QuinStreet, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended June 30, 2018. The filing also reports the fourth quarter ended June 30, 2018; it is not a fiscal 2017 Q4 report.
Business context
QuinStreet provides performance-marketing and customer-acquisition services, primarily in financial services, education, home services and business-to-business technology. It is generally paid for delivered leads, clicks, calls, applications or customers, while bearing the related media costs. Financial services supplied 70% of FY2018 revenue, education 19%, and other verticals 11%.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $404.4 million | $299.8 million |
| Gross profit / margin | $58.4 million / 14.4% | $30.4 million / 10.1% |
| Operating income (loss) | $15.6 million | ($10.7 million) |
| Net income (loss) | $15.9 million; diluted EPS $0.32 | ($12.2 million); diluted EPS ($0.27) |
| Adjusted EBITDA / margin | $34.7 million / 8.6% | $12.0 million / 4.0% |
| Operating cash flow | $27.0 million | $18.5 million |
| Cash and cash equivalents at year-end | $64.7 million | $49.6 million |
| Working capital at year-end | $69.6 million | $47.3 million |
| Total debt at year-end | None | None |
FY2018 investing cash outflow was $15.8 million, principally the $14.0 million Katch asset acquisition; financing provided $3.9 million, including $11.0 million from stock-option exercises, partly offset by share-withholding taxes and repurchases. Capital expenditures were $0.6 million and internal software development costs were $2.1 million. Accounts receivable rose to $68.5 million from $44.1 million, reflecting higher revenue; the filing identifies this increase as a significant operating-cash-flow use.
Fourth-quarter revenue was $111.5 million, gross profit $16.7 million, operating income $6.0 million, net income $5.4 million and adjusted EBITDA $10.3 million.
Changes versus prior period
- Revenue grew 35% year over year. Financial-services revenue increased $98.3 million, or 53%, attributed to enhanced products and expanded media access and partnerships. Education revenue increased 7%, mainly from not-for-profit clients.
- Gross margin increased to 14.4% from 10.1%; management cited lower personnel and intangible-amortization costs as a share of revenue, partly offset by financial services’ higher media-cost mix.
- The company returned to GAAP profitability from losses in FY2017 and FY2016. Adjusted EBITDA rose to $34.7 million from $12.0 million.
- Cash from operations increased to $27.0 million from $18.5 million. Cash and working capital also increased; year-end debt remained zero.
Outlook, risks and unusual items
- Management expects most FY2019 revenue to continue coming from financial services and education, but provides no numerical revenue or earnings guidance in the supplied filing text. It says current liquidity and expected operating cash generation should fund anticipated needs for at least 12 months.
- Progressive accounted for 23% of FY2018 revenue, up from 17% in FY2017; the top 20 clients accounted for 57%. Client agreements are generally cancelable without significant notice or minimum-spend commitments.
- Key exposures include client and vertical concentration; regulatory scrutiny of education and financial-services marketing; dependence on search engines and third-party media; media pricing and availability; privacy, telemarketing and data-security compliance; competition; and seasonality. The December quarter is typically seasonally weak.
- In November 2017, QuinStreet acquired certain Katch, LLC assets for $14.0 million, adding auto insurance, home insurance and mortgage relationships. The preliminary allocation included $6.1 million of goodwill.
- The company recorded no goodwill impairment in FY2018. It reported a $2.5 million impairment of a private-company investment in FY2017. FY2018 included $0.7 million of other income, including proceeds from sales of non-strategic assets and domain names.
- The Tax Cuts and Jobs Act reduced the federal rate and resulted in a $24.2 million reduction in deferred tax assets, offset by a valuation allowance. The company continued to maintain a valuation allowance against the majority of deferred tax assets; the filing notes certain tax accounting remained provisional.
- Previously reported material weaknesses in revenue-credit accounting (FY2017) and stock-based compensation accounting (FY2016) were reported as remediated. Management and PwC concluded internal control over financial reporting was effective as of June 30, 2018; PwC issued unqualified opinions on the financial statements and controls.
- Pending legal matters are described as ordinary-course matters with indeterminate damages in some cases. Management did not believe their outcomes would have a material adverse effect, while acknowledging uncertainty. Contractual operating-lease obligations totaled $16.9 million; approximately $2.2 million of uncertain-tax liabilities was excluded because payment timing could not be reasonably estimated.
Important facts for investors to verify
- Whether the revenue and margin gains are sustainable, particularly as financial services rose to 70% of revenue and Progressive reached 23%.
- How the larger receivables balance converts to cash and whether working-capital needs continue to rise with growth.
- Whether expanded media access and the Katch acquisition produce durable returns after associated costs and integration.
- The amount and realizability of deferred tax assets, the effect of the valuation allowance and any final Tax Act accounting adjustments.
- Future client spending, regulatory developments in education and financial services, and any material changes in media supply, search traffic or compliance exposure.