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Quinstreet Inc (NASDAQ:QNST)
Q1 2022 Earnings Call
Nov 3, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the QuinStreet First Quarter Fiscal 2022 Financial Results Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Hayden Blair. Please go ahead, sir.

Hayden Blair -- Senior Manager of Finance & Investor Relations

Thank you, Jenny, and thank you to everyone joining us as we report QuinStreet's first quarter fiscal year 2022 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 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.

Douglas Valenti -- Chairman, President & Chief Executive Office

Thank you, Hayden. Welcome, everyone. We continue to demonstrate the power of our footprint and advantages in FI Q1 and to separate ourselves through our performance. No one else in our markets has our breadth and depth of advantages and capabilities for long-term success.

We expect the trend of strong absolute and relative performance to continue as we ramp toward the full effects of our long-term investments in product, technology, and market initiatives. Our markets are growing, and we believe we are gaining share in every one of them. All of our client verticals grew at least double-digit rates year-over-year in fiscal Q1, including auto insurance.

We are raising our outlook for full fiscal year 2022. We now expect revenue to be between $650 million and $670 million and adjusted EBITDA to be between $65 million and $67 million. The raise is driven by: 1, specific indications from auto insurance clients of budget increases in the January to June period. 2, stronger-than-expected momentum in our credit-driven client verticals. And 3, the acceleration of growth initiatives across the business, including QRP.

Our full year outlook fully reflects the expected impact on auto insurance marketing budgets from increased claim costs, including from Hurricane Ida, whose losses were significantly greater than expected.

For the December quarter, our fiscal Q2, we expect revenue to be between $130 million and $135 million and adjusted EBITDA to be between $7 million and $8 million. The Q2 outlook reflects normal seasonality and the short-term effects of higher claim costs on auto insurance client budgets in calendar year 2021.

Our Q2 and full year outlook also fully reflect the expected continued effects from the pandemic on our markets and operations and on those of our clients and partners. And finally, our Q2 and full year outlook fully reflect expected effects from privacy changes to Apple IOS, from which we expect little impact. We do little to no cookie or tracking driven ad targeting. With that, I'll turn the call over to Greg.

Gregory Wong -- Chief Financial Officer

Thank you, Doug. Hello, and thanks to everyone for joining us today. Q1 started off a new fiscal year on strong footing as we grew revenue to a record $159.6 million, representing 15% year-over-year growth. Revenue grew 25% year-over-year, excluding divested businesses. GAAP net income was $3.1 million or $0.06 per share. Adjusted net income was $9.4 million or $0.17 per share. Adjusted EBITDA was $13.4 million.

Looking at revenue by client vertical. Our financial services client vertical represented 74% of Q1 revenue and grew 25% year-over-year to $117.9 million. Within financial services, all of our businesses grew at double-digit rates or more in the quarter.

Our Home Services client vertical represented 25% of Q1 revenue and grew 20% year-over-year to $40 million. As a reminder, we lapped the Modernize acquisition on July 1. We expect the strong double-digit organic growth trajectory in Home Services to continue throughout the rest of FY '22, including in the December quarter.

Other revenue, which consists primarily of Performance Marketing, agency and technology services was the remaining $1.7 million of Q1 revenue.

Turning to the balance sheet. We closed the quarter with $105.9 million of cash and equivalents. During the quarter, we generated $5.8 million of operating cash flow and $11.4 million of normalized free cash flow. As a reminder, most of our adjusted EBITDA drops to normalized free cash flow due to the low capital requirements of our business model.

Looking back, Q1 was highly representative of how we view our new footprint and the long-term vision for QuinStreet. All of our client verticals delivered double-digit revenue growth or more and represent massive market opportunities for QuinStreet. Our confidence in our growth initiatives has never been stronger, and we believe that we are better positioned to compete and execute against those opportunities than at any time in company history. With that, I'll turn the call over to the operator for Q&A.

Questions and Answers:

Operator

[Operator Instructions] And we will go first to John Campbell of Stephens Inc.

John Campbell -- Stephens Inc. -- Analyst

Good afternoon and congrats on great results.

