Good day, and welcome to the QuinnStreet Third Quarter Fiscal 2022 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Hayden Blair, please go ahead, sir.

Thank you, Hayden. Welcome, everyone. Increased claims costs continue to suppress insurance carrier marketing spend and in turn, revenue in our auto insurance client vertical. The good news is that those effects on our insurance clients and their business economics are transitory. Further good news is that revenue in our insurance client vertical appears to be at or near a bottom. Carriers are working diligently through the well-honed process of rerating or repricing their policy products to reflect the new environment. We now have a number of examples of successful client rerating where they have reestablished or increased marketing spend that had been previously paused or reduced. That's another way the environment in insurance remains generally complicated and dynamic, but the client back out to the other side of this adjustment and transition period certainly appears to have begun. Importantly, we and carriers continue to expect strong marketing spend and consumer shopping on the other side of this rerating cycle. Carrier economics will be renewed, and consumers are expected to shop aggressively in response to higher rates. As a reminder, our auto insurance revenue doubled within 12 months of the end of the last major rerating cycle. In the meantime, revenue from our non-insurance client verticals continues to perform well. It represented 50% of total revenue and grew 35% year-over-year in the quarter. All in all, we remain highly enthusiastic about our business prospects and are focused on the projects and initiatives to achieve them. Overall, I'm really pleased with how our team and business are navigating and performing in this complicated environment. Strong trends in our non-insurance client verticals, combined with the eventual resurgence of insurance bode well for the future. A return to insurance revenue, just to the levels prior to current industry challenges would imply total annual company revenue of over $700 million per year, growing at 15% to 20% per year. Even with the current impact on insurance revenue, our financial position is strong with no let-up in our investments in the future. We remain strongly cash flow and EBITDA positive while continuing to invest aggressively in growth and product initiatives across the company. Our balance sheet is strong with over $100 million of cash and no bank debt. One of the important areas of investment in the future is, of course, QRP. Current insurance industry conditions have affected agent activity and therefore reduced the slope of the QRP revenue ramp. Despite those challenges, QRP quota volumes are still well up to the right, the fundamental opportunity represented by QRP and our enthusiasm for that opportunity are as strong as ever, yet another reason to be excited as we climb out of this insurance rerating period. We are forecasting FYQ4 revenue to be between $138 and $142 million. We expect adjusted EBITDA to be between $4.5 and $5 million, continuing to demonstrate the resiliency and strength of our underlying business model and our diversification. Finally, the board of directors has approved a $40 million share repurchase program. The buyback reflects the expected transitory nature of insurance industry challenges, the strength of our underlying business model and financial position, and confidence in our long-term outlook for the business. With that, I will turn the call over to Greg.

Thank you, Doug. Hello, and thanks to everyone for joining us today. Revenue in the March quarter declined 2% year-over-year to $150.7 million. GAAP net income was $2.2 million or $0.04 per share. Adjusted net income was $4.9 million or $0.09 per share. Adjusted EBITDA was $6.9 million. Looking at revenue by client vertical, our financial services client vertical represented 72% of Q3 revenue and declined 7% year-over-year to $108.3 million. Doug will cover the details of what is going on in the insurance client vertical in his remarks. Within our credit-driven client verticals of personal loans and credit cards, progress and revenue growth continue well ahead of our initial outlook for the year, growing 89% year-over-year and eclipsing a $100 million annual run rate in fiscal Q3. Our home services client vertical represented 27% of Q3 revenue and grew 16% year-over-year to $40.7 million. We continued to expect this early stage client vertical to deliver double-digit organic growth for as far as the eye can see. Other revenue, which consists primarily of performance marketing agency and technology services, accounted for the remaining $1.7 million of Q3 revenue. Turning to the balance sheet, we generated $3.6 million in normalized free cash flow and closed the quarter with $109.5 million of cash and equivalents and no bank debt. In summary, we continue to be pleased with our diverse footprint of client verticals. Non-Insurance client verticals grew 35% year-over-year in the quarter, and we believe that will support a period of fantastic growth when we get to the other side of this challenging macro environment in insurance. In the meantime, we will continue to focus on execution and expect to aggressively execute on our recently authorized share repurchase program at current valuation. With that, I'll turn the call over to the operator for Q&A.

I might have missed this, but could you guys maybe talk a little bit more, maybe unpack the guidance and specifically just around the insurance trends? I know the FY3Q is your seasonally strongest quarter, so I'm assuming that's down from that level. Maybe if you could just talk to what you're considering on the year-over-year decline basis?

