QuinStreet, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2018; comparative periods ended December 31, 2017. Amounts below are in U.S. dollars unless noted. The filing was signed February 11, 2019.
Business context
QuinStreet operates a performance-marketing marketplace, earning fees for delivering qualified clicks, leads, calls, applications, and customers. Its principal verticals are financial services and education. AmOne, acquired October 1, 2018, expanded its financial-services publisher and customer relationships; its results are included from that date.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Year-over-year | Six months ended Dec. 31, 2018 | Year-over-year |
|---|---|---|---|---|
| Revenue | $104.1 million | +19% | $217.0 million | +24% |
| Gross profit / margin | $13.2 million / 12.7% | $12.3 million / 14.0% | $29.2 million / 13.5% | $23.7 million / 13.5% |
| Operating income / margin | $2.9 million / 2.7% | $1.7 million / 1.9% | $8.2 million / 3.8% | $3.0 million / 1.7% |
| Net income | $52.8 million | $1.9 million | $58.1 million | $3.4 million |
| Diluted EPS | $1.00 | $0.04 | $1.11 | $0.07 |
Net income includes a one-time, noncash income-tax benefit of approximately $49.4 million, principally from releasing the valuation allowance on most U.S. deferred tax assets. Excluding this unusual item, reported net income substantially overstates the period’s improvement in operating performance. Cost of revenue rose 21% in the quarter, faster than revenue, and quarterly gross margin declined to 12.7%.
- Financial-services revenue was $74.4 million for the quarter (+19%) and $151.8 million for the six months (+26%); the vertical generated 71% of quarterly revenue.
- Education revenue was $16.2 million for the quarter (+5%) and $38.7 million for the six months (+15%). Other verticals generated $13.5 million for the quarter (+38%).
- Management attributed growth to improved media segmentation, transparency and pricing, higher client demand, and the AmOne acquisition. AmOne’s preliminary purchase consideration was $30.7 million, including $7.5 million of post-closing payments; purchase-price allocation remained preliminary.
Cash flow, liquidity, and balance sheet
- Six-month operating cash flow was $22.9 million, compared with $9.6 million a year earlier. Investing cash outflow was $23.8 million, including the AmOne acquisition; financing cash outflow was $2.2 million.
- Cash and cash equivalents were $62.4 million at December 31, 2018, versus $64.7 million at June 30, 2018. Current assets were $130.5 million and current liabilities $68.1 million.
- Total assets were $287.7 million; stockholders’ equity was $211.2 million. Deferred tax assets rose to $50.1 million from $0.1 million, largely reflecting the valuation-allowance release. Intangible assets rose to $29.0 million, primarily following AmOne.
- The company reported no outstanding borrowing agreements at December 31. AmOne post-closing payments were recorded as $3.9 million current and $3.7 million noncurrent liabilities. Operating lease commitments totaled $17.3 million.
Outlook, commentary, and risks
- No numerical revenue or earnings guidance is provided. Management said cash, cash equivalents, and expected operating cash generation should meet anticipated requirements for at least the next 12 months.
- Management identifies December quarters as seasonally weaker, citing holiday-period media availability and lower client budgets; it generally expects media availability and client budgets to improve in the March quarter.
- Key exposures include reliance on quality third-party media and search traffic, client spending and concentration, highly regulated financial-services and education markets, privacy and telemarketing rules, and competitive or seasonal changes in media costs and demand. One client represented 21% of quarterly and 23% of six-month revenue.
- The company said pending or threatened legal matters were not expected, based on current knowledge, to have a material adverse effect, while noting outcomes remain uncertain. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Underlying earnings and operating cash generation apart from the $49.4 million tax benefit; the filing does not provide an adjusted net-income figure.
- How much revenue growth reflects organic performance versus AmOne, and whether the acquisition’s preliminary purchase-price allocation or estimated useful lives change.
- Whether quarterly gross-margin pressure persists as media and marketing costs rise, and whether seasonal improvement materializes.
- Exposure to the largest client and the availability, pricing, and performance of third-party media and search traffic.
- Cash requirements for AmOne deferred payments and lease commitments, alongside the company’s stated 12-month liquidity outlook.