QuinStreet, Inc. (NASDAQ:QNST) Q2 2024 Earnings Call Transcript

QuinStreet, Inc. (NASDAQ:QNST) Q2 2024 Earnings Call Transcript February 7, 2024

QuinStreet, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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: 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.

Doug Valenti: 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 already 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 limited 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: 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 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 continue 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.

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Q&A Session

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

John Campbell: Hey guys. Good afternoon. Congrats on the solid quarter.

Doug Valenti: Thank you, John.

John Campbell: On the — so on the guidance, I mean, it’s certainly encouraging that it feels like it’s the kind of early stages of the insurance recovery. You guys have been kind of bracing for that. So, it’s — glad to hear that it seems like that is kind of starting to arise. It seems like you might be laying off a little bit on the guidance for the next quarter. But if I look at just the back half of the fiscal year guidance, I’m looking for maybe a little bit of color if you can unpack some of those key assumptions mainly on insurance. I think you guys — the past second half peak you guys saw, I think that was probably FY 2021. So, maybe as a starting point, if you guys could maybe shed some light on the assumptions you’re making relative to that past peak, maybe how much further down you’re expecting within that guidance?

Doug Valenti: Yes, John, the — and you touched on it, the main variable in the range of guidance for the remainder of the year is, of course, the exact slope of the insurance ramp. We don’t know exactly what it would look like. What we do have from clients are consistent and broad-based indications of continued steep ramp. Some pretty specific about where they want to get within the next few months, some less specific, but equally bullish and very important, more importantly, from pretty much every auto insurance client we have, which is very different from where we were last year when we had a strong quarter, but it was really kind of one client that was driving that surge. Rather than giving you — so the numbers are based on the buildup of a range of assumptions based on what they’ve told us and our own information on what capacity we have in media, what budget we’re likely to get from what players and how those are likely to come together.

So, as I said, it’s impossible to predict precisely because there are too many moving parts. But what I think we tried to say in the prepared remarks is that it’s consistently, bullish, consistently a steep ramp, and a lot of good data in there that kind of builds up to the range of outcomes that we have. I would say that we — if we’re going to air therefore, we’re likely to be a little bit more conservative in this quarter because we’re still earlier in the ramp than we will be next quarter, I guess, is something you noted — and I would say that, that would be our bias. I’m not suggesting that the guide is — trying to characterize the guide. I’d suggest given that we’re earlier in the ramp, and therefore, there’s a little bit less fully known you would expect that to be the case.

But as we run a series of scenarios, with a lot of bottoms-up buildups and a lot of input of data from things like media capacity. And we have a much bigger media footprint now, by the way, than we did last time we peaked in auto insurance, as an example. This quarter, we will be nowhere near the past peak of auto insurance revenue as to our guide. Next quarter, the range runs from below that peak that peak a little bit beyond that peak. So, you can see that we’re kind of balancing out various symptoms. Does that answer your question?

John Campbell: 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 of your guidance range is not assuming heroics relative to the past peak? Is that fair to characterize?

Doug Valenti: Absolutely fair. Yes, it’s — by no means in the realm of heroic or anything if you looked at the data and the inputs you go, gosh, you’re never going to get the look we’re highly confident in our guide for this quarter, which is a $45 million ramp over last quarter at the midpoint. It would — to get to — depending on how we do this quarter against that guide, you’re talking about another $20 million to $30-ish million at the bottom end of the range. and beyond. So, I don’t think it’s — we don’t believe it’s a road. We think it’s in the range of what we would consider realistic reasonable fact-based assumptions.

John Campbell: 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 4 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?