What's in the guidance for this quarter is really what we've been experiencing since February and that's pretty flat insurance revenue. We have been for the past four months or so and expect to be through the end of the fiscal year through June flat in insurance, which does beat, by the way, typical seasonality in terms of the way we know it normally works. As you know, January was an outlier, but February forward has been plus or minus a very small number in terms of the revenue and insurance. It's one of the reasons we point out that we feel like we're bouncing along the bottom here and that combined with recent moves by some of the insurers and recent announcements by some of the insurers of success in rerating and intentions to begin to raise their marketing budgets in the second half of 2022. One of the reasons we, again, have talked about we're believers at or near bottom and bouncing along that bottom. That's a main component. The other businesses in the guide we're assuming are showing pretty much the same pattern they've been showing for the past year or so in terms of their growth rate year-over-year, but with some seasonality associated with that to your point. They move from the March quarter into the June quarters, typically a little bit down because of the strength of the March quarter. Pretty normal recent patterns, which have been quite strong in non-insurance and flat in insurance because that's what we've seen since February and that's what we are forecasting as we get indications and run rates for the business through June.

Okay. That's helpful.

Let me add one other thing, John, I'm sorry, just so I don't forget to mention this. The pressure we're seeing on margins associated with insurance is twofold. One is, of course, we've lost a lot of top-line leverage because of the loss of that revenue, and that's reflected in the guide because we're not restructuring to accommodate that. We are investing through this cycle because we know it's temporary; we want to be ready to take full advantage of the other side. But the other point is with the remaining insurance revenue, auto insurance revenue, which is dominant, of course, with us pricing and filters. Filters are tighter, and pricing is down, so we're getting a little bit of a double whammy on margins right now that will cure itself as we come out of this period in insurance.

Okay. That's helpful. Then a similar vein around just the year-over-year growth of insurance, you guys don't specifically break that at all. We've done back of the napkin math, and I feel like we've gotten pretty close to that over time. But if I look at this on a two-year stack, obviously, FY21 was a very good year, but on FY20, even with the decline in insurance here, it looks like you're still maybe up 10% or so, 11%, 12% or so over the last two quarters relative to FY20, is that directionally correct?

No, I do not have that in front of me right now. I apologize, John.

Okay. That's fine, but I think the point I'm making here is it just feels like there's some investor concerns around potentially over-earning in FY21 getting outsized industry trends and helping on the insurance side. But it sounds like for you guys that you really do believe that the transitory issue, otherwise you would be maybe making some cost measures, you wouldn't have a buyback in place because of it. Is that fair to say?

Yeah, absolutely. I don't know where that comes from, by the way. That's not consistent with anything that we hear from, know about our clients' plans and business, or anything any of our clients have said about their business and their intentions and their plans, or anything we have that we are doing that would have an impact on that. That does not sync up at all with reality as we know it and expect it. I don't know where that came from. I know sometimes the investment community people have something that takes on a life of its own, but that has zero credibility.

Thank you, gentlemen. Apologies. I hopped on late, so I apologize if you've already touched on this. But given you've been at the auto insurance business for a long time, I'm just curious when you start to see contraction on that acquisition spend, does that usually happen across one or two large carriers and then flow into the smaller carriers? And then if there's a specific pattern on how that flows across the industry? Can you talk about where we're at in terms of your customer base, large and smaller, or are you seeing that across the entire stack?

That's a great question, Jason. I'm going to talk generically because, of course, we are very careful to try not to talk about specific clients for obvious reasons, but generally speaking, they don't all act at once. Very often there will be, and I'm talking mainly the big carriers by the way, which really dominate the market so you did mention the smaller carriers, but they're relatively unimportant in the overall scheme of things in terms of supply and demand, media pricing and utilization. So, I'll focus mainly on the larger clients who dominate our budgets and dominate everybody's budgets in this channel. Typically, they don't all act at once because they all have very different economics and very different pricing and very different models and do not all even all in the same states as you know. That does tend to be a kind of a ripple effect that you will get some that will move sooner than others and then you'll get they'll raise prices sooner. They'll initially lose a little share because of that, and then very quickly thereafter, you'll see others begin to raise their prices as soon as they can and/or stop marketing where they haven't yet because they can't make any money at the current pricing. Then you'll see that we will turn a little bit and the ones that initially raise prices and maybe lost a little bit of conversion share begin to start gaining traction because they're present in a market where others aren't. And then they may gain even more share when the others come in with their price hikes because then you start seeing consumers start to shop. You get this dynamic of prices going up and pausing and stopping and across various clients, and it ripples through the market. Where we are right now as we think we're somewhere in the middle of that. We have seen, as I said, a lot of examples now finally for a while it was just we were saying nothing but reduced budgets, reduced pricing, and stoppages in terms of marketing activities and certain geographies. Lately, we have been seeing and have a lot of examples where folks have very successfully rerated in states, have gotten much more active or have gotten active again in those states and have begun to reramp their spend in various loss segments in certain geographies and in multiple geographies. We're very much seeing the first pattern of one carrier that stopped early, went in, and started fixing their rates and the others hadn't gotten to it yet. We've seen successful rerating, successful repricing, and a reramp of marketing, and others still in the process of beginning to do all that. What we haven't seen lately, and the other reason I say we're somehow in the middle is that most, if not all have now either pulled back their marketing spend or stopped their marketing spend, where they haven't been able to reprice and are unlikely to begin to reramp that spend until they do get repriced and they are in that repricing cycle now. Long way of saying we're finally seeing some upside from some carrier clients, and the other carrier clients that we're not necessarily seeing upside from yet, we don't expect seeing more downside because they're out of the market. We're in the middle and again, as I said, we certainly feel and looks to us like we're beginning to climb back out. Coupled with that for what it's worth, we're not going to try to be heroes and predict the exact timing. That's fraught, but I will give you a couple data points. One of our competitors said in their call recently, in their discussions with clients, that they thought that the client would begin in the second half of '22 and then the market would be normalized by January. I believe I'm quoting that correctly, folks can certainly check if not, I read that pretty carefully for context that's what they said based on their discussions with clients. Then another large carrier client said just recently that they did expect to be reramping their marketing spend and trying back into what they call growth mode, or words to that effect, in the second half of 2022. Those two things would also imply that we're at our near bottom and beginning to ramp back up.

