Q2 2021 Quinstreet Inc Earnings Call
Yes.
[music].
Please standby were about to begin.
Good day and welcome to the Queen Street second quarter fiscal 'twenty 'twenty, one financial results conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to Hayden Blair Investor Relations frequent Street. Please go ahead Sir.
Thank you Karina.
Thank you to everyone joining us as we report Quint Street second quarter of fiscal year 2021 financial results joining.
Joining me on the call today are Chief Executive Officer, Doug Valenti, and Chief Financial Officer, Greg Zone.
Before we begin I would like to remind you that the following discussion will contain forward looking statements.
Forward looking statements involve a number of risks and uncertainties that may cause actual results to differ materially from those projected by such statements and are not guarantees of future performance.
Factors that may cause results to differ from our forward looking statements are discussed in our recent SEC filings, including our most recent 8-K filing made to date and our 10-K filing made on August 28 2020.
Forward looking statements are based on assumptions as of today and the company undertakes no obligation to update these statements.
Today, we will be discussing both GAAP and non-GAAP measures.
Reconciliation of GAAP to non-GAAP financial measures are included in today's earnings press release, which is available on our Investor Relations website at Investor Day, Quint Street Dot com with that I will turn the call over to Douglas. Please go ahead.
Thank you Hayden.
And thank you all for joining us today.
Our business momentum.
It's strong.
We delivered excellent results in fiscal Q2.
Sure sign of the strong momentum is that revenue, excluding divested businesses grew sequentially, 6% in the quarter.
Significantly better.
And typical seasonal declines.
Year over year.
Revenue, excluding divested businesses, it's 36%.
The results were driven by strength in insurance and home services.
Our two largest businesses.
Auto insurance once again grew 57% year over year.
And home services.
165 per cent.
All of that.
While continuing to show strong cash flow.
And.
Maintaining an exceptionally strong balance.
Balance sheet.
Yeah.
We continued to make excellent progress on a wide range of short and long term growth initiatives.
And continued to strengthen our products.
Technologies.
And operations.
For future growth.
Competitive advantage.
Andy efficiency.
Including.
We are well ahead of schedule.
With our integration and synergies from.
On the modernized acquisition.
Our channel wins.
Our strong.
Marketing budgets and consumer activity.
Continue to shift to digital.
Unprecedented rate.
And increasing true.
Our core business.
Performance marketing and media.
Within those Mega trends.
Quint Street performance marketplace solutions.
On ever more recognized by the most advanced clients.
As their most productive.
And consistent digital marketing channels at scale.
We continue to make good progress with QR peaked in the quarter.
Both with the agency client pipeline.
And with more and deeper carrier integrations.
We are in process with integrations and ramps of several of the biggest opportunities in that market.
Revenue, it's still early but ramping.
And our long term expectations for Q R. P remain exciting.
Trends in credit driven quiet verticals spitz.
Specifically personal loans and credit cards.
Continue to improve in fiscal Q2.
And I continue to be excited.
Our position in those enormous markets.
The economy improves.
They are future growth engines.
Hi, good synergistic with insurance and home services.
Looking ahead to the current quarter.
For fiscal Q3.
We expect continued strong momentum in revenue and revenue growth.
And the insurance on home services client verticals.
Continued improvement in personal loans and credit cards.
And continued strong overall company performance as a result.
We expect revenue in fiscal Q3.
To be between 145.
And 100 day 50 million.
Millions of dollars.
Which at the midpoint of the range.
Represents 34% year over year growth.
And revenue excluding divested businesses.
We expect adjusted EBITDA to.
To be between 13.
On the 14th.
Millions of dollars.
With that I'll turn the call over to Greg.
Thank you Doug.
Hello, and thanks to everyone for joining us today.
We continue to see strong performance in Q2, beating typical seasonality.
Once again exceeding our expectations and outlook for both revenue and adjusted EBITDA in the quarter.
Total revenue.
It was $135 million.
