Earnings Call Transcript - QNST Q1 2026

Operator, Operator

Good day, and welcome to QuinStreet's Fiscal First Quarter 2026 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference call over to Vice President of Investor Relations and Finance, Robert Amparo. Mr. Amparo, you may begin.

Robert Amparo, Vice President of Investor Relations and Finance

Thank you, operator, and thank you, everyone, for joining us as we report QuinStreet's Fiscal First Quarter 2026 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.

Douglas Valenti, CEO

Thank you, Rob. Welcome, everyone. Fiscal Q1 was another good quarter of performance and progress for the company. We delivered record revenue and exceeded our outlook for both revenue and adjusted EBITDA. Auto insurance demand remained strong. Home services continued to grow at double-digit rates, and adjusted EBITDA remained strong, inclusive of heavy investments in new media and product development. We expect further significant growth in auto insurance revenue and margin in coming quarters and years due to strong product and market fundamentals and our rapidly expanding product, market, and media footprint. Auto insurance carrier results are good. Consumers are shopping, and marketing budgets continue their relentless movement but are still in the early shift to digital and performance marketing. While carrier spending is expected to remain strong, uncertainty about tariffs and their eventual impact on claims costs appears to be delaying what we expect to be another significant inflection up from here in carrier marketing spend. In the meantime, we are preparing for the next phase in auto insurance by investing in new media capacity and dramatically expanding our product and market footprint to drive growth and expand margins now and into the future. We also expect continued strong growth in our non-auto insurance verticals, and we are investing aggressively there as well. Overall, our total addressable market opportunity is already enormous and growing, and we continue to deliberately, continuously, and successfully expand our footprint. We estimate that we are less than 10% penetrated in our current footprint of addressable market. We expect to grow total company revenue at double-digit rates on average for many years to come. We also continue to focus on margin expansion, with a near-term next milestone goal of reaching a 10% quarterly adjusted EBITDA margin in this fiscal year, which, as you know, ends in June. Our levers to grow EBITDA margin are threefold: one, growing and optimizing media to catch up to auto insurance demand; two, growing higher-margin products and businesses; and three, capturing operating leverage from top-line growth and efficiency and productivity initiatives. Some examples: Auto insurance margins are expected to expand 5 points this fiscal year and are already up over 2 points just since July, with margins in new faster-growing product market areas of auto insurance running at more than twice those of our core click marketplace. Also, margins in big new media areas in auto insurance and across the company are now past breakeven and expanding further as they scale. Our exciting QRP and 360 finance products are expected to grow well over 100% this fiscal year and contribute positively to expanded profitability. Another area of current and future investment and excitement is artificial intelligence or AI. We are confident that we are going to be an AI winner. We expect AI to accelerate our already fast-growing markets by improving consumer access, interface, and engagement in digital media. We also believe that we will disproportionately benefit from AI due to our structured proprietary data and our over 17-year history of successfully applying AI as a competitive advantage. We have dozens of new AI projects underway across the company, and they are already improving consumer satisfaction, client results, media efficiency, and productivity. Finally, before I share our outlook for fiscal Q2 and the full fiscal year, I am pleased to announce that the Board of Directors has authorized a new $40 million share repurchase program. The authorization reflects the strength of our underlying business model and financial position and confidence in our long-term outlook for the business. Turning to our outlook, we expect revenue in fiscal Q2 to be between $270 million and $280 million and adjusted EBITDA to be between $19 million and $20 million. We expect full fiscal year 2026 revenue to grow at least 10% year-over-year and full fiscal year adjusted EBITDA to grow at least 20% year-over-year.

Gregory Wong, CFO

Thank you, Doug. Hello, and thanks to everyone for joining us today. Fiscal Q1 was another record revenue quarter for QuinStreet. For the September quarter, total revenue was $285.9 million. Adjusted net income was $13.1 million or $0.22 per share, and adjusted EBITDA was $20.5 million. Looking at revenue by client vertical, our financial services client vertical represented 73% of Q1 revenue and declined 2% year-over-year to $207.5 million. Auto insurance momentum accelerated in the quarter, growing 16% sequentially versus the June quarter and 4% year-over-year against a very tough comparison. Noninsurance financial services, which included personal loans, credit cards, and banking, declined 10% year-over-year as the year ago period included a very large limited-time promotional offer that benefited our credit cards vertical. Our home services client vertical represented 27% of Q1 revenue and grew 15% year-over-year to a record $78.4 million. Other revenue has been consolidated into our home services client vertical to more accurately depict the operational structure of that business. Turning to the balance sheet, we closed the quarter with $101 million in cash and equivalents and no bank debt, and we remain in a strong financial position. In the September quarter, we repurchased $7 million worth of company shares, and subsequent to the quarter-end, another $10 million worth of company shares, exhausting our previously authorized share repurchase program. In our October 30 Board meeting, our Board of Directors authorized a new share repurchase program of up to another $40 million. We continue to have a rigorously disciplined approach to capital allocation and prioritize: one, investing in new products and initiatives for future growth and margin expansion; two, accretive acquisitions; and three, share repurchases at attractive levels. We will continue to be measured in our approach and remain focused on maximizing shareholder value. 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 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. Moving to our outlook, for fiscal Q2, our December quarter, we expect revenue to be between $270 million and $280 million and adjusted EBITDA to be between $19 million and $20 million. We expect full fiscal year 2026 revenue to grow at least 10% year-over-year and full fiscal year adjusted EBITDA to grow at least 20% year-over-year.

