Good day, and welcome to the QuinStreet First Quarter Fiscal 2021 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Erica Abrams. Please go ahead, ma'am.

Thank you, Dan. Good afternoon, ladies and gentlemen. Thank you for joining us today as we report QuinStreet's first quarter of Fiscal Year 2021 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 in our recent SEC filings, including our most recent 8-K filing made today and our 10-K filing made on August 28, 2020. 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. 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 Q1 was a good quarter for the Company. We made excellent progress on a wide range of short- and long-term growth initiatives in our core Financial Services and Home Services client verticals, and we continue to strengthen our products, technologies and operations for future growth, competitive advantage, and efficiencies. Our tailwinds are strong. The slope of the curve of marketing budgets shifting online is steepening, while market demand for our core performance marketplace solutions has also accelerated. Our solutions are increasingly recognized by the most advanced clients as their most productive and consistent digital marketing channels at scale. We delivered strong results in Q1, particularly in Insurance and Home Services, our two largest businesses. Auto Insurance revenue growth continued to accelerate, reaching 57% year-over-year due to unprecedented and broadening demand from clients and to good progress with growth initiatives. We continued to make good progress with QRP in the quarter, both with the agency client pipeline and with more and deeper carrier integrations. QRP continues to promise to be one of the most exciting long-term business opportunities in the history of the Company. With a strong value proposition for agency clients and carriers and with big scale and SaaS-like margins for QuinStreet, it is an opportunity uniquely suited and defensible for QuinStreet due to our deep integrations with carriers and our industry-leading technology capabilities. This opportunity is long-term, deep, and sticky. QRP is a core operating platform for agency clients and carriers. Current QRP activity is dominated by integrations and testing. We are receiving strong positive feedback on early testing and usage activity from launched clients. And revenue too continues to ramp, but for now remains immaterial to overall company results. Home Services grew even faster than Auto Insurance due to the addition of Modernize. We delivered strong results there, stronger results than expected, due to the successful execution of growth initiatives and to ahead-of-schedule integration and capturing of synergies with Modernize. Trends in credit-driven businesses, specifically personal loans and credit cards, stabilized and improved in Fiscal Q1. I really like our position in those enormous markets as the economy improves. For now, I see them as stabilized, future growth engines, highly synergistic with Insurance and Home Services. As previously announced, we divested the Education client vertical on August 31 as another step in our strategy to narrow our footprint to our best opportunities and to accelerate revenue growth and margin expansion. Looking ahead to the current quarter, or Fiscal Q2, we expect continued strong momentum and revenue growth in Insurance and Home Services and continued strong overall company performance as a result. We currently expect revenue in Fiscal Q2 to be between $118 million and $122 million, at least in line with or beating typical seasonality and representing 21% year-over-year revenue growth from non-divested businesses at the midpoint of the range. We expect adjusted EBITDA margin to be in the mid-single digits, reflecting only typical seasonal fluctuation. With that, I'll turn the call over to Greg.