<unk> grew 36% year over year, excluding divested businesses.
Adjusted EBITDA was $10 million.
And adjusted net income was $7 million or.
Or <unk> 13 per share.
Looking at revenue by client vertical.
Our financial services client vertical.
Represented 77% of Q2 revenue.
<unk> grew 18% year over year to $104 $2 million.
Auto insurance, our largest business.
Delivered another record revenue quarter, Inc.
Grew 57% year over year.
This reflects strong spending and growth from a broad range of major carrier clients and excellent progress on a number of growth initiatives on the quarter.
Also on financial services, our credit driven personal loans and credit card businesses.
Continued to improve in fiscal Q2.
Combined.
They grew 25% sequentially.
We're up 80 per cent from the June quarter.
We expect these businesses to be good long term growth drivers for Quint Street as the economy improves.
Our home services going vertical.
Represented 22% of Q2 revenue on.
It grew 165% year over year to $29 $2 million.
As a reminder, on July 1st we acquired modernize to add to our scale and capabilities at home services.
We once again outpaced our expectations in the quarter demonstrating.
Demonstrating the continued success on the integration and capturing of synergies from that acquisition.
Other which consists primarily of performance marketing agency and technology services was the remaining $1 $6 million of our Q2 revenue.
Turning to the balance sheet, we closed the quarter with $102 $6 million of casualty equivalents.
During the quarter, we generated $5 6 million of operating cash flow.
Normalized free cash flow for the quarter was $7 5 million or six per cent of revenue.
Most of our adjusted EBITDA drops to normalized free cash flow due to the low capital requirements of our business model.
In summary.
We continue to see strong performance from insurance and home services, our two largest businesses and are encouraged by the substantial improvement of our credit driven businesses.
This has all resulted in us once again, beating our expectations and outlook for the quarter.
Our success in narrowing the footprint to our best performing and fastest growing opportunities as evident.
Trailing 12 month revenue excluding divested businesses.
$475 $7 million.
Reflecting a three year compound annual growth rate of 30%.
Looking ahead to the March quarter, we.
We expect the strong momentum to continue.
<unk> and a record revenue quarter and expanding adjusted EBITDA.
With that I'll turn the call over to the operator for Q&A.
Thank you if you'd like to ask a question on todays call. Please press star one on your telephone keypad.
Right.
We will go how did you go first question from John Campbell with Stephens. Please go ahead.
Hi, guys. Good afternoon, congrats on that from a phenomenal quarter.
Thank you Jim.
Absolutely so growth obviously, if you guys are really good right now you still got personal loans and credit cards that kind of weighted down that overall growth rate. I think you guys said it was up 25 per cent sequentially. Just curious if you could kind of unpack that you know if you could talk about kind of progression month to month, how they flow you know thus far into January and if you could maybe piece out.
Which would be the two is rebounding quicker.
We're we're continuing to see good.
Improvement incrementally.
Sequentially, whether it be you know kind of month to month or quarter to quarter.
We continue to see improving trends.
And both of those businesses.
We've gone from most.
Most of the clients being out of the channel.
Just a quarter to two quarters ago.
True pretty much all of the clients being back in the channel now.
And now it's a matter really of them continuing to expand their filters.
And their budgets their spending.
And they'll do that.
As the economy improves and as they as they get more comfortable.
With the environment in terms of between the two it's I don't know, Greg there's been pretty pretty similar.
Trends in the true in terms of the again it and the other thing Greg pointed out share up Oh.
80 per cent.
From the June quarter, which was the bottom.
The two but Greg on your any do you have any more on for John on the on the split between the two but you know from looking.
Looking at the business progression from my seat and the numbers are pretty similar true pretty similar progression.
Yeah, I mean for the most part personal loans is probably progressed, a little bit faster, but we're seeing progress across all our both credit cards and personal loans and John just to give you a little color on what we saw as you know in the June quarter of last fiscal year, we were down combined 70% on those businesses in the September quarter.