Operator, Operator

Your first question is from Jason Kreyer from Craig-Hallum.

Jason Kreyer, Analyst

Wonderful. Doug, just wondering if you can give some more details on the media investments that you made in the quarter, how those are performing. Specifically, you kind of teased out some of the faster growth areas where you're seeing better margin performance. Just curious for more details on that.

Douglas Valenti, CEO

Sure, Jason. We have been focused on growing our proprietary media campaigns and scaling those pretty dramatically in response to the market demand in auto insurance and in response to the competitive pressures we've seen against scarce media and auto insurance because of the spike in auto insurance demand. Those campaigns have scaled nicely over the past few months and have now surpassed breakeven; our margins there are expanding and are expanding nicely, but we expect there's a lot more to come. As I indicated, we've already seen about a 2-point improvement in our auto insurance margins overall since July, and we expect at least 5 points by the end of the fiscal year. Those campaigns will be a significant contributor to that. Other contributors include new products and services in auto insurance beyond our historic click marketplace that are also reaching good scale and also have significantly better margins. I don't want to share too many details to avoid giving our competitors a roadmap to everything we're doing. But suffice it to say, they're very contiguous, substantial, highly effective, and proprietary as well. We expect those to continue to scale and contribute. By the way, those numbers for auto insurance do not include QRP. QRP margins are treated separately from auto insurance. QRP, as I indicated, also continues to scale very nicely, and we expect to reach profitability this fiscal year as it gains good scale. It grew last year by 294%. This year, we expect it to grow at least 70% more in QRP, while the 360 product on the home services side is going to grow at even faster rates. So we're seeing significant scalability and expansion from new media, incremental products and services in auto insurance, as well as our new breakthrough products, QRP and 360, and other businesses across the company, including home services that have higher margins than auto insurance. So there are many positive developments on the margin expansion front.

Jason Kreyer, Analyst

Yes, certainly seems promising. I wanted to follow up on your tariff comments. It seemed like last quarter that a lot of the tariff concerns had pretty well abated. Now it sounds like maybe those are back on. I'm curious if there's a new round of tariffs causing concern or if the carriers are reacting more to tariffs in recent months more than they were this summer.

Douglas Valenti, CEO

No new tariffs, but no resolution of existing tariffs. In fact, some of them went up for some countries affected. We can only go by the spending behavior of our clients and by any public statements or public information. Spending behavior-wise, the clients are spending strongly, and we expect them to continue to do so, but they're not yet spending at the rate that we would expect given their strong financial performance. One noteworthy point mentioned in public filings is the risk and difficulty in quantifying the exact impact of tariffs. We would say that it's one of the few things mentioned regarding why they might not be spending more than they are relative to their performance. So we would point out that remains a risk factor that they identify and one they find difficult to quantify, which likely indicates they're being more conservative than they would otherwise. As things get clarified, we would expect significant potential for another major increase in spending. We think that you have probably heard similar sentiments from others in our space as well, all suggesting that we are getting similar reads on the market.

Operator, Operator

Your next question is from Zach Cummins from B. Riley Securities.

Zach Cummins, Analyst

Doug, I was curious if you could just talk a little bit more about the spending trends you're seeing broadly among your auto insurance carriers. I know for a good part of the past 12 to 18 months, a lot of the recovery has really been driven by just a couple of major carriers. But just curious if you've seen any sort of evolution in spending trends here in recent months among your carrier partners.

Douglas Valenti, CEO

We've observed an increase in spending, Zach. Smaller players have raised their spending at a much higher pace over the past year compared to the larger players. The larger players are still investing significantly and have expressed their intention to maintain that level of expenditure. I want to clarify that I don't consider the tariffs to be a risk to current spending levels. They are more about the timing of when we will see what we expect to be a substantial increase in spending from carriers. We're noticing a growing trend with strong spending from many clients. A record number of clients are now spending, if you consider a metric of $1 million a month. That's a notable data point for this broadening trend. There has been considerable engagement from clients with various products and overall, very healthy activity.

