Earnings Call Transcript - QNST Q1 2024

Operator, Operator

Good day, and welcome to QuinStreet’s Fiscal First Quarter 2024 Financial Results Conference Call. Today’s conference is being recorded. Following prepared remarks there will be a question-and-answer session. At this time, I would like to turn the conference over to Senior Director of Investor Relations and Finance, Robert Amparo. Mr. Amparo, you may begin.

Robert Amparo, Senior Director of Investor Relations and Finance

Thank you, operator, and thank you everyone for joining us as we report QuinStreet’s fiscal first quarter 2024 financial results. Joining me on the call today are Chief Executive Officer, Doug Valenti; and Chief Financial Officer, Greg Wong. Before we begin, I would like to remind you that the following discussion will contain forward-looking statements. Forward-looking statements involve a number of risks and uncertainties that may cause actual results to differ materially from those projected by such statements and are not guarantees of future performance. 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 most recent 10-K filing. Forward-looking statements are based on assumptions as of today, and the Company undertakes no obligation to update these statements. Today, we will be discussing both GAAP and non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures is included in today’s earnings press release, which is available on our Investor Relations website at investor.quinstreet.com. With that, I will turn the call over to Doug Valenti. Please go ahead, sir.

Doug Valenti, CEO

Thank you, Rob. And thank you all for joining us. FY Q1 was another successful quarter. Non-insurance revenue grew 18% year-over-year and represented 79% of total revenue. We continued to invest in important product and growth initiatives across the business, including staying positioned to take full advantage of the revamp of auto insurance client spending. We did all that while continuing to deliver on our commitment to maintain our strong financial position, once again demonstrating operational and financial excellence and the resilience of our business model. Auto insurance clients are communicating their intentions for calendar year 2024, and those indications support our expectation of a significant positive inflection in their spending, beginning in January. We are spring-loaded for that inflection and would expect total company revenue to jump dramatically in the back half of the fiscal year and adjusted EBITDA to grow faster than revenue. We expect auto insurance revenue to be even further up and to the right over the longer term, eventually returning to and exceeding prior peak levels as carriers benefit from compound rate increases, product optimizations, and cooling inflation and supply chains, thus allowing the shift to digital and performance marketing to reassert itself as the dominant long-term trend. Turning to our outlook. First for the current fiscal year which ends next June. We expect full fiscal year 2024 revenue to grow between 5% and 15% year-over-year, implying as I indicated earlier, a significant positive inflection in auto insurance spending in the back half. Auto insurance clients are giving us considerable detail about their footprint and budget expansion plans for January forward. While it is still difficult to predict the exact scale and slope of the auto insurance revamp, our bottoms-up estimates imply expected total company quarterly revenue in the second half of the fiscal year to average over $180 million per quarter. We expect quarterly adjusted EBITDA margin in the second half to be between 5% and 10% of revenue. For the current quarter, our fiscal Q2, we expect total company revenue to be between $113 million and $118 million, in line with typical sequential seasonality. We expect adjusted EBITDA to be between negative $0.5 million and positive $0.5 million. We will, of course, continue to maintain our strong balance sheet and strong overall financial position and discipline. Finally, our long-term outlook has never been better. We are extraordinarily well positioned to take advantage of the revamp of auto insurance client spending, and to expand our product and market footprint in that important client vertical. We also continue to scale our non-insurance businesses, which now total about $400 million in annual revenue and grew 18% year-over-year last quarter and at a 19% compound annual growth rate over the past three years.

