QuinStreet, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2017, the first quarter of fiscal 2018. Comparisons are with the three months ended September 30, 2016, unless noted. Unaudited interim financial statements are presented in U.S. dollars.
Business context
QuinStreet provides performance-marketing and customer-acquisition services, primarily in financial services and education, with smaller businesses in home services, business-to-business technology, and medical markets. It generally earns fees for delivering qualified leads, inquiries, clicks, calls, applications, or customers. The company reports one operating segment. Most revenue is generated in the United States.
Financial results and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $87.4 million | $73.4 million |
| Gross profit / gross margin | $11.5 million / 13.1% | $5.6 million / 7.7% |
| Operating income (loss) | $1.4 million | ($4.9 million) |
| Net income (loss) | $1.4 million | ($3.6 million) |
| Diluted earnings (loss) per share | $0.03 | ($0.08) |
| Cash from operating activities | $2.3 million | $1.2 million |
| Cash used in investing activities | $0.7 million | $1.0 million |
| Cash used in financing activities | $0.9 million | $0.3 million |
- Cash and cash equivalents were $50.4 million at September 30, 2017, versus $49.6 million at June 30, 2017. Total assets were $179.1 million and total liabilities were $57.9 million.
- Current assets were $106.5 million and current liabilities were $54.4 million. The filing reports no outstanding borrowing agreements at quarter-end and no interest expense in the quarter; the prior-year quarter included $0.2 million of interest expense.
- Operating cash flow included $4.8 million of noncash adjustments, offset by a net $4.0 million cash outflow from working-capital changes, principally a $5.0 million increase in receivables partly offset by a $2.3 million increase in payables.
- Investing cash outflows included $0.1 million of capital expenditures and $0.5 million of capitalized internal software development costs. Financing outflows included $0.7 million in taxes related to restricted-stock releases and $0.1 million in share repurchases.
Changes versus the prior-year quarter
- Revenue grew 19%. Financial-services revenue rose 31% to approximately $59 million, representing 67% of total revenue, compared with 61% a year earlier. Management attributed the increase mainly to enhanced products that improved media segmentation, transparency, and pricing, helping access more media and client budgets.
- Education revenue increased 3%, supported by international demand but partly offset by lower U.S. demand. Revenue from other verticals declined 5%, primarily due to weaker business-to-business technology demand.
- Cost of revenue rose 12%, less than revenue growth. Gross margin improved to 13.1% from 7.7%, primarily due to lower personnel costs following the November 2016 restructuring and lower intangible-asset amortization. Increased media and marketing costs partly offset those benefits.
- Operating expenses decreased 4% overall. Product development fell 19% and sales and marketing fell 6%; general and administrative expense increased 11%, primarily due to professional-services costs associated with the previously identified material weakness.
- The company moved from a prior-year loss to net income. The prior-year tax benefit of $1.4 million reflected a refund from an amended state tax return; the current-quarter tax benefit was immaterial. A valuation allowance remained against the majority of deferred tax assets.
Outlook, risks, and notable items
- Management said it expects most fiscal 2018 revenue to continue coming from financial services and education, with financial services expected to increase as a share of revenue. The filing provides no specific revenue, earnings, or margin guidance and cautions that quarterly results are not necessarily indicative of the full year.
- The December quarter is typically seasonally weaker because of holiday-period media supply and lower client budgets; management generally expects better lead availability and new client budgets in the March quarter. Lending and housing-related client activity can also be seasonal and cyclical.
- Key business risks include dependence on a limited number of clients and media sources, search-engine changes, competition and media-cost pressure, regulation affecting financial-services and education clients, privacy and data-security exposure, and fluctuations in client advertising budgets. One client generated 24% of quarterly revenue, up from 11% a year earlier; no other client accounted for at least 10%.
- Disclosure controls and procedures were deemed ineffective at September 30, 2017 because of a material weakness in accounting for non-standard revenue credits. A credit authorized but not timely communicated to finance was recorded in the wrong period in the prior fiscal year. Management described remediation efforts, including transaction and monitoring controls and training. It stated that the current-quarter financial statements fairly present the company’s position and results in all material respects.
- Operating lease commitments totaled $6.2 million, with leases extending through fiscal 2022. The company reported no pending or threatened legal proceedings that it believed would have a material adverse effect, while noting outcomes remain uncertain.
- In November 2017, after quarter-end, the company repurchased 62,364 shares for a total cost of approximately $0.5 million. The board had also increased the authorized repurchase amount from 905,000 to 966,000 shares in October.
- Management stated that cash and expected operating cash generation should be sufficient for anticipated requirements for at least the next 12 months. It also disclosed that it may choose to seek debt or equity financing for other purposes.
Investor facts to verify
- Whether the material weakness in revenue-credit controls is remediated and whether future filings report effective controls.
- Whether the 24%-of-revenue client concentration persists, and how financial-services growth and client demand affect revenue and margins.
- Whether the improved gross margin and operating profitability are sustainable after media costs, seasonal effects, and incentive compensation.
- Receivables increased during the quarter; monitor collections, working-capital needs, and operating cash conversion.
- Track actual share repurchases against the expanded authorization and their effect on cash and share count.
- Assess the impact of regulatory developments, client concentration, media availability, and the seasonally weaker December quarter; management gave no numerical guidance.