Good day and welcome to the QuinStreet First Quarter Fiscal 2023 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Laine Yonker. Please go ahead, ma'am.

Thank you. Thanks for everyone for joining us as we report QuinStreet first quarter fiscal 2023 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. 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 upcoming 10-Q. Forward-looking statements are based on assumptions as of today and the company undertakes no obligation to update these statements. Today, we will be discussing both GAAP and non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures are included in today's earnings press release which is available on our Investor Relations website at investor.quinstreet.com. With that, I will turn the call over to Doug Valenti. Please go ahead, sir.

Thank you, Laine, and welcome everyone. The September quarter was a good start to our fiscal 2023. We again delivered good results in a complex environment and we expect to continue to do so. Fiscal Q1 performance included yet another quarter of strong double-digit year-over-year revenue growth in our Home Services and credit-driven verticals. The strength in these two verticals, both of which are now over $100 million in annual revenue, largely offset losses in Auto Insurance. The good overall financial results in the quarter reflected the strength and resilience of our business model and footprint, as well as excellent execution across the company. We also continue to invest in and to make great progress against our enormous long-term market opportunity. Our positioning and capabilities have never been better, which bodes well for the future, including the back half of our current fiscal year. Looking ahead, we expect the trends of the past couple of quarters to continue in the December quarter, our fiscal Q2. Strength in home services and credit-driven client verticals is expected to continue to offset any losses in auto insurance. We also continue to expect a significant positive inflection in auto insurance beginning in January as loss ratios reset, carriers benefit from rate increases, and consumer shopping intensifies in response to higher rates. This inflection is expected to quickly impact our results, leading to a return to strong revenue growth rates and re-expanding EBITDA margins. Revenue in fiscal Q2 is expected to be generally flat year-over-year and about in line with typical seasonality sequentially, with a little added conservatism for auto insurance, as carriers fully absorb the effects of Hurricane Ian and otherwise finish out a challenging calendar year for that industry. We expect fiscal Q2 revenue to be between $120 and $130 million. We expect adjusted EBITDA in fiscal Q2 to be approximately breakeven, well in line with the expected seasonal decline in top line average and consistent with our planning and expectations, including, of course, our commitment to continue to invest in important growth and product initiatives through this transitory period in auto insurance. For the full fiscal year, we continue to expect revenue and adjusted EBITDA results to be generally flat with or better than last year, just as we indicated in last quarter's call. Our balance sheet is strong with almost $90 million of cash and no bank debt. And we still have $20 million remaining in our authorization for share repurchases. Now, as I did last quarter, I wanted to make a few comments on the macroeconomic environment. Obviously, an area of some uncertainty and concern. Most importantly, we have done contingency planning for a possible recession. In the event of a recession, we would still expect current full fiscal year revenue to be flat or better versus last year, and that we would still deliver nicely positive cash flow and EBITDA. We have grown profitably through both previous recessions. Our market penetration opportunity is likely to continue to offset much of any reasonably expected effects from a macroeconomic slowdown. Also in our favor, performance marketing is often one of the last budgets to be cut by marketers as the economy softens, because by definition, spending can be tied more directly to revenue. Further advantaging us in this environment, as in the past, our business helps consumers better shop and save for needed products and services, something they do more of when times get tougher. In particular, consumer shopping for auto insurance, our biggest client vertical, tends to increase in a softer economy as consumers look to save on this non-discretionary expense. Increased shopping results in more traffic to our marketplaces. With that, I'll turn the call over to Greg.