<unk>, we were down 60 per cent on those businesses this quarter year over year in the December quarter, we were down about 42% year over year.
Okay, great and in the right direction last question from me on home services you guys.
I think you're you know the core base business you guys have always had was growing nicely and then it seems like modernizes, obviously juicing that growth off of that you guys have done your integration work, but you know I I know once you've done from the integration it gets tough to kind of piece out.
Which is which at this point, but if I am I kind of on the right territory, calling from like 30 per cent or so organic growth out of home services is that on the right kind of Zip code.
It's just I think you've hit on it John it's hard for us to pull apart.
We did we had an integration plan.
From modernize.
Before we even closed the deal and we hit the ground immigrating.
And so just very tough for us to suss out.
Whats organic was not organic but I can tell you that it's a good strong double digit organic growth.
I don't I don't know that it's a I don't know 30 per cent is accurate or not but it's it is good.
And the organic growth is coming from combination.
By the way that organic growth is something on it in a COVID-19 environment.
Hum.
So but.
But we're seeing that.
On a lot of great.
Synergy work, where one plus one really is equal.
The 2.5 or more.
As well as some some good.
Strong execution work on.
On the core business expanding that core business, but we are seeing good organic growth as well as of course, the organic growth on the synergies.
Our working on extraordinarily well and we you know way ahead of our schedule on our expectations. So we could not be happier.
Modernize and we couldn't be more excited about home services overall, it's just a massive market.
Probably our biggest Tam.
And one where we think we are pretty uniquely suited.
She continues to grow with really good strong rates and deliver great results.
Clients, where our media partners Inc.
So well.
Love, where we are in home services.
Super excited about modernize.
Could not be happier with our with with how the debt businesses has gone for us.
What about the future prospects and yeah, we are seeing good strong organic growth as well yeah.
Yeah, great work across the board and once you guys get on personal loans and credit cards back doesn't tell me that you guys have going on.
B cooking from nice work thanks, guys.
Thank you Joe Thanks, Sean.
We'll go ahead and take our next question from Jason <unk> with Craig Hallum.
Work on the quarter won that's taking hold thank you Jos for a second and just is there anything you can call out in terms of our specific categories that you operate in that are showing particularly at really strong growth right now and then kind of along with that just continuing on.
Lingering COVID-19 impact on any specific categories that are performing well because they're there inside that may have some pent up demand in the next couple of quarters.
Yeah, absolutely, where we kind of kind of six core trades that were in and home services.
And those are all going super well in there.
Oh, I think we're trades, we've talked about before but but.
And then we have a number of growth trades that we're expanding into which count somewhere between five and 10 more that matter anyway from a tail of other growth trades that we're going to get into a trade we'd be like home security solar.
H back.
Roofing siding, which would be called trades at home services in general terms are most of the growth right now is coming into core trades.
And just better execution on synergies in the core trades.
We execute them to scale those.
And then we're seeing good progress in the India growth trades.
That I talked about in terms of just continued to expand it book that we believe we can be in dozens of trades. So where we think we're very early in our in our migration on our journey to get our footprint.
On a expanded debt, where we want it to be at home share because that's why I talk about it being such a big Tam in terms of general trends you are you touched on it.
If there's a general trend it is besides the fact that you know strong growth in the core trades.
During the day synergies, bringing on BDO to their clients and their media to our clients and product back and forth.
Executing on the synergies it would be that the internal projects tend to be softer.
In the house projects Dandy outside the house projects. So we are seeing greater strength.
And projects that involved the exterior.
And there is still a lot of softness and projects that involve the interior because again folks just don't want strangers in their home with Covid. So again, we do believe that the growth that we're seeing while strong in home services is actually reason.
Reasonably constrained by Covid and its effects on demand and consumer activity and then the number of the trades and if you'd asked me to split the trades I'd say, it's probably half and half Greg is that on.