Greg Wong, CFO

Thank you, Doug. Hello and thanks to everyone for joining us today. For the September quarter, total revenue was $123.9 million. Adjusted net loss was $1.4 million or $0.03 per share and adjusted EBITDA was $1 million. Non-insurance revenue was $98.5 million or 79% of Q1 revenue and grew 18% year-over-year. Looking at revenue by client vertical, our financial services client vertical represented 58% of Q1 revenue and was $72.1 million. We continue to see excellent performance from our personal loans, credit cards, and banking client verticals, which grew 33% combined. Our home services client vertical represented 40% of Q1 revenue and grew 6% year-over-year to $49.4 million. Our strategy to drive long-term growth here is simple: One, grow our business from our existing 15 or so service offerings, examples being window replacement, solar sales and installation, and bathroom remodeling, none of which we believe are anywhere close to their full potential; and two, expand into new service offerings where we see the opportunity to at least triple the number of these sub-verticals we currently serve. This multipronged growth strategy is expected to drive double-digit average annual growth for the foreseeable future. Other revenue was the remaining $2.4 million of Q1 revenue. Turning to the balance sheet, we closed the quarter with $56.3 million of cash and equivalents and no bank debt. As we look ahead into Q2, I’d like to remind everyone of the seasonality characteristics of our business, as I do every year at this time. 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. For fiscal Q2, our December quarter, we expect revenue to be between $113 million and $118 million, in line with typical sequential seasonality and adjusted EBITDA to be between a negative $500,000 and a positive $500,000. In summary, let me reiterate Doug’s earlier points. One, we are extraordinarily well positioned to take advantage of the revamp of auto insurance client spending, which we expect to begin in January. Two, we will also continue to scale our non-insurance businesses, which now total about $400 million in annual revenue and grew 18% year-over-year last quarter. And three, we expect total company revenue to jump dramatically in the back half of our fiscal year, and we expect adjusted EBITDA to increase even faster.

Operator, Operator

Our first question comes from John Campbell with Stephens Inc. Please go ahead.

Jonathan Bass, Analyst

Hey guys. This is Jonathan Bass on for John Campbell. It looks like the home services segment saw a little bit of deceleration this quarter. Can you give some color on what you’re seeing there and then maybe what specific verticals are seeing slower growth?

Doug Valenti, CEO

Yes. Home services grew by 6% year-over-year, as Greg reported. We expect home services to grow at double digits for the entire fiscal year, consistent with what we have seen in recent years. I don't foresee any significant concerns here. There may be fluctuations from quarter to quarter, but I don't anticipate any structural slowdown or issues to report.

Jonathan Bass, Analyst

Okay. Got it. And then, with your commentary around the expected insurance marketing spend coming in January, do you guys have any insight on what the potential trajectory of the spend could look like throughout the year?

Doug Valenti, CEO

We have some input from clients regarding their plans for the first half of calendar 2024, which corresponds to the second half of our fiscal 2024. One client has provided specific numbers related to state and coverage plans. However, beyond that, we only have general guidance on their expectations for the year. We anticipate that the growth will begin in January, reflecting a significant increase over the numbers from the December quarter, which are at multiyear lows. This growth is expected to continue into the June quarter based on what our clients have shared about their plans. Typically, the March quarter sees a peak, followed by a slight decline in June. Nevertheless, based on client feedback, we expect an increase from December to March and then an ongoing uptrend into the June quarter. After that, we anticipate typical seasonality, leading to flat numbers from June to September, followed by a decline in the December quarter as we navigate through the seasonal fluctuations.

Operator, Operator

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

Jim Goss, Analyst

I was curious, Doug, how many of your insurance carrier clients are showing signs that align with your optimism about a significant shift? Additionally, how do you foresee the timing of any recovery among those plans? Do you think it will occur gradually over several weeks or months rather than all at once? Although you mentioned that you aren't entirely sure about the scale and the slope, is there any additional insight you can share regarding those expectations?

Doug Valenti, CEO

Yes, Jim. Most of our carrier clients have indicated that next year, especially starting in January, will involve increased spending in the channel due to their success in achieving rate increases over the past few years and a more stable inflationary environment. They have varying plans for how and where to ramp up, with some providing clear details while others offer less. Overall, we've gathered inputs from all clients and have established strong relationships with them. Based on their feedback and additional factors like media availability and expected traffic patterns, we've created a comprehensive estimate that contributes to the results and the revenue range we provided for the year. Even at the lower end of our guidance, we're projecting an average of around $185 million per quarter in the second half of the fiscal year. We anticipate a gradual increase from Q3 to Q4 based on insights from insurers. Specifically, we do not expect auto insurance revenue to match the levels from the last March quarter, even though we expect to achieve around $180 million in revenue that quarter. We foresee the auto insurance revenue ramping up from March to June, but we do not expect it to reach the high levels of the previous March quarter during either of those upcoming quarters. While we expect a significant step-up, it’s important to note that we are currently at a multi-year low in auto insurance revenue. For context, our peak revenue for auto insurance was $90 million a few years ago in the March quarter, while last March we achieved $63 million. We have a long way to go to return to those peak levels, which we believe we can achieve within a few years, possibly sooner. The anticipated increase aligns with reasonable expectations for a revamp compared to a year ago and the peak levels, if that’s helpful.

