Business context and reporting period
QuinStreet, Inc. is an online performance marketing company that connects clients with prospective customers, primarily through qualified leads and clicks. This Form 10-Q covers the quarter and nine months ended March 31, 2013 (the third quarter of fiscal 2013), compared with the same periods in 2012. The request metadata says “2012 Q3,” but the filing itself reports fiscal 2013 Q3.
Direct Marketing Services (DMS) generated nearly all revenue; Direct Selling Services contributed less than 1%. Education and financial services represented 45% and 41% of quarterly revenue, respectively.
Financial performance and liquidity
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $79.0, down 15% from $93.0 | $229.4, down 19% from $284.8 |
| Gross profit / margin | $15.2 / 19.2%, versus $20.7 / 22.3% | $38.6 / 16.8%, versus $68.3 / 24.0% |
| Operating income (loss) | $2.2, versus $6.0 | $(91.2), versus $24.7; includes $92.4 goodwill impairment |
| Net income (loss) | $(2.2), versus $2.9 | $(65.8), versus $12.8 |
| Diluted EPS | $(0.05), versus $0.06 | $(1.54), versus $0.27 |
| Operating cash flow | Not separately presented for the quarter | $31.9, versus $42.4 |
Quarterly gross margin fell as media costs increased as a share of revenue. Nine-month margin pressure also reflected amortization, personnel and other fixed costs against lower revenue. Quarterly operating expenses excluding goodwill impairment were $13.0 million, down 12% year over year.
At March 31, cash and cash equivalents were $75.7 million and marketable securities were $38.1 million. Working capital was approximately $112.6 million. Balance-sheet debt was $97.4 million; principal outstanding included a $92.5 million term loan and approximately $6.5 million of acquisition-related notes. The amended $100 million revolving facility had no borrowings and was available subject to covenants. Total assets were $428.3 million, compared with $507.2 million at June 30, 2012; goodwill declined to $150.5 million after the impairment.
Nine-month investing cash outflow was $7.7 million, versus $62.0 million, largely because there were no acquisitions in fiscal 2013. Financing cash outflow was $17.0 million, including debt repayments and $6.2 million of share repurchases. Cash increased $7.2 million to $75.7 million over the nine months.
Material changes, outlook and risks
- Revenue declined across all major DMS verticals. Management attributed education weakness to lower client budgets amid regulatory uncertainty, and financial-services weakness to reduced availability of quality media, search-engine changes and increased competition. Other verticals also declined, particularly home services and business-to-business technology.
- The company recorded a $92.4 million noncash goodwill impairment in fiscal Q2 after its market capitalization fell below the carrying value of equity. The impairment test was completed in Q3 with no change to the charge. A $28.5 million tax benefit was associated with the tax-deductible impairment; the nine-month tax benefit was $29.5 million.
- In February 2013, the company amended its credit agreement: the revolving credit line was reduced from $200 million to $100 million, and the adjusted EBITDA covenant definition was changed to exclude specified unusual costs. The company reported covenant compliance at March 31. The facility is secured by substantially all assets and restricts additional debt and dividends.
- Management said available cash, securities, expected operating cash flow and borrowing capacity should fund anticipated requirements for at least 12 months. It expects education and financial services to remain the majority of revenue for the rest of fiscal 2013. The filing gives no quarterly revenue or earnings guidance; management says it does not provide quarterly guidance. Expenses are being constrained, while certain spending could rise if growth resumes.
- Key risks include continuing declines in client demand and media yield, dependence on education and financial services, regulation of for-profit education marketing, search-platform and publisher changes, competition, debt and covenant obligations, and potential further impairment. The company also disclosed an IPC patent-infringement lawsuit: it denied the claims, but said loss was reasonably possible and could not be estimated; legal costs may be significant. A March 2013 security incident involved business-contact information in a user database; the filing says sensitive financial or personal information was not compromised.
- Seasonality affects results, and the company noted ongoing uncertainty in its markets. Its LendingTree dispute was settled through mutual releases and a patent license in November 2012.
Important facts for investors to verify
- Whether revenue declines and gross-margin compression continue, especially in education and financial services.
- Whether operating cash generation can sustain debt service, and whether the company remains compliant with amended credit covenants.
- Whether further goodwill or intangible-asset impairment is required as business performance and valuation assumptions evolve.
- Developments, potential exposure and legal costs in the IPC patent case, for which the company could not estimate a loss range.
- Any effects of education-sector regulation, media-supply changes, or the disclosed security incident on client relationships, revenue or costs.