Thank you, Doug. Hello, and thanks to everyone for joining us today. Q1 was a strong start to Fiscal '21, where we delivered record revenue while continuing to operate in a COVID-19-impacted environment. For the first quarter, total revenue was $139.3 million. Also importantly, we made good progress with our strategic initiative to narrow our footprint to our best-performing and fastest-growing opportunities, divesting the Education client vertical on August 31. Revenue from non-divested businesses, our go-forward client vertical footprint, was $127.6 million in the first quarter, representing 23% year-over-year growth. Adjusted EBITDA grew 32% year-over-year in the first quarter, to $12.5 million, or 9% of revenue. Adjusted net income grew 42% year-over-year, to $8.8 million, or $0.16 per share. Looking at revenue by client vertical, our Financial Services client vertical represented 68% of Q1 revenue and was $94.2 million. Auto Insurance, our largest business, delivered record revenue and grew at 57% year-over-year. This growth reflects strong spending from a broad range of major carrier clients and excellent progress on a number of growth initiatives in the quarter. Trends in our credit-driven personal loans and credit cards businesses stabilized and improved in Fiscal Q1. We expect these businesses to be good, long-term growth drivers for QuinStreet as the economy improves. Our Home Services client vertical represented 24% of Q1 revenue and grew at 157% year-over-year, to $33.4 million, a record quarter for that business. As a reminder, on July 1 we acquired Modernize to add to our scale and capabilities in Home Services. Total organic year-over-year growth in Home Services client vertical was 14% in the first quarter. Sequential growth in Home Services was 33% on an organic basis, outpacing our expectations in the first quarter and demonstrating the early success of the integration and capturing of synergies from the Modernize acquisition. Our Education client vertical represented the remaining 8% of Q1 revenue. Adjusted EBITDA in the quarter grew at 32% year-over-year, to $12.5 million, or 9% of revenue. Turning to the balance sheet, we closed the quarter with $102.2 million of cash and equivalents. We began the quarter with $107.5 million in cash. Big cash movements in the quarter included the generation of $17.6 million in operating cash flow and $20 million from the sale of our Education business. This was offset by a cash outflow of $40 million for the acquisition of Modernize. Normalized free cash flow for the quarter was $10.4 million, or 8% of revenue. Most of our adjusted EBITDA drops to normalized free cash flow due to the low capital requirements of our business model. I would like to remind everyone of the seasonality characteristics in our business. The December quarter, our fiscal second quarter, is typically impacted by the holidays due to client staffing and budgets and due to consumer shopping patterns. These factors generally reverse in the March quarter, which is typically our strongest quarter of the year, where we see our clients with new annual marketing budgets and fully staffed employee levels. With that as context, looking at our outlook we expect Q2 revenue to be between $118 million and $122 million, at least in line with or beating typical seasonality and representing 21% year-over-year growth from non-divested businesses at the midpoint of the range. We expect adjusted EBITDA margin to be in the mid-single digits, reflecting only typical seasonal fluctuation. In summary, the first quarter marks a record start to Fiscal Year '21. We are happy with our financial performance in Insurance and Home Services and are encouraged by the early recovery of our credit-driven businesses. This has all resulted in us once again beating our expectations and outlook for the quarter. Going forward, we are excited about our business, especially given our success in narrowing the footprint and increasing our focus to the best-performing and fastest-growing opportunities. Trailing 12-month revenue from our go-forward client vertical footprint of Financial Services and Home Services was $439.9 million, representing a 3-year compound annual growth rate of 32%. We are well on our way to faster, more predictable revenue growth and expanding margins with little to no loss of scale. Fiscal Year '21 is likely to be a record revenue year for the Company. With that, I'll turn the call over to the operator for Q&A.

We'll take our first question in queue. This comes from John Campbell with Stephens Inc. Your line is open. Please go ahead.

Talk to us a little bit about the strategic alliance with NerdWallet. That seemed like a really interesting announcement for you guys. Is that a multiyear agreement? And then maybe if you guys could talk to what you're doing now versus what you've kind of been up to with those guys over the last two years.

It is a multiyear agreement. We're just deepening the relationships. We can both work more aggressively on joint optimization and joint programs. We're super excited about it. They are an incredibly high-quality organization, a very high-quality media, a great customer and consumer following, really a consumer advocate, and we're excited to help them run insurance and get the right matching technologies and marketplace going for insurance and probably adding other lines as well.

Okay. That's helpful. And then, Greg, I saw you kind of slip in the last minute there possibly looking for a record revenue year this year. Clearly, you guys have done a ton of divestitures over the last several months. So it seems like just given those divestitures, a record year would be a really good result for you guys this year. If you could just maybe just help us with the math a little bit. I don't know if you've got it on hand, but kind of what you guys did ex-divestitures in revenue by quarter last year or maybe all-in to just give us a sense for how much the divestitures are impacting. And then as we think about the year-over-year growth each quarter from here, trying to get to the right comp for next year.

John, last year, revenue excluding the divested businesses, so from the go-forward footprint right now, that was about $420 million for the full year.

Okay. And I don't know if you've got this on hand. Do you have it by quarter? I'm just trying to get to, like, an apples-to-apples growth rate, going forward.

Q2 was about a little over $99 million, in the December quarter. Q3 was $110 million. And Q4 was about $103 million.

Okay. Very helpful. Last one, a quick one for me. On the gross margin leverage, that was clearly there this quarter. Was that solely just a product of the total revenue growth? Or is there any kind of mix shift items to call out? It looks like you had obviously less Education revenue, less credit businesses and then a lot more of Home Services.

The biggest piece, John, was really the top line leverage. So we're growing the top line on a very similar fixed cost base. But we did also see expansion in our media margins in the quarter. So we did a good job at yielding more of the media.

Our next question comes from Jason Kreyer with Craig-Hallum. Your line is open. Please go ahead.

Congrats on the not only strong quarter, but the heavy lifting you've been doing. First, just wanted to talk, like, can you walk through any surprises you saw in the quarter? Obviously, you outperformed your original guidance pretty handily. So just wondering where you saw the pockets of outperformance emerge over the course of the last 90 days.