Jim Goss, Analyst

Okay. A couple more things if I may. When education was your primary business and you faced challenges, you did experience a recovery in other areas. As Greg mentioned, with the possibility of expanding in certain sectors, including home services and some financial areas, did you observe any internal competition among your different sectors striving to become the next big thing, even though you aim to recover in the auto sector and run on additional cylinders? Also, are there other insurance areas within the multi-line carriers you work with that could benefit from the same technology you use, even if they aren't required, like auto insurance, which could present other opportunities within those companies?

Doug Valenti, CEO

We have several promising developments underway. Our non-insurance business has experienced an 18% growth, with a 19% compound annual growth rate, all achieving strong double-digit increases. This growth isn't reliant on any single client vertical. As we've mentioned before, home services may represent our largest addressable market. There's a clear path for continued growth in this area by expanding the service areas and trades we currently operate in, as well as adding new trades. We see substantial opportunities for growth there. We also expect strong growth in our non-insurance financial services sectors, which Greg noted had a year-over-year growth of 33% in the quarter. Those businesses are nearing or have already hit $200 million in annual revenue, while home services have surpassed $200 million as well. There are vast markets such as banking, credit cards, and personal loans, in which we are still in the early stages. Leaders in those sectors believe they have the potential to generate hundreds of millions in revenue, with some confident they can reach $1 billion based on market analysis and share expansion opportunities. Regarding insurance, we see opportunities for expansion across all client verticals, including insurance. We currently focus on a click-to-direct carrier model and are one of the leading companies in this space. However, there’s still another half of the market primarily reliant on lead aggregator networks, which connect agents instead of direct carriers through leads and calls. We plan to expand our footprint but won’t follow the lead aggregator model, as it feels over-saturated. Instead, we have identified various opportunities for growth in that segment, and we've already seen significant expansion this year, with expectations of continued growth for years to come. There are also various sub-sectors within insurance, such as commercial insurance, where we are early in our expansion. Many of our large multiline carrier clients are actively engaged in that area, primarily serving small businesses, which aligns well with our capabilities. We've talked extensively about the QRP and the rating platform that enables us to serve agencies in innovative ways using our existing integrations. This opens up broader opportunities beyond what we can achieve with direct carriers, even those with significant agent networks. There are many new aspects of insurance to explore. Our initial goal is to help stabilize the insurance market, which seems to be on the verge of improvement. A significant client recently shared their plans for next year's budget, describing them as robust, which aligns with our expectations and what we've been informed about their strategies for the upcoming year. Thus, there are abundant opportunities for continued growth, and we believe it's still early to slow down our scaling or market penetration in these substantial sectors. We view ourselves as a company with the potential for multi-billion-dollar revenue, and the question remains about how many billion-dollar milestones we can achieve.

Jim Goss, Analyst

Thanks very much. Seems diversification is your friend.

Doug Valenti, CEO

Thank you, Jim. I think it’s absolutely.

Operator, Operator

Thank you. Our next question comes from Jason Kreyer with Craig-Hallum Capital Group. Please go ahead.

Cal Bartyzal, Analyst

This is Cal Bartyzal on for Jason. First question for me, I guess, given we continue to see new highs in mortgage rates, do you think that gives you guys a longer duration growth opportunity at home services with maybe people continuing to look at renovations over moving?

Doug Valenti, CEO

We do believe that we will continue to see that. You described it exactly right, and there isn't much more to add.

Cal Bartyzal, Analyst

Can you elaborate on personal loans in relation to credit repair? I'm interested to know if the personal loan segment is maintaining strong growth despite tighter credit and higher lending rates.

