Earnings Call Transcript - QNST Q2 2024

Operator, Operator

Good day, and welcome to QuinStreet's Fiscal Second 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 second quarter 2024 financial results. Joining me on the call today are Chief Executive Officer, Douglas 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-Q 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, and thank you all for joining us. December was a successful quarter. We met or exceeded our objectives in the quarter and continued recent positive themes, including growing non-insurance businesses at strong rates year-over-year, investing in and making good progress on growth initiatives across the business, and positioning ourselves well for the re-ramp of auto insurance client spending. All that while delivering solidly positive adjusted EBITDA and maintaining our strong balance sheet. I am particularly proud of those accomplishments, given that we were facing the bottom of the insurance cycle and our toughest seasonal quarter. The significant positive inflection in auto insurance client spending that we expected to begin in January has indeed begun. Auto insurance revenue is expected to be up well over 100% sequentially this quarter versus the December quarter. Auto insurance client spending increases are broad-based and consumer shopping traffic online for auto insurance is also up as consumers react to the compound rate increases of the past few years. Auto insurance clients have indicated that the steep ramp of spending is likely to continue. Accordingly, we expect strong sequential total company revenue growth and rapid EBITDA expansion in the current March quarter and further strong sequential total company revenue growth and rapid EBITDA expansion again in the June quarter. The exact slope of the auto insurance ramp is impossible to predict, but the ramp is, of course, highly impactful to our results. Turning to our outlook for the current or March quarter, our fiscal Q3. We expect revenue to be between $160 million and $170 million, representing sequential growth of 35% at the midpoint of the range. We expect adjusted EBITDA to jump to between $7 million and $9 million as we captured the initial immediate impact of operating leverage from the revenue ramp. For fiscal year 2024, which ends in June, we continue to expect company revenue to grow between 5% and 15% over fiscal 2023. Looking ahead to fiscal year 2025, which begins soon in July, while detailed planning is not yet completed, I am confident that we will expect strong double-digit full year revenue growth over fiscal 2024. Now, before I turn the call over to Greg for more details on our financial results, let me give you my overall view of where we are. We have weathered a fierce macroeconomic storm in auto insurance, our biggest vertical. We have maintained positive adjusted EBITDA and a strong balance sheet throughout, thanks to strong capabilities, disciplined execution, and a resilient business model. Our business model and strong financial foundation allowed us to continue to invest in the future during this period despite the conditions in auto insurance. We rapidly scaled two nine-figure non-insurance client verticals and invested aggressively in our capabilities, products, and footprint for future growth. We are now incredibly well-positioned for the near and long term. Our footprint for growth is large and diversified, representing tens of billions of dollars of addressable markets. We have big growth opportunities in the expansion of our existing client verticals and in exciting new contiguous markets and product areas. Our capabilities and competitive advantages are clear and strong, and we are improving them and expanding our market opportunities at a rate unprecedented in company history, or I would argue, in the history of our industry. I have never been more confident or bullish about our prospects from here, especially, of course, as auto insurance continues to adapt, normalize, and re-ramp. With that, I'll turn the call over to Greg.

Greg Wong, CFO

Thank you, Doug. Hello and thanks to everyone for joining us today. Fiscal Q2 was another solid quarter for QuinStreet. Total revenue was $122.7 million. Adjusted net loss was $2.3 million or $0.04 per share, and adjusted EBITDA was $417,000. Within the quarter, we saw the auto insurance cycle bottom out in November. That being said, we are excited about the significant inflection of auto insurance client spending, which indeed began in January. Looking at revenue by client vertical, our Financial Services client vertical represented 58% of Q2 revenue and was $71.3 million. Our Home Services client vertical represented 40% of Q2 revenue and grew 15% year-over-year to $49.3 million. Other revenue was the remaining $2 million of Q2 revenue. Turning to the balance sheet, we closed the quarter with $45.5 million of cash and equivalents and no bank debt. Moving to our outlook for fiscal Q3, our March quarter, we expect revenue to be between $160 million and $170 million and adjusted EBITDA to be between $7 million and $9 million. For the full fiscal year 2024, which ends in June, we continue to expect revenue to grow between 5% and 15% over fiscal 2023. In summary, let me reiterate Doug's earlier points. One, over the past few years, we have navigated a generational downturn in our largest vertical and continued to invest in long-term growth initiatives, all while generating positive adjusted EBITDA and maintaining our strong balance sheet throughout that period. Two, we are well-positioned to benefit from the significant positive inflection in auto insurance client spending, which has indeed begun in January. And three, we expect strong sequential revenue growth and rapid adjusted EBITDA expansion in the March quarter and again in the June quarter. With that, I'll turn it over to the operator for Q&A.