Certainly. In our largest segment, Auto Insurance, the level of momentum and the variety of growth we've seen from clients has been truly remarkable, even exceeding our own optimistic expectations. The situation is continually improving, with an increasing number of clients moving towards budget online, and many are eager to deepen their engagement with us due to our longstanding relationships and successful track record. Several clients have recognized us as their top performer across different scales, leading to a backlog of clients with significant budget increases that have enhanced our momentum in Insurance over recent quarters. Looking ahead, this trend is only speeding up. Additionally, we are actively pursuing new growth initiatives in Insurance, including product and media expansions. Many of these initiatives started to show momentum last quarter and continue to grow this quarter, which is pleasantly surprising since such developments can be challenging to predict accurately. Both the core Auto Insurance marketplace and the progress on new initiatives have exceeded our expectations. In Home Services, the integration of our Modernize acquisition has progressed much faster than anticipated, and we've managed to capitalize on various synergies. This has significantly benefited the Home Services business, resulting in a positive surprise this quarter. Based on this success, we have raised our full-year outlook for this sector considerably. The Home Services market is substantial, and the Modernize acquisition has surpassed our expectations in terms of speed and impact. As we look forward, we continue to feel optimistic. We have already adjusted our full-year targets upward and significantly exceeded our projected performance from last quarter. Another pleasant surprise has come from our work on QRP, with our pipeline becoming increasingly robust. Collaborations with both signed clients and new ones are progressing exceptionally well. We've also partnered with carriers to enhance integrations, with commitments from some carriers to provide more comprehensive quote-to-buy integrations, along with a few product expansions. Major carriers are now collaborating with us on a significant use case expansion for QRP, which is a market opportunity we hadn't fully anticipated. The commitment from carriers to QRP has been remarkable, with their strong support in developing the market and engaging in product enhancements with us. Additionally, the credit-driven businesses have stabilized and begun to grow again. Although they are still down year-over-year due to the impacts of COVID and economic conditions, we quickly identified the bottom and have rebounded strongly. Most major credit card issuers are re-entering the market, though with tighter parameters and lower budgets as they navigate economic uncertainties. Several personal loan lenders are starting to return, but not fully yet. We effectively executed on other product offerings in that business, such as credit issue assistance and credit repair services, which performed well. Overall, it was an outstanding quarter across all measures, and we have strong momentum heading into the remainder of the fiscal year.

A couple of times now you've mentioned new growth initiatives in the Auto Insurance category. I know it seems like you've been having success with new products not only for carriers but targeting the agent community. I don't know if that's kind of part of these new initiatives you're talking about or if there's maybe any other call-outs you could give us, some more details on these new initiatives you're pursuing.

We are broadening our product mix to better serve the agent networks, which we haven't historically targeted. While we now offer QRP, it represents a new technology and a SaaS opportunity rather than competing with our existing players. We've introduced products into this market, and the expansion has been progressing well. Addressing the agent networks is a significant growth initiative for us, alongside various product improvements. We have consolidated our marketplace team to focus better on these initiatives, improving performance for carrier clients by as much as 30%. Our marketplace team is being staffed and ramped up, allowing us to enhance our algorithmic and analytical offerings for both clients and media partners. We are also exploring new market segments, including agent networks, as there are many opportunities within the businesses we have chosen to retain. We believe it’s essential to concentrate our resources where we have the greatest potential.

Our next question comes from Jim Goss with Barrington Research. Please go ahead.

Maybe continuing along the theme you were just talking about, Doug, with QRP, do you regard it as an opportunity more outside of the group you're currently dealing with or within them to the extent they have direct sales versus agent groups within them? Or is it a little of both? Because it would seem like the SaaS version is going to maybe help you broaden your overall business, but it might also be involved in some of the same areas you're already currently involved with company wise.

You're right, Jim. It is both. We talk a lot about the agency clients, and of course we have not historically done much by way of business with the agent or agency networks side of the insurance world. So that's an important client expansion opportunity for us in QRP. The core of QRP is working with the independent agent world, which is the biggest part of the agent industry, to have a much more efficient and productive and managed quoting platform. Serving agencies and agents, which is a new segment of customers for us, is a big part of what we do with QRP and is the core of the QRP opportunity. That said, to your point, the quoting platform is only as good as the carriers you have on there. We have deepened our integrations and the work we're doing with a number of the major carriers that serve that channel as we integrate with them and bring their quoting all the way to bind into the agent networks and then add other services on top of that. There are carriers who want to use QRP internally for efficiency reasons and productivity reasons. So it does add to what we can do with our historic core client base, which are of course the carriers themselves, not the agent networks. So it's both.

