QuinStreet, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2017, corresponding to fiscal 2018 Q2 and first half—not calendar 2017 Q2. The filing was signed February 5, 2018. Unless noted otherwise, amounts are in millions of dollars.
Business context
QuinStreet provides performance-marketing and customer-acquisition services, primarily in financial services, education, home services and B2B technology. It generally earns fees for delivering leads, clicks, calls, applications or customers. Most revenue is U.S.-based.
Financial results
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $87.5 | $65.6 | $174.9 | $139.0 |
| Gross profit | $12.3 | $4.0 | $23.7 | $9.6 |
| Gross margin | 14.0% | 6.0% | 13.5% | 6.9% |
| Operating income (loss) | $1.7 | $(7.7) | $3.0 | $(12.7) |
| Net income (loss) | $1.9 | $(7.9) | $3.4 | $(11.4) |
| Diluted EPS | $0.04 | $(0.17) | $0.07 | $(0.25) |
- Q2 revenue rose 33% year over year; first-half revenue rose 26%. Financial-services revenue increased 57% in Q2 and 43% for the half, while education revenue declined 5% and 1%, respectively.
- Higher media and marketing costs accompanied revenue growth, but lower amortization and personnel costs lifted gross margin. Q2 operating expenses fell 9% overall, partly because the prior-year quarter included $2.4 million of restructuring charges. G&A increased, including costs related to legal services and the previously identified control weakness.
- First-half operating cash flow was $9.6 million, up from $2.1 million. Investing used $15.2 million, including the Katch acquisition; financing used $1.6 million. Cash declined $7.2 million to $42.4 million.
- At December 31, cash was $42.4 million, accounts receivable $48.7 million, current assets $97.9 million, current liabilities $55.9 million, and total liabilities $58.4 million. Stockholders’ equity was $124.9 million. The company reported no outstanding borrowings or borrowing agreements; its revolving facility had been repaid in the prior fiscal year.
Changes, outlook and notable items
- In November 2017, QuinStreet acquired specified Katch, LLC assets in auto insurance, home insurance and mortgage for $14.0 million cash. Preliminary allocation included $7.9 million of identifiable intangible assets and $6.1 million of goodwill. The company said the acquisition was not expected to materially affect the periods presented.
- Management expects financial services and education to remain the majority of revenue for the rest of fiscal 2018, with financial services likely to increase as a share. It cited client migration toward digital performance marketing and enhanced products as growth drivers. No quantified revenue or earnings guidance was provided.
- Management said Q2 is typically seasonally weak, with better lead availability and often fresh client budgets in the March quarter. Results remain exposed to media availability and pricing, search-engine changes, client spending, and economic and regulatory conditions. Management stated liquidity should cover anticipated requirements for at least 12 months.
- One financial-services client represented 23% of revenue in both Q2 and the first half, versus 10% and 11% in the corresponding 2016 periods. The two largest verticals—financial services and education—represented 89% of Q2 revenue.
- Disclosure controls were deemed ineffective at December 31 due to a material weakness in identifying and accounting for non-standard revenue credits communicated late to finance; a credit had been recorded in the wrong period. Remediation controls, a formal policy and training were implemented, but had not operated long enough to demonstrate effectiveness.
- The Tax Cuts and Jobs Act was enacted in December 2017. The company reported no material effect from the federal rate reduction in these interim statements, maintained a full valuation allowance on deferred tax assets, and said its estimate of foreign transition-tax impact was provisional.
- The company identified regulatory exposure, including rules affecting financial-services marketing, for-profit education and telemarketing, as well as reliance on third-party media and search platforms, seasonality, client concentration and cybersecurity risks. It reported ordinary-course legal matters but did not expect their known outcomes to materially adversely affect future results; outcomes remain uncertain.
Most important facts for investors to verify
- Whether growth in financial services can be sustained and whether the largest client’s 23% revenue contribution changes.
- Whether expanded revenue translates into durable gross-margin and operating-profit improvement, given media costs and seasonal variability.
- Whether Katch integration and the acquired relationships, technology and goodwill deliver expected benefits; monitor goodwill and intangible-asset impairment risk.
- Whether remediation of the non-standard revenue-credit material weakness is tested and shown to be effective, and whether any related revenue-period adjustments arise.
- Whether the provisional tax-reform estimates, regulatory developments and education-client spending produce material changes.
- Cash conversion and liquidity after acquisition spending, share repurchases and other investment needs; the filing gives no quantified forward earnings guidance.