Always appreciate the incremental color. Thank you for that. I do have a follow-up, just given the choppy backdrop in auto insurance, can you maybe talk about what you think that means for QRP? Is there an opportunity for carriers to view this as an opportunity in more challenging times and lean into QRP more in this environment than they would in a more robust environment?

I believe the momentum and interest in QRP are very strong regardless of the current environment. Over the past month, I have been meeting with key partners to confirm this, and I have never seen such enthusiasm from the important partners who are vital to the long-term success of this product. They are really committed to supporting it. However, while we continue to see growth each month, and last month was our biggest yet in terms of activity and volume through QRP, the rate of growth has slowed due to the current situation. Agencies are facing budget cuts and losing coverage as carriers withdraw from certain states until they are re-evaluated, which has affected activity levels and opportunities for those agencies. Additionally, some carriers are less active on the platform because they are still undergoing re-evaluation in specific states, resulting in a loss of market activity on both the agency and carrier sides. Despite this reduction, our overall trajectory remains positive. I would not say that the current challenging market has negatively impacted QRP, but it hasn't caused a decline either, and the enthusiasm for the product among agents remains strong, at least over the medium to long-term, defined in quarters and years rather than decades.

Perfect. Thanks for all your comments, Doug. Appreciate it.

I agree, Doug, that was a great description of the process. It also sounds like it could be quite extensive and quite variable. Now, your opportunity in terms of marketing costs might be less tied to how well the insurance carriers are doing than just whether there's a level of activity of the search process. I'm wondering, is there some phase of this that's better or worse for you and how long do you think the duration of this process might be?

Yeah, thank you, Jim. It's a good question. I don't think we know how long it will be. That's why I gave, and again, I don't want to predict it because I don't think anybody can precisely. That's why I gave the couple of data points I did in terms of what at least one of our competitors felt confident enough to say and what one of the largest carriers just said, I think it was yesterday in their call. But I would say that what we're seeing by way of consumer activity is that we did see a pretty normal shopping cycle in the February, March timeframe which we expected from consumer activity. I think, Greg, correct me if I'm wrong, but I think we had a peak volume ever of increase or clicks through our marketplaces in auto insurance. Was that March, Greg?

Yeah, that's correct.

We're observing significant consumer activity that aligns with expected trends and cycles. There has been no decline in consumer interest, although the conversion rate for this activity has decreased due to fewer offerings and carriers available in the market. Historically, during rerating cycles like the one we experienced in 2016, as companies raise their rates, it leads to increased marketing efforts and consumer engagement. We are currently in the latter half of a wave where businesses are shifting from reducing their activity to rerating and boosting their marketing spend. Early movers in this process have started to emerge, indicating that more consumers will soon be facing rate increases. This prompts them to shop around, which significantly boosts activity, with many choosing our marketplace. We believe this creates a favorable situation for us, as we see a combination of carriers raising rates for financial viability and consumers actively seeking alternatives. This scenario may lead to a notable cycle similar to what we experienced in 2016, where, within a year of that cycle, our auto insurance revenue doubled due to these combined factors. Our clients also foresee a robust cycle for similar reasons as we approach the end of this period.

Okay. Thanks for that. I wonder too if there are things to describe the rest of the financial service besides insurance, how that is proceeding. And also, what are the key drivers right now in the home services category? Are there certain groups that are carrying the increases or creating the increases rather?

Yeah. In terms of the rest of the financial services, as Greg mentioned, if you look at the credit-driven verticals, which are the next two biggest verticals within financial services for us, personal loans and credit cards, those two businesses combined grew, I think, Greg, 85% year-over-year in the quarter?