Operator, Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from John Campbell of Stephens Inc. Your line is already open.

John Campbell, Analyst

Hey guys. Good afternoon. Congrats on the solid quarter.

Douglas Valenti, CEO

Thank you, John.

John Campbell, Analyst

On the guidance, it's certainly encouraging to see the early stages of the insurance recovery. You have been preparing for this, so it's good to hear that it seems to be starting to develop. It appears you may be easing back a bit on the guidance for the next quarter. However, regarding the guidance for the latter half of the fiscal year, I would appreciate some insight into the key assumptions, particularly related to insurance. I believe the last peak you experienced in the second half was probably in fiscal year 2021. If you could clarify the assumptions you're making in comparison to that peak and how much further down you expect to go within that guidance, that would be helpful.

Douglas Valenti, CEO

Yes, John, the main factor influencing our guidance for the remainder of the year is the anticipated growth in insurance. We don't have exact figures, but our clients are showing consistent signs of a strong upward trend. Some clients have specific targets for the upcoming months, while others are less specific but equally optimistic. This outlook is a significant shift from last year, where one client primarily drove our strong performance. The numbers are formed based on a variety of assumptions from our client feedback and our data regarding media capacity and expected budgets. Predicting this with precision is challenging due to the many variables involved. However, we’ve indicated in our prepared remarks that the outlook is generally positive, with a substantial increase expected. I would note that we may be slightly more conservative this quarter, as it is still early in the ramp-up compared to what we expect in the next quarter. As we explore different scenarios, we incorporate extensive data, especially considering our larger media presence compared to the last time we saw a peak in auto insurance. In this quarter, we won't reach the previous peak of auto insurance revenue, but next quarter's guidance could range from below that peak to slightly above it. This reflects our efforts to balance various factors. Does that address your question?

John Campbell, Analyst

Yes, that is very helpful. Because I think some of the questions we get is just looking at optically, the growth rate looks pretty substantial for the fiscal 4Q, but I think the message is that getting to that high end of that guidance range is not assuming heroics relative to the past peak? Is that fair to characterize?

Douglas Valenti, CEO

Absolutely fair. Yes, it's by no means extraordinary if you looked at the data and the inputs and thought, you're never going to achieve this. We're very confident in our guidance for this quarter, which projects a $45 million increase over last quarter at the midpoint. Depending on our performance this quarter against that guidance, we could see an additional $20 million to $30 million at the lower end of the range and potentially more. So, we don't believe it's a stretch. We consider it realistic and based on reasonable assumptions.

John Campbell, Analyst

Okay. All very helpful. And then one last one here, just kind of housekeeping. But on the CapEx, I mean you guys have always kind of operated with light CapEx. I've noticed that, I guess, year-to-date, fiscal year-to-date, CapEx is like double up relative to last year and I think the year prior to that is like four times higher. So, it seems like definitely a focused investment happening there. I don't know if you're at a stage now where you can shed some light on that, but I'm curious about what's driving that?

Douglas Valenti, CEO

Yes, it's a great question, and you're exactly right. We have been increasing our investment in software development, primarily in the QRP area, driven by demand and the signing of some large accounts. We aimed to ensure that our product was fully ready for launch with these significant clients early this year. As we anticipated and observed an increase in demand for that product following the recovery of the insurance market, we decided to invest at those levels. I can tell you that we are nearing the end of this cycle, and you will see a significant drop in capitalized software development costs starting this quarter. We are really excited about the product's progress, the interest we're receiving, and the large accounts we've signed, which we expect will only improve as the insurance market continues to recover. There was a period of dormancy because not enough carriers were participating in the market for brokers and agencies to justify investing in our product. However, we have seen a notable turnaround in the last few months.

John Campbell, Analyst

Very encouraging to hear. Thanks for the time guys.

Douglas Valenti, CEO

Thank you, John.

Operator, Operator

Your next question comes from Dan Day of B. Riley Securities. Your line is already open.

Dan Day, Analyst

Thank you for taking my questions. It would be helpful if you could provide insights from a state level. I know that several major states have effectively been shut off since around April of last year. Could you comment on what has come back in January? Are those larger states being activated again in a significant way? Any thoughts on this would be appreciated.

