QuinStreet, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2020. This is QuinStreet’s fiscal second quarter of fiscal 2021, despite the request metadata referring to 2020 Q2. The filing was signed February 5, 2021. QuinStreet operates a performance-marketing marketplace, primarily in financial services and home services.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Year-over-year change | Six months ended Dec. 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $135.0 million | +14% | $274.2 million | +12% |
| Gross profit / margin | $14.5 million / 10.8% | +14%; margin unchanged | $31.6 million / 11.5% | +20%; up from 10.7% |
| Operating income (loss) | $(0.2) million | Compared with $1.3 million income | $2.7 million | Compared with $3.0 million |
| Net income | $0.5 million | Compared with $1.5 million | $15.1 million | Compared with $2.7 million |
| Operating cash flow | Not presented by quarter in this filing | $23.1 million | Compared with $19.5 million |
- Quarterly diluted EPS was $0.01, versus $0.03 a year earlier. Six-month diluted EPS was $0.28, versus $0.05.
- Six-month net income includes a $16.6 million gain on the sale of the education business. Excluding that item, reported net income growth would be substantially lower; the filing does not provide a corresponding adjusted net income figure.
- Quarterly revenue growth reflected home services growth of $18.2 million, mainly from the Modernize acquisition, and financial services growth of $16.0 million. Divested businesses reduced quarterly revenue by $18.9 million. For the six-month period, divestitures reduced revenue by $30.1 million.
- Cost of revenue rose 14% in the quarter, broadly in line with revenue. Operating expenses rose 28%, including higher product development and general and administrative costs. The company cited Modernize-related headcount, incentive compensation, stock-based compensation and professional services fees.
- Cash and cash equivalents were $102.6 million at December 31, 2020, down from $107.5 million at June 30. Current assets were $181.4 million and current liabilities $97.8 million. QuinStreet reported no borrowing agreements outstanding.
- Six-month investing cash outflow was $23.3 million, principally reflecting the Modernize acquisition, partly offset by divestiture proceeds. Financing cash outflow was $4.6 million. Cash, cash equivalents and restricted cash declined $4.9 million over the six months.
Balance sheet, transactions and obligations
- On July 1, 2020, QuinStreet acquired Modernize for estimated total consideration of $70.8 million, including $43.9 million cash at closing and $27.5 million of post-closing payments, plus a tax-election liability. Purchase-price allocation remained preliminary at period-end.
- Goodwill increased to $110.1 million from $80.7 million, primarily due to Modernize, partly offset by goodwill disposed with the education business. Net intangible assets increased to $55.7 million from $28.2 million.
- Total liabilities were $135.7 million. Acquisition-related post-closing payments and contingent consideration totaled $34.4 million; these are obligations, although the company had no outstanding borrowings. Operating lease liabilities totaled $16.3 million.
- Management said existing cash and expected operating cash generation should cover anticipated requirements for at least the next 12 months. Contractual obligations totaled $55.8 million, primarily leases and acquisition payments; the table excludes approximately $2.3 million of uncertain-tax-position liabilities for which timing could not be reasonably estimated.
Outlook, commentary and risks
- The filing gives no numerical revenue, earnings or margin guidance. Management’s stated priority is revenue growth from sustainable sources while maintaining target profitability, with continued investment in growth opportunities.
- Management described the December quarter as seasonally weaker, citing holiday-period media availability and lower client budgets. Home-services demand typically improves in spring and summer.
- COVID-19 continued to weigh on certain credit-driven financial-services lines, including personal loans and credit cards. Management said the pandemic’s future effects on clients, media availability, consumer demand and collections remained uncertain.
- Key risks include dependence on a major client, third-party publishers and search engines; competition for quality media; regulatory and privacy requirements, including TCPA and data-protection rules; cybersecurity; and economic and seasonal volatility. One financial-services client represented 24% of quarterly revenue and 25% of six-month revenue.
- The education vertical sale reflected a decision to focus on better-performing businesses and opportunities. The company also disclosed that its previously paused financial-advisor-led review of strategic alternatives had been paused amid COVID-19 uncertainty.
- Management reported effective disclosure controls as of December 31, 2020 and no material change in internal control over financial reporting during the quarter. It did not believe pending legal matters were reasonably likely to have a material adverse effect, while noting legal outcomes remain uncertain.
Investor verification checklist
- Assess how much of reported six-month earnings came from the $16.6 million education-divestiture gain, and compare underlying operating performance across periods.
- Track the largest client’s revenue contribution and any changes in client spending, particularly in credit-sensitive financial-services markets.
- Evaluate Modernize’s contribution to home-services growth, integration progress, final purchase-price allocation and remaining acquisition-payment obligations.
- Monitor gross margins, media costs and operating-expense growth as the company pursues growth investments.
- Review cash conversion, receivables and credit exposure, including the effects of COVID-19 and the concentration of revenue and receivables.
- Consider seasonality, regulatory and privacy exposure, and the absence of quantitative forward guidance when evaluating future results.