QuinStreet, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2015. The interim financial statements are unaudited. QuinStreet provides online performance-marketing and customer-acquisition services; its Direct Marketing Services (DMS) segment generated all revenue in both periods.
Key financial results
| Metric | Three months ended Dec. 31, 2015 | Year-over-year change | Six months ended Dec. 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $65.0 million | Down 3% | $137.4 million | Up 1% |
| Gross profit / margin | $4.8 million / 7.4% | Down from $6.3 million / 9.4% | $11.4 million / 8.3% | Down from $12.1 million / 8.9% |
| Operating loss | $5.9 million | Wider than $5.4 million | $11.5 million | Narrower than $12.8 million |
| Net loss | $6.1 million; $0.13 per share | Versus $5.5 million; $0.12 per share | $12.1 million; $0.27 per share | Versus $11.8 million; $0.27 per share |
| Operating cash flow | Not provided for the quarter | Used $5.0 million | Versus $0.6 million provided |
- For the quarter, cost of revenue was $60.2 million, or 92.6% of revenue. Operating expenses totaled $10.7 million, down 8% year over year.
- For the six months, cash used in investing activities was $3.0 million and cash used in financing activities was $1.7 million. Cash and cash equivalents declined $9.7 million to $50.8 million.
- At December 31, current assets were $98.1 million and current liabilities were $42.0 million. Total assets were $189.1 million; stockholders’ equity was $126.6 million.
- Debt was $15.0 million under the revolving facility, plus a $49,000 current acquisition-related note. The $25.0 million facility matures June 11, 2017, leaving $10.0 million nominally undrawn. Borrowings are subject to a borrowing base and other conditions. The facility is secured by substantially all company assets; the company reported covenant compliance.
- Six-month segment operating income before depreciation, amortization and stock-based compensation was $1.1 million, compared with $2.0 million a year earlier. This is a company-defined segment measure, not GAAP operating income.
Changes, outlook and material items
- Quarterly financial-services revenue increased 10% to $30.3 million, while education revenue fell 12% to $20.8 million and other verticals fell 13%. For the six months, financial-services revenue increased 7%; education declined 1% and other verticals declined 8%.
- Management attributed financial-services growth to strategic partnerships and enhanced products. Education revenue was pressured by reduced spending from a large for-profit education client and declines in traditional lead products; broader products, markets and partnerships partly offset the decline.
- Management said new partnerships initially carry media margins below the company average, contributing to lower gross margin. Cost reductions in operating expenses partly offset the pressure, but quarterly operating loss widened.
- During the quarter, QuinStreet paid $10.0 million for a 10-year agreement to be the exclusive click-monetization partner for most insurance categories of All Web Leads. The company recorded $1.0 million in current assets and $8.8 million in noncurrent assets at December 31 and recognized $0.2 million of amortization. This payment contributed to operating cash use.
- The December quarter is typically seasonally weak, with less cost-effective lead supply during the holidays and lower client budgets. Management expects that financial services and education will continue to account for a majority of revenue in the remainder of fiscal 2016. It also said it expects product-development, sales-and-marketing, and general-and-administrative expenses to rise in absolute dollars as it pursues growth and profitability. No specific financial guidance was provided.
- Management said existing cash, expected operating cash generation and available revolver borrowings should meet anticipated cash requirements for at least 12 months. This outlook depends on future performance, market conditions and access to the facility.
- Key risks include regulatory and enforcement developments affecting education and financial-services clients; dependence on third-party media and search engines; competition and media-cost pressure; client spending changes; privacy, data-security and marketing-compliance exposure; and seasonality. Management reported no pending or threatened legal proceedings expected, based on current knowledge, to have a material adverse effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- Whether the $10.0 million insurance partnership generates the expected revenue and ultimately improves media margins.
- How client spending and regulatory developments affect education and financial-services revenue, including reliance on a limited number of clients despite none individually representing 10% or more of revenue.
- Whether gross margin can recover as new partnerships mature, and whether operating cash flow improves after the upfront payment and working-capital outflows.
- Available borrowing capacity under the receivables-based revolver, compliance with financial covenants, and the company’s ability to service the $15.0 million balance through its 2017 maturity.
- The effect of seasonality and management’s growth investments on results and profitability; quarterly results are not necessarily indicative of full-year performance.