QuinStreet, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2012, the three months ended September 30, 2011. Financial amounts below are in millions of dollars, except per-share data. Comparisons are with the three months ended September 30, 2010 unless otherwise stated.
Business context
QuinStreet provides online vertical marketing and media services, primarily generating qualified leads and clicks for clients (Direct Marketing Services, or DMS). DMS generated nearly all revenue. Education and financial services represented 44% and 41% of revenue, respectively; the Direct Selling Services segment contributed less than 1%.
Financial performance
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $101.2 | $103.6 | Down 2% |
| Gross profit / margin | $25.5 / 25.2% | $30.0 / 28.9% | Down 15%; margin down 3.7 percentage points |
| Operating income / margin | $10.2 / 10.0% | $15.0 / 14.4% | Down 32% |
| Net income / margin | $5.5 / 5.4% | $7.5 / 7.2% | Down 27% |
| Diluted earnings per share | $0.11 | $0.16 | Down $0.05 |
| Operating cash flow | $10.7 | $8.8 | Up $1.8 |
| Investing cash flow | $(35.7) | $(35.4) | Primarily acquisitions |
| Financing cash flow | $(0.9) | $(1.9) |
Revenue declined mainly because financial-services revenue fell $7.9 million (16%) amid lower pricing, partly offset by higher volume. Education revenue rose $1.8 million (4%) on higher prices and a shift toward higher-priced inquiries; other verticals increased $3.8 million (34%), primarily from home-services leads and the IT BusinessEdge acquisition. Cost of revenue rose 3%, including higher media costs and acquisition-related amortization, contributing to lower gross margin. Operating expenses increased 2% overall.
At September 30, cash and cash equivalents were $106.5 million and marketable securities were $38.8 million, totaling $145.3 million. Current assets were $215.3 million and current liabilities $72.5 million. Reported debt was $103.8 million, comprising $14.4 million current and $89.4 million noncurrent. The filing reported $123.4 million available under the existing facility. Management believed available liquidity and operating cash flow would cover anticipated requirements for at least 12 months.
Cash fell $25.8 million during the quarter, principally reflecting acquisition spending and net purchases of marketable securities. Operating cash flow exceeded net income, supported by noncash depreciation, amortization and stock compensation, while receivables increased $6.1 million. Goodwill increased to $228.0 million and net intangible assets to $73.0 million, largely following acquisitions.
Material changes, outlook and risks
- QuinStreet acquired IT BusinessEdge for $24.0 million cash and five other online publishing businesses for $6.6 million cash plus notes. The acquisitions added $16.1 million of goodwill in the quarter.
- On November 4, 2011, after quarter-end, the company replaced its $225 million credit facility with a $300 million five-year facility: a $100 million term loan and a $200 million revolver. The new facility had lower interest-rate margins; the company reported covenant compliance at execution.
- On November 3, 2011, the board authorized repurchases of up to $50 million of common stock through November 2012. Repurchases are discretionary; none were made during the quarter.
- Management did not provide quarterly revenue or earnings guidance. It described revenue growth at target profitability as its objective and said it expects to continue investing in technology, sales and marketing, infrastructure and acquisitions. Results are seasonal; the quarter ending December 31 is typically weaker.
- Key operating risks include regulatory uncertainty affecting for-profit education clients, financial-services pricing pressure, competition for quality media, dependence on search engines and third-party publishers, client concentration and acquisition integration. The top three clients represented 23% of quarterly revenue.
- A LendingTree patent-infringement lawsuit remained unresolved. The company said the outcome and potential damages could not be assessed; an injunction could require changes to lead-generation activities in certain verticals.
- The filing identifies no material off-balance-sheet arrangements. Management stated disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether financial-services pricing and education-sector regulation continue to affect revenue, margins and client spending.
- Whether acquisitions, including IT BusinessEdge, deliver the expected media access and growth relative to integration costs and amortization.
- Current borrowings, facility availability, interest-rate exposure and compliance with the replacement credit facility’s covenants.
- Developments in the LendingTree litigation, including any potential business restrictions or financial exposure.
- Whether the authorized share-repurchase program is used, and its effect on liquidity and share count.
- The 10-Q cautions that interim results are not necessarily indicative of full-year results; it provides no clear numerical earnings or revenue outlook.