Thank you, Doug. Hello and thanks to everyone for joining us today. As Doug stated earlier, the first quarter was a good start to fiscal year 2023 with total revenue of $143.6 million. Adjusted net income was $2.5 million or $0.05 per share. Adjusted EBITDA was $4.8 million. All of our businesses, except insurance, delivered year-over-year revenue growth in the first quarter. Non-insurance client verticals represented 58% of Q1 revenue and grew 20% year-over-year. Looking at revenue by client vertical, our financial services client vertical represented 66% of Q1 revenue and was $95 million. Insurance carriers continue to experience combined ratio challenges due primarily to inflation and are working through a drawn-out re-rating process. We continue to expect a positive inflection in carrier insurance revenue in January as loss ratios reset, carriers benefit from rate increases, and consumer shopping intensifies in response to higher rates. Within our credit-driven client verticals of personal loans and credit cards, we continue to be pleased with our performance and execution in Q1, growing combined revenue 23% year-over-year. Revenue on our home services client vertical grew 17% year-over-year to $46.7 million or 33% of total, a record quarter for the business. As we've discussed in the past, Home Services may be our largest addressable market and our strategy to continue to drive growth here is simple. One, continue to diversify our existing service offerings, examples of which include window replacement, solar systems, and bathroom remodeling, all of which are still early in our market penetration. And two, expand into new service offerings. We see the opportunity to serve dozens more. This multi-pronged growth strategy is expected to drive double-digit organic growth for the foreseeable future. Other revenue was the remaining $1.9 million of Q1 revenue. Adjusted EBITDA for fiscal Q1 was $4.8 million. Turning to the balance sheet, we generated $5.7 million of operating cash flow in Q1 and closed the quarter with $88.4 million of cash and equivalents and no bank debt. As a reminder, in May, we announced a share repurchase program, reflective of the expected transitory nature of the insurance industry challenges, the strength of our underlying business model and financial position, and confidence in our long-term outlook for the business. To date, we have repurchased over 1.9 million shares of common stock or 4% of shares outstanding at a total cost of $20 million. As we look ahead into Q2, I'd like to remind everyone of the seasonality characteristics of our business. The December quarter, our fiscal second quarter, typically declines about 10% sequentially. This is due to reduced client staffing and budgets during the holidays and end of year period, a tighter media market, and changes in consumer shopping behavior. This trend generally reverses in January. The March quarter is generally our largest of the fiscal year as staffing levels and marketing budgets renew. For fiscal Q2, our December quarter, we expect revenue to be between $120 and $130 million and adjusted EBITDA to be approximately breakeven. In closing, we feel great about our long-term business prospects and financial model. Growth in our non-insurance client verticals of 20% in the first quarter should support a period of strong total company growth when we get to the other side of the insurance environment.

I wanted to start by discussing the profitability in the guidance you provided for the December quarter. Since we began tracking your performance, we have not observed a breakeven EBITDA quarter, even during COVID and amid volatility in the education sector. I'm curious if you could explain what is different about this quarter, or if you are simply using a more conservative approach in your guidance at this time.

Jason, yes, I think what's different is the top line pressure we're getting from the insurance industry issues and combining that with the December quarter seasonality. We're just at a revenue level where with the expense base we have, we're willing to go down to breakeven. What we don't want to do, given that we know insurance is coming back — actually it’s going to be coming back quite strongly starting in January. We don't think it makes sense to cut expenses and cut our investment in growth initiatives across the board and see those investments paying off. So, it's no more than that. We expect to be ramped back up to the kind of levels of EBITDA you would expect from us within a quarter or two and beyond, frankly, as we get that leverage back from insurance and get that volume back. But right now, it's just a volume related thing. And it's a loss of top line leverage while wanting to carry a normal expense load and normal investments in the future instead of cutting costs and cutting investments because of a temporary issue in insurance. If you do a kind of top line leverage analysis, you'll find that it's all very consistent. There is no degradation in our media margin, which, of course, is what variable marketing margin, whatever you want to call it, which is really what drives our gross margin in our business. In fact, it's up sequentially and it's flat year-over-year. So, good margins despite some degradation in insurance because of the weakness there. And because of the strength in the other verticals, as insurance comes back, you're going to see the spring kind of get unloaded here both on the top line and an EBITDA margin expansion right back where you would expect it for their revenue levels we'll be generating.

All right. Always appreciate the color, Doug. I also just wanted to talk about Hurricane Ian a little bit. I mean, are there any changes or notable trends in your business that changed from before the hurricane hit until after? Or maybe the same question, just in terms of carrier dialogue, if there has been kind of any short-term pauses from carriers as they try to recover from the losses that that brought in?