Doug Valenti, CEO

We have a diverse range of lenders and have experienced timing challenges over the past year. However, this is balanced by our extensive network of lenders that cater to various credit levels and loan types. We are continually expanding this network to reach more consumers and media. Additionally, we offer top-notch solutions for consumers, including credit repair and debt settlement, provided by high-quality service providers. These offerings help consumers address their credit issues, which is crucial for us to better serve media by providing solutions for a larger audience. This approach has contributed to our strong performance compared to other market players over the past year or more.

Operator, Operator

Our next question comes from the line of Dan Day with B. Riley Securities.

Dan Day, Analyst

On the insurance side, I know you don’t provide like a quote request metric or anything along those lines, but just in general, like these rate hikes starting to get passed to consumers, I’d have to imagine that shopping activity is pretty active right now. I don’t know if there’s not kind of any demand to meet yet. So just anything directional you can provide on quote requests or any other relevant metrics you think are important that supply is there? We just need the demand to come back as you think it will in January?

Doug Valenti, CEO

Yes, Dan. I think you're right about that. With all the rate increases, we’ve observed a notable rise in shopping for auto and home insurance, as expected. People notice the rate hikes and might consider finding cheaper options elsewhere. This is particularly intensified by inflation affecting personal finances and a slightly slowing economy, although we did experience strong growth last quarter. It varies by segment, but overall, we are seeing increased shopping activity. One of the other companies in this area is reporting record consumer shopping for insurance. While I can't say we are at record levels, we are certainly experiencing a considerable rise compared to last year, which itself was up from two years ago, all driven by ongoing rate increases that have averaged in the double digits for the past three years. We have many shoppers, but the issue is that many insurers are currently not active in the market, leading to shoppers not finding the options they want. Thus, while we're receiving a lot of inquiries and traffic, this does not necessarily equate to quote requests because there aren’t enough insurers available to provide them. It’s hard to predict how that metric will develop given the current market dynamics, but the key takeaway is that shopping is up. Based on what we're hearing from carriers, there should be more choices for shoppers in the coming year, which will likely lead to a significantly higher number of quote requests and actual quotes.

Dan Day, Analyst

Just, second one on the M&A environment. You’ve been pretty quiet on this front for a while now. Just anything interesting out there, and just any areas you’d be looking to tackle on if there is something out there that presents itself?

Doug Valenti, CEO

Yes. We’ll continue to be opportunistic and active. We’ve made a few small acquisitions over the past year or so, smaller. We are always looking, we’re always open, for things that add meaningfully to our verticals, and we’ve got a couple in the hopper right now that we like a lot. Neither of them are real big, but they could be really impactful. We like those best. Of course, it’s great to find a company that has done well at their scale that we can kind of plug into our network and ramp and scale much more rapidly, and that’s kind of our favorite opportunity. And we’ve got a couple of those in the hopper right now that we’re pretty excited about, and I’m sure there will be more. We’re also being conservative because of the insurance environment and the fact that our adjusted EBITDA is kind of at the breakeven level, so we’re not replacing the cash we’re using. We’re mindful of that. But it hasn’t caused us to pass on anything that we’d really like to do yet. And as I indicated, we expect to return to pretty robust cash flow levels in the second half of the fiscal year.

Operator, Operator

Our next question comes from Bruce Goldfarb with Lake Street Capital. Please go ahead.

Bruce Goldfarb, Analyst

Are you guys planning any changes to the cost structure to drive margins higher and take advantage of the ramp?

Doug Valenti, CEO

We already have positioned ourselves to take full advantage of the ramp, being very mindful of costs over the past few years. If you calculate the top-line leverage we lost over the past few quarters, we should not have achieved as much EBITDA as we did. We accomplished this because we were focused on margins and costs, ensuring we could maintain positive adjusted EBITDA margins despite the decline in top-line revenue, while also being ready to respond quickly as auto insurance comes back. In short, we have done this, and we will continue to do so while also investing in promising growth opportunities. I believe we have balanced these two competing objectives quite well and feel satisfied with our current position.

Bruce Goldfarb, Analyst

Great. Could you share what percentage of revenue for the quarter was from Progressive, if possible?