I'm sure that's not 100% accurate, but it's probably a good enough on the alternative of how many trades were in better external exterior how many trades worth it or interior.
I think that's right on yeah.
Yeah.
Hey, Thanks for the color I appreciate that Greg one for you. Just curious have you had any call outs on on the margin and we talk a lot about your semi fixed cost operating structure and typically when we see the growth acceleration like we did this quarter.
Gross profit you know usually follows that kind of broke away from that a little bit. So you saw the nice profit on the bottom line gist.
Just not as much quarter over quarter on the gross margin side, just wondering if theres anything influencing that number.
No not really Jason on a quarter over quarter perspective, it's really you know as we talked about it it's a seasonally lighter quarter. So it's really the loss of top line leverage on on a very similar fixed cost from that standpoint.
Yeah.
Got it thanks guys.
Thanks, Jason.
We'll go ahead and take our next question from Jim Goss with Barrington Research. Please go ahead.
Okay. Thank you Uh huh.
Half a dozen core segments your operating income from the home services area.
Could you say about what share of the revenue base in that categorization or in those 666 segments.
And then also in terms of.
The likelihood of how you price yourself and executing a growth strategy in that area.
Understandably there are hundreds of categories you did get into how how do you intend to pursue it in terms of selectivity with him.
As categories before year and filling those out before your growth isn't there some sub verticals because I'm sure you can't because spread too thin and be effective.
Yeah, I don't have the exact numbers in terms of that split in front of me, Jim, but it's more than 50 per cent.
The revenue today.
Home services is in our six core trades.
On the trades that are have got there's some semblance of scale, although there are still.
Well short of the scale, we believe they can eventually be and still ramping pretty aggressively for us.
In terms of debt, you're you're exactly right part of the the magic and executing in that business.
Just making sure that we have a smart alignment of resources with.
How much goes into scaling the core trades comedy new growth trades do we take on and at what rate do we paced them with how many resources and that's a decision that's done very iteratively with that management team and that leadership group on but in you know you can imagine in general.
It has to do with the debt the attractiveness seven day trade to us generally speaking, which usually has to do with.
Getting budgets annual marketing spend.
On a lifetime value of customers media availability and media economics, there's really at all.
The main kind of screens, we put them through.
And then there's the tactical considerations like you know have we been able to.
Sign a yeah I left clients in a particular trade to give us a critical mass of demand that we can then use to get media efficiency. We can then use to go get more budget that we cannot low used to get more media efficiency and start working that virtuous cycle.
And so it's a combination of a top down assessment of the attractiveness based on the debt metrics that matter to our business and so we you know every home services trade its not attracting to Quint Street.
We need things like.
Strong lifetime value strong marketing spend are good.
On media.
If they haven't been lean digital and the ability to to make the media economics work in digital and then sort of a top down but again, even with that you go from there being hundreds to we think dozens that we can be in.
Doesn't that hundreds of debt exist. It doesn't we can be in.
And Dennis It again, it's the tactical work is as you have some groups focus on the core some groups focused on the new.
How much progress do we make the specific client demand, which will put you know if you got seven candidates do growth verticals, you're working on at any given moment and then one of them you have to decide.
No.
Our national service provider or a Super regional service provider, then that was going to get more attention on it and that's sometimes just has to do with pipeline flow client activity you know client personnel client priorities things like that so that's how we that's how we work it.
Okay, and just a couple of other things one other thing armed services.
I was wondering if you could describe the competitive situation. There now that you've merged one of your existing keep competitors how does it how does that stack up relative to what you deal with on the insurance side.
And then on the financial services area, it's in personal loans and credit cards are there.
Is there a concentration shipped a number of large.
Customers in the way progressive on a couple of other insurance companies factor on.
Importantly in the ear insurance group.
Sure in our in home services.
It much.
<unk>.
Much less competitive intensity.
Then we have we.
See in most of our other verticals, including.
Our insurance of course, which is highly highly competitive.