Yes, we would have beaten by even more if it hadn't been for Ian. Ian did set the carriers back in terms of combined ratios, which are now loss ratios, and caused a number of carriers to pause further and cut budgets. I want to say pause it because they tend to shut down states where they have their economics least attractive. So, there were incremental budget cuts and state pauses due to Ian, and the impact Ian had on combined ratios. We would have beaten by even more this quarter if it hadn't been for that. It has not affected what we've heard from the carriers with respect to their outlook, January forward because, as you know, commodity ratios reset on a calendar year basis. The carriers themselves have made great progress in the re-rating and getting their rates increased against the inflationary backdrop and are in — the ones that are furthest along and some of the biggest ones are in really good shape financially and are seeing super results in terms of rates versus costs and claims. They have given us very strong indications of their intent to be aggressive beginning in January, just as we expected, and we just have more confidence of it going forward. But yes, Ian had an impact, but it was a kind of backward-looking impact at this point, at least as we see it with respect to January for us. But December is definitely going to be weaker because of Ian, and last quarter was weaker because of Ian at the end of September part of it.

As we sit here kind of in the early November timeframe, have you seen that start to — you mentioned some carriers pause certain states. Have you seen they had now normalized a month or so after the hurricane?

Not so much, no. I mean, it's affecting this year through December. We still expect that it's reflected in our outlook. Auto insurance is going to be even weaker than it was going to be because of inflation in the December quarter because of Ian. But again, given we just gave you the guide for December, the January forward, it does not have an impact. But December-wise, it is going to have an impact on this quarter, but we fully reflected that in our guide. I don't expect that the carriers are going to recover — add more budget through December, partly because of the impact it had on the loss ratios. But they are all now focused on really is January forward as those ratios reset and they get ready to ramp into what they expect to be a very strong year, given that they've gotten rates increased appropriately for inflation. They expect consumer shopping to be very aggressive due to both the higher rates and potentially due to a softening economy. Both of those things will drive consumer shopping, which drives volume in the insurance market.

Congrats on a good quarter. Doug, I've known you long enough to know that — I mean, obviously, you expect a lot out of your team. You've got some big aspirations around where you can take this insurance business over time. But just thinking about this near to kind of medium-term, do you feel like you've got the necessary things kind of lining up to get back to those past peak insurance revenue levels again? And maybe that's just on a run rate at some stage next year? And before you answer that, don't worry, I'm not going to necessarily put that in the forecast, even if you are feeling pretty confident about it. I'm just trying to get a better sense for how you're feeling about the extent of the rebound in insurance and maybe how long do you think it takes to kind of get back to past prior levels?

Yes, no, it's a great question. We don't know for sure because we haven't been through something like this before. But if you look at the indications from the clients and you look at some of the data we have in terms of what they spent last January and what they intended to spend this year had they not gotten tangled up with inflation and then Ian. I'd say that — and then if you look at the list of initiatives we have going on and the things we're working on to continue to expand in insurance because insurance is not nearly as mature as you might think. There’s still an awful lot to be done in insurance when it comes to allocating budgets effectively to digital and effectively to performance marketing, the way performance marketing ought to be done. There's really a lot more there. I would say, I've never been more confident. I mean, we will absolutely get back to prior year run rates — to prior peak run rates. Our expectation of ourselves, when you look at all that together, is that we will grow insurance to way beyond that. Our aspiration in insurance is still to double our previous peaks over time as we look at adding more footprint, bringing more client budget online, taking that budget to the performance levels it ought to get to, and then implementing new product initiatives like QRP because there are a lot of new opportunities springing up with QRP. All of this has been kind of slowed down by this past year with the inflation effects on carriers' economics, but that's all going to change. We're mostly re-rated. The carriers are going to continue to finish up their re-rating process. The good news is the carriers that have gotten mostly through it are seeing great success. They’ve got their rates right, and they're getting their economics back. They're very much in growth mode and now again, combined with our market expansion, budget expansion, penetration, and new product initiatives gives me great confidence that we'll get way past our peaks in insurance.

That's very helpful. That's a great answer. Also on the personal loans and credit cards, I think pretty clearly with the results this quarter, they held up very well. It seems like an offset to a lot of decline. I'm just curious about kind of how that trended, if you can break it out by both types, credit cards and personal loans, kind of how it trended in the quarter? Maybe if there is any clarity or an indication on how that looked in October? And then maybe just bigger picture, how you think those businesses hold up, maybe in the softening macro?