Douglas Valenti -- Chairman, President & Chief Executive Office

Thank you, John.

John Campbell -- Stephens Inc. -- Analyst

Sure. I mean, I think considering the backdrop and obviously, what some of your peers have reported, I think there was a lot of had wringing going into the results. So great execution by you guys. But Doug, you highlighted that these results help you kind of separate yourself from the pack. I couldn't agree more with that statement, but maybe if you could unpack that a little bit more.

So maybe what stood out as the specific advantages. And then you guys have outgrown peers by a healthy margin in recent quarters. There's been stretches, obviously in the past where you may be trailed. So as you think about those advantages, was anything particularly kind of enhanced by the backdrop or just work in your favor? Or do you view these as kind of growing structural advantages?

Douglas Valenti -- Chairman, President & Chief Executive Office

Yes, great points and questions. Most of the times when we trailed in the past, we were pulling along the education boat anchor, as you would call. So getting that out of the mix is super helpful to kind of clarify how well we actually are doing in the core verticals that don't have big structural industry problems, as you know.

We are seeing advantages across the board. We believe, and I think it's showing in our results that we have the best products to both match and serve consumers but also match and serve our clients, the marketers in the industry. We've talked about those for years. We've invested in those. They matter. And they're working.

We have the best broadest mix, and we have the ability to integrate any client and to match pretty much any consumer in the way they want to be matched. That matters a lot. We believe we have the best technologies in the industry for segmenting, for right pricing based on performance, for optimizing. We have the best algorithms for optimizing and the best data analytics. We believe we have -- on top of the data analytics, we think we have the best data experience.

We've been doing this for 22 years. We started out as a company that said, you know what, we need to save this data and use it along with our clients' performance to drive results. And I think we've built up the best database, and I think we have the best most sophisticated team and technologies arrayed against that data for analytics and optimization, which really matter in a marketplace technology.

We believe we have the deepest integration and the deepest relationships with the biggest clients. I don't think there's any doubt about that, and it shows in the multiple projects that we're working on with them to continuously not only allow them to perform better in our marketplaces, but to add new business opportunities. And we have a number of those rolling out to market, only one of which we've really talked a lot about, which is QRP, which is really done in conjunction with the big carrier clients in partnership with them.

And we believe that we have the deepest integrations and the best relationships with the big media partners. Again, a long, long list of initiatives to continue to help them strengthen their position in the market, to better engage consumers, to better optimize the results for those consumers and then optimize the results for themselves.

And as you know, in our business model, we have been investing in these -- all of these areas, which we call growth initiatives or a subset of the growth initiatives for years, and we talked about them over and over and over again. And the compound effects of that experience and those investments and that execution are really coming together and inflecting for us in a lot of ways and a lot of different parts of the business.

John Campbell -- Stephens Inc. -- Analyst

That's a great answer. I appreciate that. And then on the guidance, Greg, I just want to make sure I kind of understand it. I mean, obviously, the full year, very impressive raise. So you guys are expecting -- it sounds like from client indications that you feel very good about the first half of the upcoming calendar year.

But the guidance for the next quarter looks like it steps down a little bit, and then you've got the ramp in acceleration. So I guess on the guidance for this next quarter, is it more of a continuation? I guess when you're exiting this last quarter, was there a slowdown in spend, you're expecting that to kind of continue through the quarter? You're just being conservative there? Or does it require a ramp? Did you drop pretty sharply? Just kind of give us any kind of indication of the movements within the quarter?

Gregory Wong -- Chief Financial Officer

Yes. I would tell you, John, two things on the Q2 guidance. The first one is it always reflects normal typical seasonality that we see, which is going to be about down 10% or so sequentially. What we saw later in the quarter was really the impact of Hurricane Ida on auto insurance client budgets, which are putting pressure from that standpoint in the December quarter. And again, we feel that that's short term pressure. We have very specific budget indications of big budgets coming in the June -- or the January through June time period.