Greg Wong, CFO

This is Greg. Progressive was 3% of revenue.

Bruce Goldfarb, Analyst

Thank you. I have one last question. For the larger insurance programs you're discussing, do they provide you with visibility for nearly the entire year? Do you have some bigger customers involved?

Doug Valenti, CEO

They provide us with general objectives and plans for the year, which can be influenced by various factors, such as the severity of the hurricane season. I would say they give us an overall idea of their goals and how they anticipate the upcoming year will unfold. They provide varying levels of detail a few quarters in advance, with more specific information closer to the next quarter. Typically, these projections are fairly accurate, barring any unforeseen issues that may arise.

Operator, Operator

Our next question comes from Chris Sakai with Singular Research. Please go ahead.

Chris Sakai, Analyst

To start, a question on the revenue guidance that you gave of 5% to 15%, I just wanted to know, is that somewhat of a downgrade from the previous quarter when you said that you would expect revenue and adjusted EBITDA to grow at double-digit rate?

Doug Valenti, CEO

I’d say it’s a little more specific for you. I mean, double digits covers a lot of ground, right? And so, we decided that now that we have more information going into the latter part of the year and this quarter, we would narrow it down. I would point out that the middle of that range is double digits, 10%. We still maintain that even if auto insurance were flat year-over-year, we would still grow double digits because of the strength of non-insurance. So, there is no downgrade here. There’s no lowering of expectations. We’re just providing more specifics to the range, and all the things we’ve stated previously are still true.

Chris Sakai, Analyst

Okay, sounds good. And then, to go back to personal loans, so in June, it had a very good month. How did the months this quarter compare?

Doug Valenti, CEO

I’m sorry. I didn’t quite understand the question. Chris, ask again, please.

Chris Sakai, Analyst

I recall that June was a very good month for revenue from personal loans. How does that compare to the other months this quarter?

Doug Valenti, CEO

Personal loans continues to perform exceptionally well for us. I think Greg pointed out that personal loans, credit cards, and banking together grew 33% year-over-year, and personal loans makes up more than half of the total revenue from this combined category. Therefore, you could conclude that it had a really good quarter last quarter. Greg, did I get that right?

Greg Wong, CFO

Yes, you did. To add to that, it was a very good quarter. You're right, Chris. The June quarter was particularly strong for personal loans. Additionally, the September quarter that we just completed was also a record quarter for personal loans. Overall, it was a very strong performance.

Chris Sakai, Analyst

Are you expecting that all your segments will be growing sequentially in the third and fourth quarter?

Doug Valenti, CEO

I’d have to look at the third fiscal quarter compared to the second fiscal quarter. I also need to consider the transition from the third fiscal quarter to the fourth fiscal quarter. Typically, we see a decline from the peak in March as part of our seasonal pattern. However, auto insurance is expected to increase from the March quarter to the June quarter. The other businesses are likely to remain flat or decrease slightly if seasonality follows its usual trend. Greg, do you have that information available?

Greg Wong, CFO

Yes. No. That makes sense. That exactly makes sense. Yes.

Chris Sakai, Analyst

Okay. Sounds good. And last for me, I guess, you were seeing last quarter as far as expecting for improvements as far as in auto insurance. Are you still seeing that? And are you seeing what you expected last quarter play out into this quarter?

Doug Valenti, CEO

We mentioned last quarter that we anticipated a significant improvement in auto insurance starting in January, and we still expect that to happen. For the current quarter, which is December, we believe auto insurance will remain challenged until January when they adjust their combined ratio targets and set new budgets. This situation is similar to last quarter, which aligns with our expectations. We anticipate that January will mark the beginning of a notable improvement, or possibly the March quarter, depending on how you view it, and we still stand by that prediction. We have also been able to gather more detailed insights to better assess the impact on the overall business for the latter half of the year. In short, yes, we remain optimistic.

Operator, Operator

Thank you. And there are no further questions at this time. Thank you everyone for taking the time to join QuinStreet’s earnings call. Replay information is available on the earnings press release issued this afternoon. This concludes today’s call. Thank you for joining us.