Yes, that's a great question. Personal loans, I think, grew 35% year-over-year in the quarter. That business is doing extraordinarily well for lots of reasons. One is, we're executing well. We are in very much in market share gain, market expansion mode there and in implementing the latest product and optimization capabilities we have, which we're still a long way from fully getting implemented in personal loans. Now, what we did see in the quarter was some tightening of filters by the lenders, and that affected some of the budgets on the lending side. When that happened, we saw a mix shift over more to some of the credit repair, credit services, credit counseling, debt management services that we also provide for matched consumers. That will offset some of the softening on the lender side. That business is in really good shape. Looking forward — our folks just came back from a big industry conference, and they report that the lenders are all saying that they feel like they are in great shape, that the changes they've made to their filters, to their underwriting criteria to reflect inflation and a bit of a weakening in the economy, put them in good condition. They all report being very stable, having good sources of capital. The cost of capital is up, but their interest rates are also rising. So that industry seems to be weathering it very well. Again, a little bit of tightening, a little bit of a mix shift. And we are hedged because we do have those other services that we also offer to matched consumers, and those are some very, very good services for us. So personal loans, we expect to continue to have a lot of momentum for those reasons. Credit cards are doing really well. That market is super healthy right now. Travel is up dramatically, as you know. We're most leveraged to travel in our credit card business where we're most leveraged to prime consumers. We have very little exposure to the lower end of the credit spectrum, which is where it is getting hurt right now. The upper end is in really good shape. You heard that from everybody. You heard that from the economists and from the big banks. Delinquencies haven't even yet reached pre-pandemic levels for consumers. The core consumer base that we serve in credit cards is in very good shape, and in fact, that market is very strong right now with a lot of good limited time offers and a lot of very attractive limited time offers, along with aggressive marketing by the banks and a consumer that’s in really good shape looking for travel opportunities. So, I'd say that in both cases, you heard Greg say that those businesses together grew about 23% year-over-year. Credit cards weren't as big as personal loans, but it wasn't that credit cards were the strongest; they had such a tough comp from the previous year because last year was a really strong quarter in credit cards. We expect to be able to weather well, and if there is a recession, in our planning specifically for a recession for credit cards, we've assumed that those businesses in particular that credit cards will take a substantial hit in a recession scenario, more than we need to for that contingency planning. I don't think that's going to happen, not at the levels we've taken — not if you look at the strength of the consumer and how we're leveraged to the prime consumer; I just don't see a recession having that big an impact as we reflected in our contingency planning on that segment.

Yes, I wanted to revisit the Q2 guide with regard to the flat revenue in the — roughly breakeven on the adjusted EBITDA. If I go back to Q2 a year ago, the $125 million that generated nearly $6 million of adjusted EBITDA. Could you help me better understand that $6 million or $5.6 million delta, what are we investing in here now that we weren't a year ago?

Yes, it's a great question, Eric. I mean, as I indicated a couple of times, we're not stopping our investments across the business and new product initiatives. We're investing very aggressively in the businesses that we can grow in this environment, including personal loans, credit cards, banking — which is a part of our business we don't talk a lot about, but it's on fire — which is a source of funds account service we provide to financial institutions, particularly banks, and home services. We have a lot more expenses in the system right now for continuing to invest in growing those businesses at the rates we're growing them now for the long term than we had last year. In auto insurance and insurance generally, we have the same expense base we had last year despite that business being down. I don't know, Greg, what was it down year-over-year in the quarter, 30% to 40%, something like that. Because we know it's a temporary thing. What we don't want to do is to stop investing there when we know that the industry and the market is going to come right back, and we have got even more investments in QRP and the products related to it. Those investments are in the future that represents extraordinarily big opportunities and tons of economic and financial leverage to the company. We can do all that and have a quarter with only $125 million in revenue because of what's going on in insurance and still be at least cash flow breakeven, and still have over $90 million in cash in the bank and no bank debt. We think it’s a period where we should do that because most of our competitors don't have all those advantages. We don’t think it’s a time to back off; we think it’s the time to push forward.

Progressive was about 25% of total revenue in the quarter.

All right. And then what leading indicators — Doug talked about given indications of their intent to be aggressive in January. Is there any you could share with us, maybe not Progressive-specific but auto insurance, leading indicators?