So we feel very good about the overall outlook for the year. But the Q2 outlook is a combination of typical seasonality that you see, which is going to be about 10% down sequentially as well as loss ratio impact on auto insurance carrier budgets.

Douglas Valenti -- Chairman, President & Chief Executive Office

John, and I know we just probably lost you, but just to -- I didn't answer part of your question. It relates to the guide and way you asked about the backdrop and whether or not it was helping or hurting us. And the performance marketing industry generally when things get soft, like they did in the last part of last quarter and they are for this quarter generally for auto insurers, the worst mixes and the lowest quality get cut first, always.

And so we do know from our clients that we have been cut the least. And we have been told by all of them, and we know for a bunch of them, just from the numbers that we have gained share. As -- while we have been cut some, and you can see in the guide that we expect to lose somewhere in the neighborhood of $10 million next quarter in revenue from the impact of auto insurance client budgets relative to where we might be in a normal 10% down scenario.

And it gives us -- we lose a little bit of EBITDA leverage on that. It's really a very, very minor impact relative to what you've heard from a number of the other industry participants. And that's because when again, when things get tough, these clients cut the worst first, and they keep the best and they cut it at the least. And we have -- so the backdrop in many ways is an advantage to us relatively speaking.

Obviously, we don't like losing the spend this quarter. But we do -- what we do have from the clients is assurances of having been cut by the lowest amount, having picked up share, and a very aggressive budget starting in the January period. It's important to understand the loss ratios for these major carriers who are our big clients reset on January 1. New calendar year. New fiscal year. New loss ratio calculations.

So Ida, which was a hurricane, had a lot worse losses than most. And I think it's at least in the top five, might be in the top two of all time, largely because not just because it hit the coast hard and that's tragic for those folks where it got hit. But because it then worked its way to the Northeast, which is the most populated area of the country and sat there and flooded automobiles. And our clients cover that.

And so very, very high loss ratios for a hurricane and for a storm of any type. But again, isolated to calendar year 2021 for the purposes of our budgets and our clients' budgets. And a reset happens on January 1, and our big clients are already talking to us, and we are already in the planning stages with them on how we're going to meet those budgets starting January 1.

And all of the big clients' budgets are not only up sequentially January 1, but they were up pretty significantly year-over-year to the January quarter. So that's what gives us the confidence is deep relationships, ongoing conversations, and actual planning with our clients of how we're going to meet their demand January 1.

John Campbell -- Stephens Inc. -- Analyst

Thank you, Doug.

Operator

And we'll go to our next question from Jason Kreyer of Craig-Hallum. T

Bailey -- Craig-Hallum. T -- Analyst

This is Bailey on for Jason. Thank you guys for taking my questions. Congratulations on the great quarter.

Douglas Valenti -- Chairman, President & Chief Executive Office

Thank you.

Bailey -- Craig-Hallum. T -- Analyst

Just wanted to touch a little bit on QRP. I know with a more choppy backdrop for auto insurance. Just kind of wondering what do you think the impact will be, if any, on the continued rollout there of QRP?

Douglas Valenti -- Chairman, President & Chief Executive Office

Yes, it's a great question. We're so early in the rollout that we really expect little to no impact from the loss ratio issues that we're going to experience -- that we experienced late last quarter and this quarter.

The pipeline is stronger than ever. The market is bigger than we thought. We now have clients past integration and testing stages and into the ramp stages. And those ramps are going very well. So we're better able to begin to project. We were very conservative in our QRP estimates in the outlook that we gave last call, which, of course, was our first outlook for the fiscal year. So we're generally conservative anyway. But we were very conservative for QRP because, again, a new business, still in the early stages.

I would say that while we have pretty substantially increased our expectations for QRP in the revised outlook, it is still at the low end of the range that we actually think we're going to hit. So we're still being conservative, but we're also able to add pretty substantially.

Because, as I said, we have a lot more real market data from clients that are now actually ramping and into that, and we're able to now begin to project and watch lines and curves. And we also have a couple of very big client projects that have been accelerated that we expect to be executed by mid-January so that they can hit the insurance shopping season, auto insurance shopping season, which kind of starts in mid- to late January and runs into the spring.

