QuinStreet, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2019 (the second quarter of fiscal 2020; fiscal year ends June 30). The filing is unaudited. QuinStreet provides performance-marketing and customer-acquisition services, primarily in financial services, education and other verticals.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Year-over-year | Six months ended Dec. 31, 2019 | Year-over-year |
|---|---|---|---|---|
| Net revenue | $118.1 million | +13% | $244.7 million | +13% |
| Gross profit / margin | $12.8 million / 10.8% | $13.2 million / 12.7% | $26.2 million / 10.7% | $29.2 million / 13.5% |
| Operating income | $1.3 million | Down from $2.9 million | $3.0 million | Down from $8.2 million |
| Net income | $1.5 million | Compared with $52.8 million | $2.7 million | Compared with $58.1 million |
| Diluted EPS | $0.03 | Compared with $1.00 | $0.05 | Compared with $1.11 |
| Operating cash flow | Six-month total: $19.5 million, versus $22.9 million | — |
Revenue growth was led by financial services: quarterly revenue rose 20% to $89.1 million, while education revenue fell 10% to $14.5 million. For the six months, financial services increased 20% to $182.0 million and education declined 17% to $31.9 million. Other-vertical revenue increased 7% for the quarter and 16% for the six-month period.
Profit comparisons are affected by a one-time, non-cash $49.4 million income-tax benefit recorded in the prior-year period following release of most of the company’s deferred-tax valuation allowance. Current-period tax benefits were immaterial. Lower gross margins reflected media fees and personnel costs rising as a share of revenue. Cost of revenue increased 16% in both comparison periods, faster than revenue.
Liquidity, cash flow and obligations
- Cash and cash equivalents were $76.1 million at December 31, 2019, up from $62.5 million at June 30, 2019. Current assets were $151.0 million and current liabilities $82.7 million.
- Six-month cash flows: $19.5 million provided by operations, $2.0 million used in investing and $3.9 million used in financing. Cash increased $13.6 million over the period.
- The company reported no borrowing agreements outstanding. Management said existing cash and expected operating cash generation should meet anticipated requirements for at least 12 months.
- Acquisition-related post-closing payments and contingent consideration totaled $18.7 million at fair value; contractual obligations also included operating leases. The filing lists $12.1 million of total contractual payments due within one year, including leases and acquisition obligations.
- Operating lease liabilities were $14.8 million, including $4.1 million current. Adoption of lease accounting in July 2019 recognized operating-lease assets and liabilities; comparative periods were not restated.
Material changes, outlook and risks
- Management attributed financial-services growth to an enhanced product set that expanded media access and increased client budgets; AmOne acquisition contributions also supported six-month personal-loan revenue. Education revenue was pressured by the loss of a large former client that entered federal receivership in January 2019.
- Management describes December-quarter results as seasonally weak, citing holiday-period media availability and lower client budgets; it generally expects media availability and client budgets to improve in the March quarter. No numerical revenue or earnings guidance is provided.
- In November 2019, QuinStreet announced a review of strategic alternatives with a financial advisor. The company gave no assured transaction, outcome or completion timetable and cited risks including costs, employee retention, management distraction, customer loss, litigation and share-price volatility.
- Key business risks include client and vertical concentration, dependence on third-party media and search platforms, changing media costs and margins, seasonality, regulatory exposure (including privacy, telemarketing and education rules), and cybersecurity and data-protection risks. One client represented 18% of revenue in both current-period comparisons, versus 21% and 23% in the corresponding prior-year quarter and six months.
- The company reported no material goodwill impairment. It disclosed ordinary-course legal matters and stated it did not believe pending matters would materially adversely affect future results, while noting outcomes remain uncertain.
- A January 8, 2020 settlement with the California Franchise Tax Board is expected to yield a $3.1 million tax refund. Management assessed disclosure controls as effective at December 31, 2019.
Most important facts to verify
- Whether the strategic-alternatives review produces a transaction or other outcome, and what costs or operating effects result.
- Whether revenue growth can be sustained without further deterioration in gross margin and operating profitability.
- How financial-services and education client concentration, including the 18% client, evolves; and whether education-related receivable or client risks persist.
- Whether acquisition-related payments and contingent consideration differ from estimates, and whether acquisitions deliver expected benefits.
- Whether regulatory, privacy, telemarketing or cybersecurity developments affect client spending, compliance costs or operations.