QuinStreet, Inc. — Form 10-Q Summary
Period: The filing covers the quarter and nine months ended March 31, 2020 (QuinStreet’s fiscal third quarter of 2020), compared with the periods ended March 31, 2019. The request metadata says “2019 Q3,” which does not match the filing period.
Business context
QuinStreet provides performance-marketing and customer-acquisition services, primarily in financial services, education and home services. It earns fees for delivering qualified clicks, leads, calls, applications and customers. Financial services generated 77% of quarterly revenue and 75% of nine-month revenue.
Financial results
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Nine months ended March 31, 2020 | Nine months ended March 31, 2019 |
|---|---|---|---|---|
| Revenue | $128.7 million | $116.2 million | $373.4 million | $333.2 million |
| Gross profit / margin | $14.5 million / 11.2% | $17.9 million / 15.4% | $40.7 million / 10.9% | $47.1 million / 14.1% |
| Operating income (loss) | $4.0 million | $(0.9) million | $7.0 million | $7.2 million |
| Net income | $13.9 million | $0.9 million | $16.6 million | $59.1 million |
| Diluted EPS | $0.26 | $0.02 | $0.31 | $1.12 |
| Operating cash flow | Not separately reported | Not separately reported | $34.6 million | $29.3 million |
- Quarterly revenue rose 11%; nine-month revenue rose 12%. Financial-services revenue increased 15% for the quarter and 18% for the nine months. Education revenue rose 4% in the quarter but declined 11% over nine months, partly reflecting the loss of a large former client. Home-services growth contributed to the “other” category.
- Gross margin contracted in both comparisons as media fees and personnel costs grew faster than revenue. Quarterly cost of revenue increased 16%, versus 11% revenue growth; the same 16% cost increase exceeded 12% revenue growth over nine months.
- Quarterly net income included a $12.0 million gain on the sale of the business-to-business technology client vertical, recorded in other income. Nine-month net income was far below the prior-year period, which benefited from a $49.4 million noncash tax benefit related to releasing most of the deferred-tax valuation allowance.
Financial position, cash flow and liquidity
- At March 31, 2020, cash and cash equivalents were $97.1 million, up from $62.5 million at June 30, 2019. Total assets were $360.5 million; total liabilities were $111.3 million; stockholders’ equity was $249.2 million.
- Nine-month operating cash flow was $34.6 million. Investing activities provided $6.1 million, mainly reflecting divestiture proceeds; financing activities used $6.3 million, including acquisition-related payments and taxes on restricted-stock releases. Cash, cash equivalents and restricted cash increased $34.6 million.
- The company reported no borrowing agreements outstanding. Acquisition-related post-closing payments and contingent consideration totaled $17.0 million at fair value; operating lease liabilities totaled $14.1 million. Management said existing liquidity and expected operating cash flows should fund anticipated requirements for at least 12 months.
- Operating lease right-of-use assets and liabilities were recognized following adoption of the lease accounting standard in fiscal 2020; comparative periods were not restated.
Changes, outlook and risks
- In February 2020, QuinStreet sold its B2B technology client vertical for $12.9 million, including $10.0 million cash and a $2.9 million secured note. It also divested businesses in Brazil and its interest in another entity. On April 30, 2020, after quarter-end, it agreed to sell its mortgage-business assets for $3.3 million.
- The company said COVID-19 had affected the quarter through reduced marketing and advertising spending and changes in media availability or performance. The duration and future financial effect were uncertain; the filing gives no quantitative earnings or revenue guidance.
- QuinStreet’s November 2019 strategic-alternatives review remained ongoing, with no assurance that it would result in a transaction. Management described a strategy of focusing on stronger-performing businesses and market opportunities, while continuing to invest for growth and constrain expenses where practicable.
- Key exposures include COVID-19 and broader economic conditions; dependence on a major client (22% of quarterly and 19% of nine-month revenue); reliance on third-party publishers and search traffic; competition and media-cost pressure; regulation and privacy requirements; and client credit and collections. The company also cited education-sector regulatory pressures and seasonality.
- Management concluded disclosure controls were effective as of March 31, 2020. The filing reported no material adverse effect expected from the CARES Act tax provisions and no pending legal matter believed reasonably likely to materially harm future financial results, while noting legal outcomes remain uncertain.
Investor verification priorities
- Confirm how COVID-19, client budgets and media availability affected results after March 31, 2020, and whether margins recovered or weakened.
- Assess the sustainability of financial-services growth and the concentration risk from the largest client.
- Separate recurring operating performance from the $12.0 million divestiture gain and compare taxes with the prior-year valuation-allowance benefit.
- Review the strategic-alternatives process, the mortgage-asset sale, divestiture proceeds and any resulting changes to the business mix.
- Track acquisition-related payments, lease obligations, receivable collections and the realization of deferred tax assets.