Q3 2022 Quinstreet Inc Earnings Call
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Good day and welcome to the Queen Street third quarter fiscal 2022 financial results Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Mr. Hayden Blair. Please go ahead Sir.
Thank you Jenny.
And thank you to everyone joining us as we report when streets third quarter fiscal year 2022 financial results.
Joining me on the call today are Chief Executive Officer, Doug Lucky and Chief Financial Officer, Greg Wong.
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 today and our most recent 10-Q filing.
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.
A 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 Doug <unk>. Please go ahead Sir.
Thank you Hayden.
Welcome everyone.
Increased claims costs.
To suppress insurance carrier marketing spend.
And in turn.
Revenue in our auto insurance client vertical.
The good news.
Those effects on our insurance clients and their business economics are transitory.
Further good news.
Is that revenue and our insurance client vertical.
Appears to be at or near a bottom.
Carriers are working diligently to the well honed process of re rating or repricing their policy products.
In fact, the new environment.
We now have a number of examples.
Of successful client re rating.
Where they have reestablished or increased marketing spend.
Did they had been previously that had been previously paused or reduced.
Said another way.
Environment and insurance remains generally complicated and dynamic.
But the climb back out to the other side of this adjustment and the transition period.
Certainly appears to have begun.
Importantly.
We and carriers continue to expect strong marketing spend and consumer shopping on the other side of this re rating cycle.
Carrier economics will be renewed.
And consumers are expected to shop aggressively in response to higher rates.
As a reminder.
Our auto insurance revenue.
Doubled within 12 months at the end of the last major re rating cycle.
In the meantime.
Revenue from our non insurance client verticals.
Can use to perform well.
It represented 50% of total revenue.
<unk> grew 35% year over year quarter.
All in all.
We remain highly enthusiastic about our business prospects and are focused on the projects and initiatives to achieve them.
Overall.
Really pleased with how our team.
And business are navigating and performing.
In this complicated environment.
Strong trends in our non insurance client verticals combined with the eventual resurgence of insurance.
Well the future.
A return to insurance revenue just to the levels prior to current industry challenges would imply total annual company revenue.
Of over $700 million per year.
Growing.
15% to 20% per year.
Even with the current impact on insurance revenue our financial position is strong.
With no let up in our investments in the future.
We remain solidly cash flow and EBITDA positive.
While continuing to invest aggressively in growth added product initiatives across the company.
Our balance sheet.
<unk> with over $100 million of cash and no bank debt.
One of the important areas of investment in the future.
Of course, you RFP.
Current insurance industry conditions have affected agent activity.
And therefore reduced the slope, but the Q R. P revenue ramp.
Despite those challenges TRP quote volumes are still well up and to the right.
The fundamental opportunity represented by Q RP.
And our enthusiasm for that opportunity.
As strong as ever.
Ever.
Yet another reason to be excited as we climb out of this insurance re rating period.
We are forecasting FY Q4 revenue.
To be between 138 and $142 million.
We expect adjusted EBITDA to be between four five and $5 million continuing to demonstrate the resiliency and strength of our underlying business model.
And I.
Our diversification.
Finally.
The board of directors has approved a $40 million share repurchase program.
The buyback reflects the expected transitory nature of insurance industry challenges.
Strength of our underlying business model and financial position and.
And confidence in our long term outlook for the business with.
With that I will turn the call over to Greg.
Thank you Doug.
Hello, and thanks to everyone for joining us today.
Revenue in the March quarter declined 2% year over year to $157 million.
GAAP net income was $2 2 million or <unk> <unk> per share.
Adjusted net income was $4 $9 million or <unk> <unk> per share.
Adjusted EBITDA was $6 $9 million.
Looking at revenue by client vertical.
Our financial services client vertical represented 72% of Q3 revenue and declined 7% year over year to $108 $3 million.
Doug will cover the details of what is going on in the insurance client vertical in his remarks.
Within our credit driven client verticals of personal loans and credit cards.
Progress and revenue growth continue well ahead of our initial outlook for the year growing 89% year over year, and eclipsing a $100 million annual run rate in fiscal Q3.
Okay.
Our home services client vertical represented 27% of Q3 revenue and grew 16% year over year to $47 million.
We continue to expect this early stage client vertical to deliver double digit organic growth for as far as the eye can see.
Other revenue.
Which consists primarily of performance marketing agency and technology services was the remaining $1 7 million of Q3 revenue.