The carriers really want to hit that hard, including a couple of our biggest, in fact, I think our two biggest QRP projects and clients want to be up and running full scale for that January shopping season. So just a lot of good stuff going on with QRP. And we have pretty meaningfully increased our expectations in the outlook, but only to the lower end of the band that we actually believe we're going to get to. But again, it's a newer business, so we're more conservative, and I think that's appropriate for everybody to understand an appropriate for us to do.

Bailey -- Craig-Hallum. T -- Analyst

Thats great color and great to hear. Appreciate that. And if I could just squeeze one more in there. I was wondering if you guys might be able to frame the recovery in loans and credit card. Just wondering how you expect that to progress with some of the volatility we've been seeing in the rest of the market? Appreciate it.

Douglas Valenti -- Chairman, President & Chief Executive Office

Those -- we call personal loans and credit cards or credit-driven verticals, as you know. And they're pretty big businesses. They're our third and fourth biggest businesses, I think, after Insurance and Home Services. And together, they about doubled year-over-year in the quarter and continue to have a lot of tailwinds. The consumer is healthy. The credit is healthy. The credit card business is leading a little bit, which is what you would expect. Consumers in good financial shape, begin to spend, begin to increase their activity levels, which we're seeing.

Other credit cards get used more and they shop more with more credit cards, and that cycle begins. And so credit cards has been a little bit ahead of personal loans. And what typically happens is then they build up credit card debt, and it's followed by a cycle of looking for personal loans to consolidate and pay down often and lower the rates on that credit card debt, which we haven't really gotten much into that cycle yet.

So we see the indications from our clients and from consumer activity or that the credit card is likely to continue to grow at a high rate. And we are beginning to see, and we have extraordinary activity among the personal homes clients as they are geared up and waiting for their part of the cycle to pick up more steam. And we're fairly early in that.

So our expectation and the actual results have been quite strong, and we feel very good about our position in those businesses and in those markets. We feel very good about the trajectory of those markets.

Bailey -- Craig-Hallum. T -- Analyst

That's good to hear. Thanks again.

Douglas Valenti -- Chairman, President & Chief Executive Office

Thank you, Bailey.

Operator

We'll hear next from Jim Goss of Barrington Research.

Patrick Sholl -- Barrington Research -- Analyst

This is Pat on for Jim. I just had a question on the -- on the auto insurance vertical. I was just wondering, in prior, I guess, prior to periods when youve had issues with the loss ratio driving reduction in budgets. What was sort of like the time frame of that kind of recovering? And I guess, is there any sort of issue potentially I guess, supply chains or anything like that, that could cause it to take a little bit longer? Or anything else that could [Indecipherable] in terms of a better understanding of pricing as policy.

Douglas Valenti -- Chairman, President & Chief Executive Office

Yes, between us and the predecessor company that we acquired when we got into the auto insurance market, weve got about 22 years of experience in the auto insurance market. And so weve seen a lot of cycles. Most of them, similar to what Ive described, were reset in January in a relatively short-term if you have an event-driven issue like we just had.

And so what the clients are telling us relative to next year into January is very consistent with an event-driven in a given year issue. There have been times, and the biggest time was really in, I think it was 2016, where it took longer and that was when there were structural issues with the clients underwriting models, which we do not have today. The clients are very comfortable with their underwriting models. Theyre very comfortable with their pricing.

They just had an event that cost more than everybody thought it was going to cost, and therefore, they have less money to spend on marketing because they have to spend more money on their claims in 2020 and calendar year 2021. But in 2016, it was a structural thing, and that was a little bit more difficult for them to work through because what was happening was they were seeing higher incident rates that had crept up on them due to distracted driving. And more and more people with their cellphones and their cars, their smartphones and their cars and doing stuff in their cars, they shouldnt be doing when theyre supposed to be driving. And that kind of broke through as a major issue that had fundamentally changed underwriting models in consumer incident rates.