The it's a it's a tougher business.
To execute it.
Because it is represented by so many more service.
Service trades.
And so therefore, a lot more clients you have to be able to go you know kind of a multi vertical on home services.
And it's the the are big clients themselves.
Are much more fragmented and the media is much more fragmented it aligns very well with our operating capabilities.
Our capabilities and our technology platform, which was built.
To be multi vertical.
So we think we're advantaged there and that I think that helps explain.
There's less competitive intensity I mean insurance you got you know if you.
You get the 10 biggest carriers.
You can make on insurance marketplace.
You might argue you do that with less than that at.
At home services, you get 10 clients you haven't even started.
You have you you had you on.
You kind of have not gotten going maybe if they're all on one trade.
You can get going.
But you know we have we think we have to get to thousands of.
With clients at home services to eventually get where we want to get.
Well I think we're already at a thousand.
Versus say 50 carriers in auto insurance, you know, which includes you know a lot of smaller.
Kerry so very different operating requirements are aligns very well with our technology our capabilities on the way we were with the way, we implement and execute.
And I think that's part of the reason, we see a lot less competitive intensity. The biggest player on the vertical courses as home advisor Angie home a gotcha.
Range of homes or services, a very different model than us obviously, they are in hundreds and hundreds and hundreds of trades.
And they are much more of a broad base our marketplace. We are as we usually are a much narrower deeper.
On a player.
It's a much more deeply integrated with both our clients on.
And with our media sources.
So we find ourselves we think we're very complementary with Angie home advisor. They are a partner of ours and we do a lot of joint allowed revenue together.
Besides the two of US, there's a pretty big white space between us and the next player.
So as you can see it's a it's a much a.
Much less competitively intensive.
Our market.
In terms of personal credit card concentration I again, I don't have the numbers in front of me, but the short answer is not nearly as concentrated.
As as say insurance, we don't have that at progressive.
And in personal loans and credit cards are much more broadly spread out both from our.
Generally bigger.
Generally more players on the market the credit cards and they were probably RBC.
Five or six major issuers in credit cards that debt debt do dominate the market. So.
But but I, we're not dominated by any one of those and personal loans are a lot more players in that.
And again, we don't have any single player. That's that's that significant the bigger than the others. So again the short answer is yes.
No we're not as concentrated in those verticals, that's where our insurance.
Well, we don't have a we don't have the one big client.
Like we do on insurance.
Okay, well I appreciate your thoughts.
Well go ahead and take our next question from Eric.
With Lake Street.
So what they're on.
Credit card side of the house just wondering.
So you've seen a sequential step up there on the demand side.
To focus on one or two.
And our leading indicators.
Get better.
If you look at stimulus or Florida, remember vaccine will allow what's a good indicator as to where that day.
Yeah, Eric I think the best indicator is probably just economic activity on employment.
As the employment numbers gets stronger than consumer credit will tend to get stronger.
And demand in those businesses tends to get stronger.
Interestingly stimulus doesn't really help personal loans because it tends to people.
People tend to put off personal alone if they think they're going to get the stimulus checks.
It's probably good for credit cards, though so they don't they don't operate as you know they they don't they're.
They're not lock step in terms of what's good for them, but I would say that it's the best indicator because both of these again, that's why we referred to as credit driven businesses as it is anything that makes consumer credit better.
Broadly.
And in the Middle Middle America.
Anything that makes credit consumer credit better.
And in Middle America is going to make those businesses stronger credit cards and personal loans.
Okay.
Curious to know this one is from Greg It looks like based on the guidance, we got a nice adjusted EBITDA margin expansion.
Q3 guidance Q3.
Is your strongest is that true.
The.
Incremental step up in revenue or are there other things going on in that margin expansion.
Yeah, Eric the biggest component is just exactly what you said, where we're a top line driven or.
Topline leverage driven model so as the more revenue you drive the more margin you see the margin expansion. The expansion happened because you have a very similar semi fixed cost base. So really the margin expansion that you're seeing is driven by a better top line.
