QuinStreet, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2011; the quarter is QuinStreet’s second fiscal quarter. Amounts below are in millions unless stated otherwise. The filing is unaudited.
Business context
QuinStreet provides online vertical marketing and media services, principally delivering qualified leads and clicks to clients. Direct Marketing Services (DMS) generated 99.6% of revenue; Direct Selling Services was immaterial. Education and financial services together contributed 85% of quarterly revenue. The company said the December quarter is typically seasonally weak.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Revenue | $90.5 | $97.6 | $191.7 | $201.2 |
| Gross profit | $22.1 | $26.9 | $47.6 | $56.9 |
| Gross margin | 24.4% | 27.6% | 24.8% | 28.3% |
| Operating income | $8.5 | $11.4 | $18.6 | $26.3 |
| Net income | $4.4 | $6.9 | $9.9 | $14.4 |
| Diluted EPS | $0.09 | $0.14 | $0.20 | $0.30 |
| Cash from operations | — | $24.9 | $29.7 |
Quarterly revenue fell 7% year over year; six-month revenue fell 5%. Quarterly and six-month net income declined about 36% and 31%, respectively. Gross margin contracted as the business had a lower mix of owned-and-operated media, lower publisher-arrangement margins, and higher acquisition-related amortization. Operating income margin was 9.4% for the quarter and 9.7% for the six months, versus 11.7% and 13.1% a year earlier.
Education revenue declined 15% in the quarter and 6% for the six months, mainly on lower lead volumes. Financial services revenue declined 9% and 13%, respectively, reflecting lower prices and, for the quarter, lower click volumes. Other verticals grew 33% in both periods, partly due to IT BusinessEdge and home-services activity. Cost reductions in personnel and certain operating expenses partly offset lower revenue and margins.
Cash, debt and liquidity
- At December 31, cash and cash equivalents were $105.6 million and marketable securities were $38.9 million. Current assets were $209.4 million against current liabilities of $68.6 million.
- Balance-sheet debt was $114.1 million, including $100.0 million outstanding on the term loan; the $200.0 million revolving facility was undrawn. Cash and marketable securities exceeded balance-sheet debt by approximately $30.4 million.
- The company replaced its prior facility with a $300.0 million, five-year facility in November 2011. It reported compliance with financial covenants at quarter-end; the agreement limits additional debt and dividends and requires specified coverage and leverage ratios.
- Operating cash flow was $24.9 million, down from $29.7 million. Investing used $38.3 million, including acquisitions and net marketable-security purchases; financing used $13.4 million, including $15.6 million of share repurchases. Cash declined $26.7 million from June 30.
- Management said existing cash, securities, operating cash generation and available borrowing capacity should meet anticipated requirements for at least the next 12 months.
Acquisitions, capital returns and outlook
During the six months, QuinStreet paid $24.0 million for IT BusinessEdge and acquired six other online publishing businesses for cash and seller notes. These transactions added $23.3 million of goodwill. On February 3, 2012, after quarter-end, it acquired certain Ziff Davis Enterprise assets for $17.5 million cash; purchase accounting was not yet available.
The board authorized a $50.0 million repurchase program in November 2011. By December 31, the company had repurchased 1.79 million shares for $16.5 million at an average $9.25 per share, leaving $33.5 million authorized. Management expected to complete repurchases by fiscal year-end, subject to its discretion. The filing provides no specific revenue or earnings guidance. Management described a goal of growth from sustainable sources at target profitability while investing in growth; it also anticipated higher absolute costs in areas including product development, sales and marketing, and administration.
Risks, contingencies and unusual items
- Education revenue faces uncertainty from for-profit education regulation, including incentive-compensation rules effective July 2011 and gainful-employment requirements expected to take effect July 2012. The company warned these could reduce client marketing activity or revenue.
- Financial-services pricing is exposed to client bidding and competition for media. The company also depends on search-engine rankings and third-party publishers for traffic and inventory.
- A LendingTree patent-infringement case remained in pre-claims-construction proceedings. An injunction could require changes to lead-generation activity in certain verticals; outcome and potential exposure were not assessable.
- Seasonality, client concentration, acquisitions and integration, goodwill and intangible-asset estimates, and broader economic conditions may affect results. The top three clients represented 22% of quarterly and 23% of six-month revenue, although no single client accounted for 10%.
- The company recorded $4.5 million of acquisition-related earn-out payments as goodwill and debt, payable in January 2012. It also reported a one-time $0.9 million offline marketing event expense related to an acquisition.
Important facts for investors to verify
- Whether revenue and margins stabilize in education and financial services, and whether growth in other verticals can offset declines.
- How the IT BusinessEdge and Ziff Davis Enterprise acquisitions contribute to revenue, cash generation, integration costs and future amortization.
- Debt repayment, covenant headroom and liquidity after the Ziff Davis acquisition and remaining planned share repurchases.
- Developments in the LendingTree litigation and the effects of education-sector regulations on client spending and contract terms.
- Whether cash-flow generation and the repurchase pace remain consistent with management’s stated liquidity outlook.