89%. Yeah, 89%.

We are currently generating well over $100 million in annual revenue this quarter, and those businesses continue to thrive as we observe increased consumer activity across the economy. This uptick drives the need for access to credit and its utilization. We feel very optimistic about the ongoing outlook for those businesses, which play a significant role in the broader financial services sector. In the home services sector, we are engaged in various trades including window replacement, walk-in tubs, home security, and solar. Despite facing challenges in the market, such as supply chain and labor issues, we are performing well. Many of our clients are experiencing shutdowns in certain areas due to a lack of installers or unfulfilled orders because supply chains have not yet returned to normal. We are actively engaged across a spectrum of around 10 to 12 trades, with a solid presence in four of them. Although activity is generally positive in these trades, it is limited by supply chain and labor constraints. Nevertheless, we are achieving strong growth and maintaining good margins. As we continue to emerge from the difficulties stemming from COVID and the related supply chain and labor shortages, we anticipate gaining more momentum. We are dedicated to our ongoing efforts, which include adding more clients, securing larger budgets from them, and optimizing our media strategies to better connect with consumers. We are committed to fully deploying our marketplace technologies within the home services sector, where our modernized acquisition strategies are key, and we have significant work ahead to integrate all our technologies into these operations. We know that once we accomplish this, we will see a substantial improvement in our performance. Home services present a massive opportunity for us. Moving forward, we plan to enhance our client-side product offerings while expanding into more trades; we believe we can grow into dozens of trades from our current focus on around twelve, with significant scale only reached in about four. As Greg mentioned, we have a lengthy growth trajectory and considerable potential in home services.

I just had a question on insurance. How much of that was financial services?

How much of financial services does insurance represent?

Right.

Historically, it's been about 70%, 7-0 percent, of financial services. With the downturn, Greg, do you have a round number for what insurance represents in financial services this past quarter?

Yeah, it's pretty similar Doug. It's 70% of financial services right around there and it can vary quarter to quarter, but as we discussed and you can see in the bullets of the press release, it's 50% of total revenue. Non-insurance businesses are now 50% of revenue; they grew 35%.

Okay. Great. My other question was on home services and I know in previous calls you might have talked about this, but I can't remember for sure. But we're seeing now we're in a rising rate environment, so how would this affect home services if at all? And what other time periods, if you can remember, that home services, how did a rising rate environment affect home services and what was the outcome?

Yeah. We just went through an analysis of this because we were doing some contingency planning partly as we were putting together the cash flow models for the buyback just trying to consider worse-case scenarios to make sure we still had lots and lots of more margin in terms of cash to fully execute the buyback and we did some planning around recession and an interest rate-driven recession. As we went through that process with the team, the answer was pretty flat. Not significantly down, not significantly up; we have some trades within home services that we would expect to be negatively impacted, and we have some trades in-home service that we expect to be positively impacted. There are a lot of different themes to that because home services is quite a diverse set of trades. But a simple example I might give you is that we are likely to see fewer new home buyers, which would mean that projects to work on and remodel existing homes will many times go up. The general answer is, in a recession or rising rate environment, which could push us to a recession, just rising rates alone have very little impact generally which still rates that aren't going to have a big impact we don't believe on any of our businesses. But to the extent rates get quite high and/or drive a recession, the business we think would suffer most would be credit cards, where we would expect to see a pretty significant downturn. We've modeled that into our downside scenario planning, and then I guess home services, Greg was the other one that we had relatively flat to down as much as 20% in that environment. Is that right?

That's correct. To add on to that, in our contingency planning, we observed that historically, recessions have not significantly affected the growth of our home services business, as we have been in this sector for a long time.

I want to clarify that the -20% figure should not be interpreted as a certain outcome. We are being cautious in our projections, focusing on safeguarding our cash position and ensuring we have ample liquidity regardless of potential outcomes. Historically, we haven't observed a significant negative effect on home services during past recessions for a couple of reasons. Firstly, our market penetration is such that broader economic impacts don't heavily influence home services, and I don't foresee this changing in the foreseeable future. Secondly, home services encompass a wide variety of trades, and we will concentrate on those least impacted or even benefiting from a recession while downplaying those that face negative effects. We have appropriate strategies to navigate this market as we typically do. That said, in our conservative planning for cash positions, we have projected a worst-case scenario of a 20% decline.

Okay. Great. Well, thanks, Doug.

Thank you, Chris. I might also add, by the way, while we're talking about the recession that generally speaking historically, and we've been in insurance a long time. Auto insurance does very well in a recession because consumers shop aggressively to reduce their costs across the board, including the requirement to spend on auto insurance, and driving activities reduced. So auto insurance carriers tend to do well in recessionary-type periods generally speaking.

This concludes today's call. You may now disconnect.