Okay.
And then lastly from me.
Well benefiting from a shift to digital marketing over the past three quarters it.
Certainly you guys are benefiting most digital marketing performance marketing business sells are benefiting in your world, but definitely financial services are you concerned at all about.
The pendulum swings back economy reopens more.
And then more like broadcast it sort of shift back to traditional advertising and away from performance marketing is at risk.
Risk here.
It's a great question and the short answer is we dig into this with clients is no. These do not appear to be temporary shifts. These appear to be and makes sense to be if you look at kind of share of spend based on activity on the channel permanent changes that we've accelerated.
You're already on the the migration curb that was already happening.
So we do not expect that we expect that these shifts.
Will stay with us.
And and debt. This is just kind of taken a curb it was already moving.
You know up until the right in digital marketing and increase the slope of it because it is it at that.
Caused companies to have to go faster and to adapt faster. So we do not expect a meaningful.
Ship back too.
Non digital channel.
Yeah, Thanks for that and just to add onto that Doug as well is there or did you do.
We've been growing even pre pandemic you've been seeing that shift. This is just the acceleration on that shift of offline to online and you can see that in our you know our three year compound annual growth rate.
On our business now our current footprint, it's been 30%. So we've seen that that shift has been happening and we've seen you know long term growth out of those businesses already.
Yes, congrats on the floor.
Okay.
Thank you Eric.
Well take our next question from Chris Sakai with singular research.
Hi, Hi, everyone. Good afternoon, I just had a question.
Uh Huh I just had a question on.
So your auto insurance and home services.
Growing pretty well now I wanted to see what you guys thought about.
Host post pandemic.
What do you think you'll see.
Maybe a switch on switch navy into more credit driven businesses growth.
And lastly, the auto insurance and home services I just wanted to go out there.
Hard to say.
Well, Chris we think some of the you can't get to put the Genie back in the bottle on a lot of the shift that's happening to digital debt was spurred by or accelerated by Covid. So that's it.
As a as I responded to Eric's question, we do not expect a significant retraction.
Instrument.
Of the non digital channels.
Post COVID-19.
Whether or not we will still be growing at these rates was gonna be.
I think less Covid related then.
Uh huh.
Other activity in other initiative related.
As we continue to expand.
As we continue to do things that we're doing that are allowing these credits or spend more on digital.
I think those will drive as much of the activity as as Covid has spurred the day the.
Inflection in that activity I do expect that the credit driven businesses will return to growth as the economy improves for sure. So they will contribute more to growth.
And then of course, we will lap the modernized acquisition you know July one and so I think that.
Net net.
I liked the timing.
Of the credit driven businesses.
Progress, we've been making there and what we're seeing in the in front of us at insurance.
The clients are telling us they're going to do and the momentum we have with the initiatives. So you know we we.
We feel very good about our growth prospects for as far as we can see.
Oh, Okay, all right, Thanks, Doug and then.
One thing I just wanted to ask about the home services segment.
Good day.
I.
I guess is it.
Related or.
Negatively related to interest.
Interest rate so interest rates are down home services and vice versa.
Not clear on I would say that I don't I don't expect that would be a big impact because we're still so early in the penetration of home services home services is a.
Massive market and it would be you know where we're early in the penetration.
Performance marketing.
And digital advertising penetration of insurance deal that for a couple of clients.
Hum.
Hunter, it's just much earlier than that we are an insurance. So I think that macro macro effects like that are unlikely to be a big driver relative to.
Just two.
Continued.
You know natural migration penetration of marketing budgets.
For digital performance marketing going forward so on.
I don't I would not expect we don't we don't expect that that's a major driver.
Of these abuse of demand for these services now.
Okay alright. Thanks.
Thank you Chris.
And it appears we have no further questions at this time.
And everyone on there will be a replay available.
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For this call.
It will be available today at seven P M central time.
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