And SaaS businesses tend to be stable and high-margin. So maybe the impact on your business would be to add less to revenue but more to the overall profit. So it would seem to muddy up the financials a little, though in a positive way. Do you think you'd try to account for it as a separate category. Just to be clear?

It's a great question. We haven't reached a point where we can definitively determine how to approach that. If we simply integrate it into our existing reporting, it could obscure our performance, which is not our goal. We will likely wait until it reaches a sufficient scale to justify a specific reporting method, but once it does achieve that scale, it might be challenging to keep it blended in with other results, and that wouldn't accurately reflect our performance. Initially, it doesn't make sense to separate it for various reasons, including its early-stage nature and inherent uncertainties. We know that our pipeline is progressing, our client interactions are positive, and our product is functioning well. However, predicting the exact revenue growth has been difficult since this is uncharted territory for us. This is an essential operating platform for our agencies, and they won't simply adopt it overnight. The implementation process involves testing it with a few agents over several months before full rollout, which means tracking it separately in these early stages isn't practical for either the business or our investors. It's crucial for everyone to understand that the growth we experienced last quarter came from our core business rather than from QRP, which remains insignificant to our overall results. The margin improvements were entirely related to our core operations, including business mix, scale, and efficiencies. Despite not optimizing as we typically would due to COVID and the divestitures, we are demonstrating that we can grow from here. We believe it's reasonable to anticipate record revenue this fiscal year based on our projections. We expect to grow much more rapidly, and that growth will translate more directly to our bottom line, similar to what we demonstrated last quarter.

Okay. And just one more, along similar lines, regarding the EBITDA margin profile you're targeting. You haven't broken out an EBITDA margin by major category. Now that Education has gone, we basically have two major categories. Can you distinguish between Financial Services and Home Services in terms of the relative margin profile so that as we're modeling the revenue changes we can also get some mental thought about how it would impact the bottom line and the profit margin potential?

I don't know that we're going to do that, given that there are so many shared resources between those businesses. It's very difficult for us to bring any of our client verticals down to their own profit margins because most of the core resources are shared. The core media resources, core technology resources, the actual technology platform are all shared costs. We'd have to go through a big exercise of allocating costs, which would basically bring you right back to how we report it today. From a contribution margin standpoint, because I know we've had these conversations with investors as well as analysts, they're all in a pretty tight range. The contribution margin to core functionality of our various businesses are very similar. We get there in Auto Insurance with scale and a little bit lower media margin because it's dominantly a clicks business which has less burden at the business line level than, let's say, a leads-driven business. In the Home Services business, we get there a little bit higher media margin, but more burden operationally because of the fact that it's a more diverse business and it's dominantly a leads business, which tends to need more headcount. So on a contribution basis they're pretty similar, and we tend to indicate what those are periodically. Breaking them out as segments would be difficult and misleading given the way we run the business, which is with the vast majority of the headcount costs being shared costs in the core business and engineering, media are the big ones. So probably not.

Okay. I think you gave some helpful differentiation with the answer you just gave. So thank you very much. Appreciate it.

Our next question comes from Ryan Meyers with Lake Street Capital Markets. Your line is open. Please go ahead.

First one for me. So if I recall, on the last call you guys stated that you expected to see meaningful revenue from the QRP platform. Any reason why that wasn't the case this quarter?

We experienced good revenue growth from QRP. The definition of 'meaningful' may vary. As I mentioned last quarter, we were starting from very low revenue figures. We anticipated more than just single-digit dollars in this quarter. Although we observed a solid revenue increase from QRP, it does not contribute significantly in comparison to our overall revenue, which is nearly $500 million annually. For now, QRP's revenue is not material to the company and will likely remain so for the next few quarters. I want to refrain from forecasting QRP since I'm not confident in that area. Regardless, we did see significant revenue growth, and QRP is starting to generate revenue that is somewhat relevant, but it still remains immaterial to the company's scale.

Okay. That's helpful. And then just one more for me. So what sort of trends are you guys seeing so far in the second quarter in personal loans and credit cards? And then have you factored in conservatism or upside in the guidance for that?

Great question, particularly with what's going on with the second wave in that. We see continued stability and gradual improvement in personal loans and credit cards so far this quarter. We have seen much more of a positive inflection in credit cards so far this quarter than we saw last quarter. We see continued good progress in personal loans, which we did see last quarter. I would say that the trends continue to be generally moving up and to the right, but nowhere near the point where they're going to get back to where they were a year ago. So it's stable and improving gradually, but still down. Overall, the two verticals are down, Greg, probably 50-plus percent still, 60%, overall?

