home Services business, which generated about $50 million last year. The revenue from this acquisition will be reflected in our numbers for this quarter since we closed on July 1st. It will be included in our Home Services financial results. As previously indicated, we expect that Modernize will contribute between $50 million and $60 million to our company revenue for the full fiscal year 2021, with that also adding to the Home Services revenue. Therefore, you will see that contribution this quarter as the initial revenue. I cannot specify the exact number for Modernize this quarter, as it will be combined with Home Services, reflecting their previous performance and the additional synergies we can achieve. We anticipate that these synergies will increase, ideally at an accelerating rate throughout the year, meaning this quarter is likely to show the least impact from Modernize. However, we expect revenue will grow as we fully integrate the business and leverage significant synergies in media efficiencies, client budgets, and product improvements.

Okay, great. Regarding the acquisition, will there be any additional acquisition costs in the upcoming quarter, or were those incurred in the last quarter?

I don't think there are any. Greg, am I missing anything? I'm pretty sure that those acquisition costs are all behind us. Can you add anything to that, Greg?

The material, they're all behind us because there will be small pieces coming up, yes, there could be. But no, I expect the bulk of the acquisition costs related to that in the June quarter.

Okay, great. Well, I think that takes it all for me. So thanks.

Great. Thank you, Chris.

Thank you. This concludes today's call. A replay of the conference will be available by dialing 888-203-1112 or 719-457-0820. The access code is 3216055. Thank you for your participation. You may now disconnect.