Douglas Valenti, CEO

Sure Dan. You are correct, a lot of big states have been shut down by a number of carriers in some states, pretty much all the carriers. We have seen some re-openings of some major states by major carriers. Of course, it's a map with a lot of different participations by different carriers. So, not all the carriers are opening all the states at the same time. But I can tell you that we have seen some big states reopened by major carriers and by a number of carriers, and we've been told to expect that to continue. And we have gotten indications of some of our major clients that they would expect to be reopened in all major states and back to what they consider to be a normalized demand, which we are nowhere back to yet, by the way, by mid-year.

Dan Day, Analyst

Okay, great. Sounds like good news. You guys said in past quarters, you've broken out the growth in the credit-driven vertical specifically. I didn't hear any commentary this quarter. Maybe I missed it, but can you just give us some color on how the personal loans, credit cards, other connection verticals performed and the outlook for the next couple of quarters?

Greg Wong, CFO

Home Services, which you didn't ask about, grew about 15%, making it our second or third largest business. The largest component of credit-driven verticals, personal loans, increased by 18% year-over-year in the quarter. Credit cards experienced a slight decline compared to the previous year, but that is primarily due to a tough comparison with last year's figures. The fluctuations in credit card performance are influenced by limited-time offers or promotions. Last year saw numerous attractive promotions in the December quarter, while this year there weren't significant new promotions. We anticipate that things will stabilize as we introduce new promotions in the upcoming quarters. These categories account for over 90% of the credit-driven sector.

Dan Day, Analyst

Okay, great. Appreciate it guys.

Douglas Valenti, CEO

Yes, thank you, Dan.

Operator, Operator

Your next question comes from Mark of Lake Street Capital Markets. Your line is already open.

Unidentified Analyst, Analyst

Hi, guys. Thanks for taking my call. So, it looks like you had some strong growth in the Home Services piece, but I was wondering if there was anything you could say around any impact you saw with rising rates and what that may add on Home Services lead generation?

Douglas Valenti, CEO

That's a great question, Mark. However, we haven't noticed anything specific. Generally, in our experience and discussions with clients, higher rates are influencing several factors. One impact is that consumers tend to stay in their current homes since they don’t want to give up their mortgage. This leads them to invest in their homes, which is a continuing trend in Home Services. We're making sure to engage with our clients in product and service areas that align with this trend. Additionally, while it might be harder for consumers to fund larger projects due to interest rates if borrowing is necessary, we haven't observed this affecting our business significantly. We firmly believe that Home Services remains a strong growth market for us, with double-digit growth expected for the foreseeable future. It's still in its early stages, it's substantial, and it aligns well with QuinStreet. That sums up my response to your question.

Unidentified Analyst, Analyst

Got you. That’s helpful. Thank you very much. That’s all I have.

Operator, Operator

Your next question comes from Jim Goss of Barrington Research. Your line is already open.

Jim Goss, Analyst

Thank you, Doug. I believe you touched on the media footprint and capacity. Could you share a couple of metrics to indicate that we have reached an inflection point? Is it the volume of inquiries? What can we take away to understand that this milestone has been achieved?

Douglas Valenti, CEO

The main point I mentioned earlier is that our auto insurance revenue will surpass 100% growth this quarter compared to last quarter. This reflects a significant shift, driven by increased consumer demand due to higher rates and the introduction of more options as states open up and participate more. We observed a 30% increase in online consumer traffic for auto insurance in January compared to December. Moreover, nearly all our clients in auto insurance have seen substantial increases from the fourth quarter. Overall, we are looking at around 120% to 130% growth quarter-over-quarter this quarter compared to last quarter, with indications that this trend is accelerating. The budget we had in December was significantly better than in November, and we saw a notable surge in January compared to December. This growth momentum has continued into February, with more budget allocated and additional states participating than in January. Clients are also expressing a desire to reach higher levels of engagement, including some large clients aiming for coverage across nearly all states. Currently, most states are open, and clients are managing their budgets as they prepare for a ramp-up by June. These factors reflect the overall growth trajectory we are experiencing.

Jim Goss, Analyst

Okay. I know you mentioned that these cycles can be unpredictable and that no two cycles are exactly the same. But does history indicate any level of sustainability in the rebound? Is it typically a long-lasting situation, or does it usually happen quickly when it occurs as dramatically as it is right now?

