QuinStreet, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2013. The quarter is the company’s second fiscal quarter of fiscal 2014. Financial amounts below are in U.S. dollars; unless noted, figures are in millions.
Business context
QuinStreet provides online performance-marketing and customer-acquisition services, principally through Direct Marketing Services (DMS), which delivers leads, clicks, calls and customers to clients. Direct Selling Services (DSS) contributed less than 1% of revenue. Education and financial services together accounted for 82% of quarterly revenue; the business was predominantly U.S.-based.
Financial results and position
| Metric | Quarter ended Dec. 31, 2013 | Quarter ended Dec. 31, 2012 | Six months ended Dec. 31, 2013 | Six months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Revenue | $66.1 | $71.8 | $143.1 | $150.4 |
| Gross profit / margin | $10.0 / 15.2% | $10.0 / 14.0% | $23.4 / 16.4% | $23.5 / 15.6% |
| Operating loss | $(2.8) | $(94.3) | $(2.9) | $(93.4) |
| Net loss | $(44.0) | $(63.5) | $(45.0) | $(63.6) |
| Diluted loss per share | $(1.01) | $(1.48) | $(1.04) | $(1.49) |
- Quarterly revenue declined 8% year over year; six-month revenue declined 5%. Quarterly gross profit was essentially unchanged, while gross margin improved to 15.2% from 14.0%.
- Quarterly DMS segment operating income before depreciation, amortization and stock compensation fell to $6.5 million from $11.2 million. The measure is a company-reported segment metric, not GAAP operating income.
- The 2013 periods had no goodwill impairment. The comparable 2012 periods included a $92.4 million goodwill impairment, explaining much of the large difference in reported operating loss.
- A $40.2 million non-cash income-tax charge was recorded in the current quarter to establish a valuation allowance against a significant portion of deferred tax assets. This drove the current-period net loss despite a substantially smaller pretax loss. Management said the charge does not itself affect the ability to use tax attributes to reduce future cash taxes.
- Cash from operations for the six months was $10.3 million, down from $21.6 million. Investing used $10.8 million and financing used $6.3 million. Cash and cash equivalents ended at $83.2 million, down $6.9 million from June 30, 2013.
- At December 31, cash and cash equivalents were $83.2 million and marketable securities were $39.2 million. Current assets totaled $163.7 million against current liabilities of $57.4 million. Total assets were $373.2 million and stockholders’ equity was $240.1 million.
- Term-loan principal was $85 million; there were no revolver borrowings against the $100 million revolving facility. Balance-sheet debt was $85.5 million, including acquisition-related notes and accounting adjustments. The company reported covenant compliance. A swap fixed the Eurodollar component at 0.97% on a notional amount of approximately $85 million, scheduled to amortize through November 2016.
Material changes and management commentary
- Quarterly education revenue fell $2.8 million (9%), attributed to lower client budgets amid regulatory uncertainty and adjustments by for-profit education institutions. Financial-services revenue fell $2.2 million (8%), primarily because the company could not cost-effectively access enough high-quality media. Other verticals also declined.
- Management cited increased competition for quality media, media-source consolidation and search-engine algorithm changes as constraints on growth and margins. It is pursuing diversification in products, media and markets, including non-profit and international education, and expanding financial-services offerings.
- Cost of revenue fell faster than quarterly revenue, partly because of lower amortization and media costs. Management said product-development, sales-and-marketing, and general-and-administrative expenses were expected to increase in absolute dollars during the remainder of fiscal 2014, while expenses were being constrained where practicable.
- Management described the December quarter as seasonally weak, citing holiday-period lead availability and lower client budgets; it generally expects better lead availability and client budgets in the March quarter. It gave no specific revenue or earnings guidance in the supplied filing text.
- Management said existing cash, securities, expected operating cash flow and available credit were expected to cover anticipated requirements for at least the next 12 months. That expectation is subject to operating performance, covenant compliance and access to the credit facility.
Risks, contingencies and unusual items
- Revenue remains concentrated in education and financial services, both exposed to regulatory changes and client-budget shifts. The company also depends on third-party publishers and search providers for media and traffic, with risks to supply, pricing and campaign performance.
- The Telephone Consumer Protection Act’s heightened consent requirements, including rules effective in October 2013, had a relatively small negative effect on traffic conversion, according to management; further effects on revenue or profitability remain possible. The filing also discusses privacy, marketing-compliance and client-industry regulatory risks.
- Internet Patents Corporation appealed the dismissal of its patent case against QuinStreet to the Federal Circuit. QuinStreet denied the claims and assessed the probability of loss as remote, while warning that an adverse outcome or settlement could significantly affect the business and that legal costs may be significant.
- The credit facility is secured by substantially all company assets, restricts certain financing and corporate actions, and includes financial covenants. Scheduled credit-facility principal payments total $85 million through fiscal 2017; operating-lease commitments totaled $15.6 million.
- Management identified revenue recognition, goodwill and intangible-asset valuation, stock-based compensation, income taxes and long-lived assets as critical accounting areas. Disclosure controls were assessed as effective at the reasonable-assurance level, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether education and financial-services demand and high-quality media access stabilize, and whether diversification offsets continued weakness.
- How the deferred-tax valuation allowance changes, and whether future profitability supports realization of remaining deferred tax assets.
- Operating cash generation excluding the significant non-cash tax adjustment, and cash available after scheduled debt payments and investment spending.
- Compliance with credit-facility covenants and the terms and availability of the unused revolving line.
- Progress and potential costs or exposure from the IPC appeal, TCPA compliance and other regulatory or litigation matters.