Zach Cummins, Analyst

Understood. And a follow-up question, Greg, I really appreciate the additional segment detail regarding Q1. Just as we look at the full year guidance and the implied ramp in the second half of the year, anything we should keep in mind regarding credit card offers or anything of that nature in the credit-driven verticals that we should be factoring into our model?

Gregory Wong, CFO

No, I think about the guidance overall, Zach, is what we expect to see is continued strong spending within auto insurance, although we do expect a significant increase once we gain more clarity around tariffs, etc., which Doug mentioned. That increase is not factored into our outlook because we just don't know the timing of that. So I'd say we expect continued strong spending from the carriers, and then what you would typically see is typical seasonality in the back half, alongside continued progress on our other initiatives as well as with the noninsurance business. That's how I would characterize the outlook for the year.

Operator, Operator

Your next question is from Patrick Sholl from Barrington Research.

Patrick Sholl, Analyst

I was just following up on the credit-driven verticals. Have there been any indications in the current macro environment of changes in the monetization of those categories regarding the customer profile coming through those media channels?

Douglas Valenti, CEO

I would say not significant changes, but the trends show that the lower-end consumer is under more pressure. We're seeing high demand for credit and debt-related relief products and, in some cases, personal loan products, which cater more to that demographic rather than the upper end of the income spectrum. The middle and upper income brackets remain very healthy. Banks reported consistent demand, and we're seeing it ourselves as well. The demand for credit cards and associated debt is at record levels, but delinquencies are not; they remain at quite low levels. Therefore, the trend indicates a bifurcation. Our credit card business primarily targets upper-income consumers, while our M1 financial products business focuses on helping lower-income consumers. The banking business, which serves as a source of funds, is still growing rapidly; it was somewhat stagnant during the low-interest period, but with increased interest rates, that market has taken off, and we're seeing strong demand from a diverse range of clients. The general trend is that interest rates are stabilizing now, which has opened up funding accounts again. Overall, there aren't significant changes or inflections that we have noted.

Patrick Sholl, Analyst

Okay. And then within the Home Services segment, have you seen any sort of change in activity driven by lowering interest rates? Or is that more likely to flow through the financial services sector?

Douglas Valenti, CEO

We have not seen changes in terms of demand; we continue to see robust demand for home services. There is ample business opportunity and market opportunity that we can handle, and I believe we will have that for decades to come. It's a huge market that is very healthy. Performance marketing is working well; we are excelling, and our clients have confirmed that. The key is executing and implementing effectively. As you've seen, we are consistently growing at strong rates and perhaps limited only by our ability to execute, rather than market demand. We are still very early in our penetration of that large market. The market is strong, with consumers having substantial equity and capacity to fund projects. They have not been relocating as much, which means there are fewer new projects tied to moving, but many new projects related to improving their current homes. In summary, the market is very healthy. Homeowners are in solid financial shape overall, and our penetration of that substantial market is still quite early.

Operator, Operator

And your next question is from Elle Niebuhr from Lake Street Capital Markets.

Unknown Analyst, Analyst

So first, wondering how we should think about mix-shift impacts on gross margin into 2026, especially as the carrier budgets remain healthy.

Douglas Valenti, CEO

That's a great question. The carrier budgets are healthy, but we haven't modeled the next major growth leg for this fiscal year. If we stay steady and just grow with seasonality as we enter this insurance shopping season in the March quarter, we expect the mix, which has shifted significantly toward auto insurance over the last 1.5 years, to begin to normalize. It may happen that growth in other products and services could outpace auto insurance. If that occurs, it will generally lead to expanded gross margins rather than contracting them. As indicated in my prepared remarks, we are targeting a 10% adjusted EBITDA in the latter half of the fiscal year, which will surely be a factor in that.

Unknown Analyst, Analyst

Got you. And then with that margin expansion, do you see that coming from auto mix or operating efficiency? Or where do you see that expansion coming from?

Douglas Valenti, CEO

Yes, three main areas. One is the mix and initiatives, particularly the new media initiatives in auto insurance continuing to scale and help grow our margins there. The growth of higher-margin businesses, as I indicated earlier, is a key aspect. This includes the new products for 360 and QRP or home services and various other businesses that have typically higher margins and are growing either faster or not declining in the mix. Lastly, we've been undertaking a lot of efficiency and productivity initiatives. Just to provide a data point to demonstrate that, over the past two years, we've increased our revenue from about $600 million per year to $1.2 billion. During this time, we have only added 26 employees, going from 902 to 928 total employees. So when I discuss efficiency and productivity initiatives, it’s apparent that they are yielding positive results.

Operator, Operator

Thank you. There are no further questions at this time. And that concludes our question-and-answer session for today. 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. You may all disconnect your lines.