Douglas Valenti, CEO

It's a good question. When I refer to it as unpredictable, I mean the exact trajectory is hard to forecast. However, it is clear that the trend is upward and appears to be steepening. Sustainability is a significant concern, especially considering our experiences from the last couple of years. The indicators from our side suggest that the sustainability is strong. If we look at the reported combined ratios and profitability of auto insurance carriers over the past few quarters, they have improved significantly and consistently compared to last year and the year before that, which is crucial because their financials need to be viable. The combined ratios have improved mainly due to rate increases, and they have seen compounding double-digit increases over the past three years. Additionally, they have made adjustments to their offerings and market strategies to enhance their economics. As a result, we're seeing robust combined ratios and profitability reports from all major carriers. This trend is likely to continue. Another point is the breadth of participation. In the past few years, the surge in January was concentrated among one or two carriers. This year, we're seeing increased engagement across all our carrier clients. I can't think of any that haven't significantly boosted their spending with us, and there’s a strong outlook for continued spending. Additionally, their overall engagement is much broader this year compared to last. This signals to us that the future looks promising and credible. Your inquiry about longevity is an excellent one. Historically, the bad markets in insurance tend to have relatively short cycles compared to the recent years we've experienced. This is why it has been characterized as a generational challenge; it's been a profound and challenging cycle in auto insurance. Factors like COVID-19's impact on driving behaviors, along with inflation and supply chain issues, have all contributed to this situation, leading to difficulties for insurance carriers that took longer to resolve than usual. Typically, these down cycles last about a year, followed by several favorable years. While I'm not an insurance industry analyst, many analysts following the industry believe we might be on the verge of a multiyear positive cycle due to the adjustments carriers have made in terms of products and rates. We also need to be mindful of unexpected events that can lead to shorter cycles. Nonetheless, we feel optimistic, and our clients seem to share that outlook.

Jim Goss, Analyst

Thank you. I heard someone mention that they were told by an agent that some states are hesitant to insure certain cars due to risks that have emerged over the last couple of years. Are you witnessing anything like that or any other factors worth considering?

Douglas Valenti, CEO

No, it's a good question. There are situations like that in the market all the time. However, nothing that we expect will fundamentally change the trajectory. There are significant issues, particularly in California, where home insurance coverage is lacking. Nonetheless, there are many factors at play, but the overall trend of the market from this point seems to be upward.

Jim Goss, Analyst

All right. Thanks a lot. Appreciate it.

Douglas Valenti, CEO

Thank you, Jim.

Operator, Operator

Your next question comes from Jason Kreyer of Craig-Hallum. Your line is already open.

Jason Kreyer, Analyst

Great. Thank you. Doug, just wanted to see if you could give us more color on the dialogue you're getting from carriers. I know in past cycles, the resurgence of spend has been kind of driven by digital first carriers with more of the captive agencies, a little bit behind them? Are you seeing that play out now? Or are you seeing a little bit more increased spend out of both buckets?

Douglas Valenti, CEO

We actually see more out of both. Recently, we reviewed the auto insurance market and business with the Board, and one of the slides highlighted how much more diverse our footprint has become compared to last year for this quarter, and it's quite significant. We're experiencing a broader base than in previous cycles, which I believe is generally true. It's also specific to us since our footprint is larger now than it was in the last cycle. We participate much more widely in different areas of the digital landscape; we used to primarily rely on clicks, but now we have clicks, calls, leads, services like QRP, and more. So, while this is anecdotal, it appears we're seeing broader engagement in response to your question.

Jason Kreyer, Analyst

That's great. So, as the re-ramp continues to build, I'm just curious what you think your prospects are for taking market share over the next several months?

Douglas Valenti, CEO

I think it's good. We have not lost market share in the media sector. In fact, we've significantly gained market share during this period. We've recently signed a major player in media that will enhance our successes as we launch that in the next month or two. No one else has been able to invest in products that expand the market and our presence like we have during this time because we were in a position to do so. We had no debt and generated positive cash flow. Most other players in the market were burdened with debt or were heavily reliant on the auto insurance cycle and other issues, which limited their ability to make aggressive investments like we have. We've invested in areas we believe will help us not only grow the channel and our footprint but also increase our market share. We've gained market share, and we expect to continue doing so.

Jason Kreyer, Analyst

Just one more question, if you don't mind. Earlier, you mentioned some data or statements regarding QRP. I understand you don't want to disclose specific numbers or contributions. I'm just curious about the potential rate of change and how significant that could become over time. Do you believe it could have a larger impact and be more meaningful to your fundamentals?

