Business context and reporting period
QuinStreet, Inc. operates a performance-marketing marketplace, earning fees for qualified clicks, leads, calls, applications and customers, primarily in financial services and education. This 10-Q covers the quarter and nine months ended March 31, 2019, the company’s fiscal third quarter and year-to-date period. Although the request metadata says “2018 Q3,” the filing itself reports fiscal 2019 Q3; comparisons below are with the periods ended March 31, 2018.
Key financial metrics
Amounts are in millions of dollars unless noted. The filing presents unaudited results.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $116.2 (−1% year over year) | $333.2 (+14%) |
| Gross profit / margin | $17.9 / 15.4% (15.2% prior year) | $47.1 / 14.1% (14.2% prior year) |
| Operating income (loss) / margin | $(0.9) / (0.8)% (prior-year income $6.6) | $7.2 / 2.2% (prior-year income $9.6 / 3.3%) |
| Net income / diluted EPS | $0.9 / $0.02 (prior year $7.1 / $0.14) | $59.1 / $1.12 (prior year $10.5 / $0.21) |
| Operating cash flow | Not reported separately for the quarter | $29.3 (prior year $15.3) |
At March 31, 2019, cash and cash equivalents were $67.0 million, accounts receivable $67.5 million, current assets $140.3 million and current liabilities $75.0 million. Total liabilities were $84.1 million and stockholders’ equity $214.3 million. Management reported no borrowing agreements outstanding and said available liquidity should cover anticipated cash requirements for at least 12 months. Cash increased $1.4 million from the beginning of the nine-month period.
Material changes versus the prior comparable period
- Quarterly revenue declined modestly, while nine-month revenue grew 14%, driven mainly by financial services and “other” verticals. Nine-month financial services revenue rose 15%; other revenue rose 30%. Quarterly education revenue fell 25%, primarily due to a large former education client entering federal receivership.
- Quarterly operating results moved to a loss, largely reflecting an $8.7 million bad-debt expense related to that former education client. The company also reversed $2.9 million of media and marketing costs no longer contractually payable because of the client’s uncollectibility.
- Nine-month net income included a one-time, non-cash $49.4 million income-tax benefit from releasing most of the U.S. deferred-tax-asset valuation allowance. The $59.1 million reported net income therefore does not represent recurring operating earnings.
- AmOne was acquired on October 1, 2018 for total estimated consideration of $30.7 million, including deferred payments. Its results are included from the acquisition date; preliminary purchase accounting recorded $5.1 million of goodwill and $21.3 million of customer, publisher and advertiser relationship intangibles.
- After quarter-end, QuinStreet acquired CloudControlMedia (CCM) on April 15, 2019. Terms included $8.3 million paid at closing, $7.5 million in post-closing payments and an estimated $3.1–$4.2 million earn-out.
Outlook, commentary, risks and unusual items
The filing gives no quantified revenue or earnings guidance. Management’s stated objective is revenue growth from sustainable sources while maintaining target profitability and investing in growth. Management cited improved media availability and client budgets in the March quarter after typical December-quarter seasonal weakness, but emphasized that results fluctuate with client demand, media supply, seasonality and market conditions.
- Revenue is concentrated: one financial-services client represented 23% of revenue in both the quarter and nine-month period. Client contracts can generally be terminated at any time and have no minimum spend requirements.
- Key business risks include dependence on third-party media and search platforms, competition and media pricing, regulatory changes and enforcement in financial services and education, and client credit risk. The former education client’s receivership illustrates collection and demand risks.
- Acquisitions create integration, purchase-price, amortization and contingent-payment risks. AmOne had $7.7 million of post-closing payment liabilities recorded at March 31; CCM’s earn-out depends on future managed revenue.
- Other notable exposures include $16.9 million of future minimum operating lease payments and ongoing privacy, data-security, telemarketing and other regulatory risks. Management said pending legal matters were not expected, based on current knowledge, to have a material adverse effect, while noting outcomes remain uncertain.
- Management concluded disclosure controls were effective as of March 31, 2019; no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- How much of reported nine-month earnings and EPS is attributable to the $49.4 million tax valuation-allowance release, versus recurring operating performance?
- What is the recoverability and collection timing of receivables, particularly those related to the former education client, and are further bad-debt or media-cost adjustments possible?
- Can growth outside the largest financial-services client and education vertical offset client concentration and regulatory-driven volatility?
- What are the final AmOne purchase-price allocation and the realized operating contribution of the acquisition?
- How will CCM’s performance, earn-out and deferred payments affect cash, earnings and integration costs?
- Does management’s at-least-12-month liquidity assessment remain sound after acquisition payments, leases and other commitments?