And that was combined with higher repair costs, which had also kind of crept up on them, which as youve got more and more cars into the market with smart bumper technologies, what used to be a fender vendor became a $5,000 repair or a $3,000 repair because, you had all those sensors in the bumpers that had not been in cars before.

So that cycle was longer. That one took, as I recall, somewhere around a year to work itself out. But it was very fundamental. They had to rework the underwriting models, rework their profitability models, rework their risk models, reprice their policies, and get those all approved. Were not in that cycle. Were in the -- there was an event last year that cost more than they thought.

The underwriting models are fine. Their pricing is fine. They may lift it a little bit more reflective of general trends rather than gradual trends, rather than onetime things. And they fully expect and its consistent with past behavior that they would, based on that type of an issue, come back very strong in January. So very consistent with what we know to be the case, what the rationale is, and what weve seen in previous cycles.

Patrick Sholl -- Barrington Research -- Analyst

Okay. Thank you.

Douglas Valenti -- Chairman, President & Chief Executive Office

You bet.

Operator

And well move to our next question from Max Michaelis of Lake Street Capital markets.

Max Michaelis -- Lake Street Capital markets -- Analyst

This is Max on for Eric. Congrats on the quarter.

Douglas Valenti -- Chairman, President & Chief Executive Office

Thanks, Max.

Max Michaelis -- Lake Street Capital markets -- Analyst

My first question is just related to mix. Have you guys seen any change in your ability to acquire high converting media?

Douglas Valenti -- Chairman, President & Chief Executive Office

No. Not anymore. I mean, were always seeing changes in the high-quality Douglas Valenti

Max Michaelis -- Lake Street Capital markets -- Analyst

And then if I could just squeeze a couple more in. My second one is related more to model. Have you guys noticed any OpEx inflation regarding to more talent acquisition as well as more travel and entertainment expenses?

Douglas Valenti -- Chairman, President & Chief Executive Office

No. Go ahead, Greg.

Gregory Wong -- Chief Financial Officer

I wouldnt say anything material, no, from an operating expense perspective. I would tell you, as we get into the back half of the year, you do have slightly seasonably higher operating expenses just because things like on January 1, payroll taxes reset. And so they are at a higher rate earlier on in the year. And we also have some regulatory work we do because were a June year-end. So we do a little more regulatory work on the back half of the year. So seasonally, were slightly higher in the back half than we are in the first half, but were not seeing anything major from current events.

Douglas Valenti -- Chairman, President & Chief Executive Office

Yes. The seasonal thing is every year. So theres nothing unique about it or new about it.

Max Michaelis -- Lake Street Capital markets -- Analyst

Okay. Thank you guys and then just my last one, and Ill jump back into queue here. Are you guys seeing at this time any near-term M&A opportunities?

Douglas Valenti -- Chairman, President & Chief Executive Office

We are constantly looking. We looked really hard at a couple this past quarter that I really liked. One that gave us some new capabilities in media. That one, they decided not to do anything. It looks like were going to have a partnership there, which is good, but I wouldnt mind owning them too.

Another one that was an extension of one of our verticals of business that was -- would have added more scale and a lot of synergies with one of our businesses. That one too, decided not to do anything. They took a little bit more private equity and theyre going to do some stuff on their own. Were continuing discussions, and well continue to talk to both of them.

And we will continue to look at -- there are always going to be, and youve seen us do a consolidation acquisition opportunities, which are accretive in performance marketing. We will continue to be active, and well also continue to have a very high bar, but we did not do any this past quarter. Any of any size. I cant remember if we did any real small ones or not. Sometimes well scrape up some little ones too, but I dont recall us doing any of those.

But we did -- we are looking -- we are seeing some. We didnt get it done last quarter, but you should expect us to continue to be actively looking and active when we find something as good as the M1 and Modernize type acquisition that weve made historically.

Max Michaelis -- Lake Street Capital markets -- Analyst

All right. Thanks guys. Good luck on the quarter. Congrats on the quarter.

Douglas Valenti -- Chairman, President & Chief Executive Office

Thank you.

Operator

And well hear next from Chris Sakai of Singular Research.