Douglas Valenti, CEO

It's a good question. We've made a significant investment in that product because we believe it has great potential for us. We expect it to generate tens of millions of dollars, possibly even more, especially when considering its side effects and how it can be combined with other services. The opportunity is substantial, with a market exceeding $100 million. While we don’t anticipate capturing the entire market, we are confident that we are ahead of competitors in terms of the product's capabilities. There may be a slight delay in our growth compared to the overall market rebound, as it relies on increased marketing spending and client engagement, as well as agencies becoming active and investing in projects like QRP, which enhances their efficiency and productivity. Although we anticipate this lag, we expect a significant ramp-up this year and into the next fiscal year. Currently, we are generating seven figures, but we aim to elevate that to mid to high seven figures in the next fiscal year and beyond, with hopes to reach an eight-figure figure eventually. This revenue is quite impactful, contributing about 80% to 85% as we scale, far beyond the typical 30%. We view this as a highly valuable market opportunity. We plan to hold an Investor Day in the next six to twelve months, focusing on QRP and updating on major client programs, which may each reach seven figures or more. These contracts are signed, and we are optimistic about them. The rollout was somewhat delayed due to challenges in auto insurance, but we've recently seen renewed activity and success with major signings that are currently in the launch and ramp stages. We will provide more details as we progress, and while we may eventually break out these figures, we want to ensure we are fully operational again before doing so.

Jason Kreyer, Analyst

Got it. Thanks for all the color Doug. I appreciate it.

Douglas Valenti, CEO

Thank you, Jason.

Operator, Operator

Your next question comes from Chris Sakai of Singular Research. Your line is already open.

Chris Sakai, Analyst

Hi, good afternoon Doug and Greg. I have a question about Q4. It seems like a lot of growth is expected in Q4. What are the chances that auto insurance won't ramp up as quickly as needed to meet Q4 goals?

Douglas Valenti, CEO

I believe we are within the expected range, Chris. We've indicated a 5% to 15% growth for the year, which allows for considerable variability at our scale. This suggests there is a possibility we may not reach the high end of that range. However, we also think it’s plausible that we could exceed the low end. As mentioned previously, we're experiencing a sequential growth of approximately $45 million quarter over quarter. The lower end of our range likely reflects another $20 million depending on our final position, landing somewhere between $20 million to $25 million in addition to the sequential growth. At the bottom of the range, we are observing a slowing of the ramp, though there is currently an acceleration in the auto insurance segment. Ultimately, we anticipate finishing within that range, but the specific point will largely depend on the pace of the auto insurance growth. While that growth is on an upward trajectory, it’s challenging to predict its exact path, which is evident in our results. The auto insurance ramp mainly drives our expectations, yet we also have strong growth opportunities in Home Services, which is around $200 million, personal loans, about $100 million, and credit cards, which could benefit from increasing market promotions. Overall, where we finish with the ramp is primarily tied to the characteristics of the auto insurance growth, but we are comfortable with the bottom end of our projections and believe the top end is achievable.

Chris Sakai, Analyst

Have you considered diversifying away from the fluctuations in auto insurance in a strategic manner?

Douglas Valenti, CEO

No, I mean we will diversify; we have diversified, right? At the beginning of this auto insurance cycle, I think home services, Greg, has more than doubled during this period.

Greg Wong, CFO

You're probably right.

Douglas Valenti, CEO

Personal loans have likely doubled during this period. We have significantly expanded our presence and diversified our offerings because we discovered promising new market opportunities that align well with QuinStreet. Our aim was not to move away from auto insurance, which we see as a strong market for the long term. We possess exceptional capabilities, a robust media presence, and top-tier products and services in this sector. We maintain close relationships with leading clients in the industry. Auto insurance will continue to be influenced by marketing for the foreseeable future due to the nature of its business model, where rates are regulated by authorities. To enhance shareholder value over time, growth will mainly come from gaining market share rather than increasing margins or pricing, which are ultimately controlled by state insurance commissioners. We are fundamentally supportive of this market, which is substantial, and we hold a solid position within it. We intend to grow this business significantly with our ongoing initiatives and will also expand into other client verticals. We see Home Services as our largest addressable market, much larger than auto insurance over time, and we have already demonstrated our ability to scale in that area. We believe personal loans are equally significant, if not larger, depending on how one interprets the lending market; we have shown our capability to scale in this domain as well. Additionally, we are enthusiastic about other credit-driven businesses, including credit cards and banking, which are still in the early stages. Together, we are nearing $100 million a year in revenue from these two segments and believe we will soon surpass that amount. Our diversified footprint will encompass auto insurance and an expansion of products and services related to both auto and home insurance moving forward.

Chris Sakai, Analyst

Okay. Thanks.

Douglas Valenti, CEO

Thank you.

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 conference call. Thank you for your participation and you may now disconnect.