Yes, in the first quarter they were down 60%.

So, still way down, but up and to the right from where they were. To your point, Ryan, we have been quite conservative in the way we think about them for this quarter, and they could reverse on us pretty significantly from here and we would still be very comfortable with what we provided as our outlook for Q2.

We'll take our next question in queue. This comes from Chris Sakai with Singular Research. Please go ahead.

Just wanted to get, I guess, a macro view on Auto Insurance, what's going on and what was leading to such great growth.

Chris, it's a combination of factors. One is that with COVID there's a lot less driving. The auto insurance carriers are much more profitable than they would be. With less driving, there are fewer incidents, fewer payouts. So they have a lot more money to very comfortably and aggressively spend on marketing, generally, not just on the Internet, but generally, it's been on marketing. The auto insurance carriers themselves are quite healthy in this period. That has led to, among other things, not just an increase in marketing generally, but a more aggressive shift to budget to online. The other thing that's happening with COVID is that folks are spending more time online and on streaming and less time on other traditional marketing channels. They're not listening to drive-time radio. So that budget is something that gets allocated elsewhere, and most of the 'elsewhere' is coming online. There's not as much fresh sports content as there was pre-COVID. So there's less inventory to spend marketing budgets there. A lot of that budget is coming online. It's caused carriers to turn their attention with these marketing budgets more to online. As they've done that, we have seen carriers making very fundamental shifts and saying, 'We've been wanting to shift online faster for a long time. This is a very natural spur to do that.' We're seeing them make shifts that we expect to be permanent. We don't expect that they're going to flop right back offline again. In fact, we've never seen the phenomenon of clients going from our solutions and shifting that budget back offline. That's never been anything we've seen, generally. I don't know if we've even seen it specifically, even in off cases. Most of the moves we're seeing are pretty permanent shifts, and this COVID has been something that's just kind of spurred it. We've got a lot of budget seeking to not only go online because that's where the action is now and where you can get productivity now but also seeking to make a more permanent shift to digital and put the systems and the integrations and the other factors in place that they may have been postponing. But now they have the reason and motivation to do it, and that's getting done. The last thing I would add is that we're getting to the point in our channel where there's been so much success for some of these most successful carriers that a lot of the other carriers are finally saying, on top of everything I just said about reasons to do it, 'Now is our opportunity to try to play a little bit of catch-up.' The big carriers that went more aggressively and have more budget in digital, particularly in our part of the channel, are performing much better than carriers that haven't. You're seeing some capitulation associated with the fact that you've got this moment in time where they're being spurred to do it anyway. It's an interesting confluence of a lot of different things, but we think a very positive permanent shift and long-term inflection as we now are seeing. From carriers that over the past couple of quarters have begun that shift, we're seeing pretty dramatic increases in their appetite and demand as they are now set up to do digital better and as they're starting to get a taste of what we can do for them from a performance standpoint.

Okay. Great. One thing, if it's not Auto Insurance, do you see this type of growth in any of your other sectors? I guess Home Services? Is that the other segment that has this type of growth?

We're experiencing strong growth in our Insurance segment, particularly in Auto Insurance, which constitutes the majority of our Insurance business. Additionally, we are seeing significant growth in other Insurance lines such as home, health, Medicare, and life insurance, areas where we have not historically been as heavily involved but are much larger for several of our competitors. Overall, Insurance growth is looking good. Home Services is also performing well and growing rapidly, and we expect this trend to continue even after the Modernize acquisition. The integration and synergies from these two assets have accelerated, and we anticipate ongoing momentum. Recent homeowner surveys suggest that despite typical seasonal slowdowns in November and December, many homeowners are planning to engage in home services projects during these months since they will be home for the holidays. Therefore, we may see stronger performance in Home Services than expected during this period. Regarding credit cards and personal loans, we experienced strong growth in these areas prior to COVID. Like everyone else, we faced declines due to the pandemic's impact on the economy and high unemployment. However, as the economy recovers, I am optimistic about these businesses' ability to rebound strongly and contribute significantly to our growth once we move past the initial effects of COVID. Currently, they are not contributing to our growth, and the growth we are seeing is primarily from personal loans and credit cards as standalone businesses. I expect these segments to become significant growth drivers again in the near future. Our current footprint shows growth rates exceeding 30% on a three-year compound basis. Auto Insurance and Home Services, which are not directly affected by COVID, are performing exceptionally well. Although personal loans and credit cards have remained stable, I believe they will regain momentum soon, leading to remarkable increases in our growth rate.

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