Chris Sakai -- Singular Research -- Analyst

Hi, Doug and Greg, just a question. In your opinion, whats driving the increase in auto insurance marketing budgets?

Douglas Valenti -- Chairman, President & Chief Executive Office

In general?

Chris Sakai -- Singular Research -- Analyst

Yes.

Douglas Valenti -- Chairman, President & Chief Executive Office

In the January to June period or just overall generally over time?

Chris Sakai -- Singular Research -- Analyst

In this last period.

Douglas Valenti -- Chairman, President & Chief Executive Office

The increase in the last period for us was a combination of more budget penetration and greater share of wallet for us with a number of the larger clients as weve continued to roll out with them. Mostly a lot of the analytics programs that we work with them on to help them best segment, optimize, and right price the consumers in the marketplace along with some new initiatives that expand our media footprint, a couple of which are in partnership with specific clients that were quite excited about.

And then when we do that, we also pick up more budget for those media initiatives. So its more general budget increases and penetration of budgets and share increases to us for the programs that were running with them, and then new projects and initiatives with them. And of course, in the longer run, those also will be compounding as well as the just general shift of budgets to online and online to performance, and from performance to us. Because were usually the last stop for those more sophisticated big budgets.

Chris Sakai -- Singular Research -- Analyst

Okay. Great and then as far as -- are you guys looking to go into any new verticals?

Douglas Valenti -- Chairman, President & Chief Executive Office

We are adding contiguously in the verticals were in. So for example, in insurance, where auto and home, of course, are our biggest. We are aggressively expanding in life, health, and some of the even smaller ones like pet, motorcycle, RV.

In home insurance, Home Services, excuse me, youve heard me say before, were in four or five of our verticals are kind of at pretty good scale. Were in another, call it, 10. And those are earlier stage, and were expanding those. And we think we can be in dozens at least. And I used to say 100, and I think thats still the right number. But lets say dozens for the kind of scale Im talking about over time.

And those are trades. Like windows would be a trade or a subvertical; doors, bathroom remodeling, kitchen remodeling. Those are the -- or solar, home security. Those would be what I would call. So taking all those and ramping them out. So were continuing to enter new verticals in Home Services, or trades is what we call them, in Home Services.

We are entering new verticals in our banking vertical. We have expanded beyond traditional source of funds accounts like deposit accounts into money market accounts, investment accounts, retirement accounts, advisor accounts, and fintech and beyond.

So weve dramatically expanded that footprint and are entering, depending on how you call -- what you decide what you want to call a vertical, we call the whole vertical banking or within banking. So at the highest level, we are not adding any new major vertical headings beyond insurance, home services, credit cards, personal loans, banking. I think I did mention personal loans.

But within them, were expanding pretty aggressively into new segments of them, expanding their footprint and of course, getting a lot deeper in them. So we have plenty of growth capacity to keep working on for Id say that we could feast off of what weve got -- the footprint weve got now and the way -- and the expansion opportunities we have.

Because I havent even talked about the broadened product offerings in those verticals like QRP and insurance. And we have a couple very much like QRP, right behind QRP, that we havent started talking about that apply to a couple of our other verticals coming as well. So we could feast off of that for at least the next decade and grow really, really well.

So the answer is kind of no and yes. No, but yes. No more big ones right now. But yes, because were filling out the ones were in.

Chris Sakai -- Singular Research -- Analyst

Okay. Great. Well, thanks.

Douglas Valenti -- Chairman, President & Chief Executive Office

Thank you, Chris.

Operator

[Operator Closing Remarks]

Duration: 37 minutes

Call participants:

Hayden Blair -- Senior Manager of Finance & Investor Relations

Douglas Valenti -- Chairman, President & Chief Executive Office

Gregory Wong -- Chief Financial Officer

John Campbell -- Stephens Inc. -- Analyst

Bailey -- Craig-Hallum. T -- Analyst

Patrick Sholl -- Barrington Research -- Analyst

Max Michaelis -- Lake Street Capital markets -- Analyst

Chris Sakai -- Singular Research -- Analyst

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