Yes. The most important indicator is that the re-rating has gone well. The carriers are reporting that the new rates match up well with their economics that they're seeing in the business, and that gives them great confidence to really put the pedal to the metal in January. We've also received direct indications from certain carriers of their intention to be aggressive coming in January as that gets closer. We don't have specific budget indications, but all of the feedback we have received has been very positive regarding the period starting in January. Again, the underlying factor is that the re-rating has gone well and that they got it done, and some carriers, who are almost completely through that process, have already begun to spend pretty aggressively, relatively speaking, and they are confident to bid for January 1.

Just had a sort of a macro question, how do your different segments do in a rising interest rate environment?

Yes. Rising interest rates in and of themselves, I don't think we could have that direct an impact go through on insurance, generally speaking. In a rising interest rate environment, they make more money because, as you know, they invest the float. And interest rates being low has been hard on a lot of insurance carriers because they dominantly invest in fixed income. In most cases, insurance economics get better in a rising interest rate environment when it comes to that part of the business. On the core side of their business, the operating profit side, rising interest rates to the extent that they put pressure on consumers, will drive consumers to shop more for insurance. We've seen that in the previous two recessions; the carriers would tell you the same thing, the industry would tell you the same thing. To the extent that rising interest rates put pressure on consumers and/or inflation affects consumers, we tend to see more consumer shopping for insurance because they're trying to find any line item they can in their monthly budget to reduce. Usually, when consumers shop for insurance, they save on their policies because it's such a challenging market to navigate. We expect that to be a factor next year, although it hasn't really been included in our planning. We've been really focused on fine economics, client re-rating, and therefore, client budgets on what they are willing to spend. So, both sides of the market ought to benefit from that. In Home Services, rising interest rates tend to slow down new home purchases. However, most of our business in Home Services comes from existing homeowners making improvements to their current homes. What we observed in the last recession was that Home Services remained flat during the recession and through a softening housing market for several reasons. You have, on the one hand, consumers choosing to improve their existing homes because they can't go buy a new home or sell their current property. They’re going to stay there longer, so they choose to move forward with that kitchen remodel, bathroom remodel, and other enhancements they previously postponed. On the downside, if the projects are more discretionary and there is economic pressure on consumers, they delay those jobs. As I stated about credit cards, in Home Services, we’re generally leveraged to prime consumers. These are homeowners, who, at this point, are in good financial shape and sound balance sheets and home equity-wise, even with declining prices. Therefore, the expectation is that, they will weather a recession better than non-homeowners or lower-income individuals. Our two biggest businesses look pretty good in a rising interest rate environment. Moving now to personal loans, the personal loans market shows continued good momentum. This trend is not surprising; as consumers face challenges with credit card debt and rising interest rates, they often seek to consolidate that credit card debt to reduce their monthly payments with a personal loan. By the way, you can refinance personal loans just like any other loan; you might take out a new personal loan to replace the existing one if required. In addition, we offer credit repair, credit consulting, and debt management services, which could see increased demand for similar reasons. Overall, as we evaluated our recession planning for that business, the management team concluded that the mix of these services puts us in good standing. Those are services that we are recognized for in the personal loans space. That business has performed extraordinarily well, growing 35% year-over-year in the most recent quarter. It reflects that we are actively expanding our market share and leveraging our latest product and optimization capabilities, which are not yet fully implemented.

Okay. Just a question on the Auto Insurance side of things. If you're expecting a bump up in the second half, do you have any inkling for potential acquisitions in this area? And how are valuations concerned?

That's a great question. It's one of those things where everybody is — the valuations are down. On the private side, expectations have dropped as much as the valuations have decreased. So, you always have that issue. The private market tends to lag and tends to be pretty resistant to these kind of periods. On the public side, the valuations are down, but the owners have no interest in talking about selling because they too know that the market is going to come back. Why would they sell at the bottom? So, I would say that, it's not likely we'll acquire or merge with another insurance company in the near term because they're all going to wait for the market to recover. They will expect appropriately that when the market returns, they'll perform better, and their valuations will rise. Hence, they aren't going to consider selling unless they’re in distress, which I don't foresee any opportunities we're interested in acquiring in distress. So I think that's where we stand there.

We will take the next question from Chris Sakai from Singular Research. It appears that there are no further questions from the participants. A replay of the conference call will be available approximately 2 hours after the completion of the call by dialing 1 (866) 583-1035 and using the passcode 2194847. That concludes today's event. Thank you for your participation. You may now disconnect.