Turning to the balance sheet, we generated $3 $6 million in normalized free cash flow and closed the quarter with $109 $5 million of cash and equivalents.
No bank debt.
In summary.
We continue to be pleased with our diverse footprint of client verticals.
Non insurance client verticals grew 35% year over year in the quarter and we believe that will support a period a fantastic growth when we get to the other side of this challenging macro environment in insurance.
In the meantime.
We will continue to focus on execution.
And expect to aggressively execute on our recently authorized share repurchase program.
Current valuation.
With that I'll turn the call over to the operator for Q&A.
Thank you.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad and if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Star one to ask a question.
Just a moment to allow everyone an opportunity to signal for questions.
And we will go first to John Campbell with Stephens, Inc.
Hey, guys good afternoon.
John Hey.
I might have missed this but could you guys maybe talk a little bit more maybe unpack the guidance and specifically just around the insurance trends.
FY <unk> is your seasonally strongest quarter, so I'm, assuming that's down from that level. So maybe if you could just talk to what you're considering on a year over year decline basis.
Yeah, what's in the guidance for this quarter is really what we've been experiencing since February and that's pretty flat insurance revenue.
So we had.
Ben.
For the past four months or so and expect to be through the end of the fiscal year through June .
Flat in insurance, which does beat by the way typical seasonality.
In terms of the way it normally works. So as you know January was an outlier, but February forward to spin.
Or minus a very small number in terms of the revenue and insurance and that's one of the reasons we'd point out.
I think we feel like we're bouncing along the bottom here in that.
Bind with.
Recent moves by some of the insurers.
And recent.
Announcements about some of the insurers of succession rewriting and intention is to begin to raise their marketing budgets.
In the second half of 2022, one of the reasons we can.
I've talked about.
Certainly believe were at or near a bottom and bouncing along the bottom. So that's a main component.
Other businesses in the guide, we're assuming are showing pretty.
Pretty much the same pattern they've been showing for the past year or so in terms of their their growth rate year over year, but with some seasonality.
Associated with the to your point they move from the March quarter into the June quarters, typically little bit down because of the strength of the March quarter, It's a pretty normal normal recent patterns, which have been quite strong and non insurance and flat.
In insurance, because it's what we've seen since February and that's what we're forecasting and as we as we get indications and run rates.
For the business through June .
Okay. That's helpful.
And let me add let me add one other thing Jonathan I'm, sorry, just so I don't forget to mention this.
The remaining.
The pressure, we're seeing on margins.
Insurance is twofold. One is of course, we lost a lot of top line leverage cause the loss of that revenue.
And Thats reflected in the guide because we're not.
We're not restructuring.
To accommodate that we are investing through this cycle, because we know it's temporary we want to be.
Ready to take full advantage of the other side.
But the other point is with the remaining insurance revenue auto insurance revenue, which is dominant of course with us.
Pricing.
And filter filters are tighter and pricing is down so we're getting a little bit of a double whammy on margins right now that will cure itself as we come out of this period in insurance.
Okay. That's helpful and then kind of a similar vein.
And just the year over year growth of insurance I mean, you guys don't specifically break that out we've done kind of back of the napkin math I feel like we've gotten pretty close to that over time, but.
If I look at this on a two year stack.
Obviously, 'twenty one FY 'twenty one is a very good year.
But on FY 'twenty.
Even with the decline in insurance here it looks like you're still maybe up 10, or so 11% to 12% or so over the last few quarters relative to FY 'twenty is that Directionally correct.
I don't have that in front of me Greg do you have that in front of you.
No I do not have that in front of me right now.
I apologize Sean.
Okay, that's fine, but I think the point I'm, making here it just feels like there's some investor concerns around potentially over earning in FY 'twenty, one getting outsized.
History trends in helping on the insurance side.
So it sounds like for you guys that you know we do believe it's a transitory issue otherwise you would be maybe some cost measures you wouldn't have a buyback in place because of it so is that fair to say yeah.
Absolutely I don't know if that comes from by the way that's not consistent with anything.
That we hear from no about our clients plans and business anything any of our clients have said.
About their business and their intentions and their plans and anything we you know we have.
That we're doing that would have an impact on that so.
Debt.
That.
It does not seem at all with reality as we know it is unexpected so I don't I don't know where that came from I know, sometimes the investment community people.
Kind of something like that takes on a life of its own but that has zero credibility.
Makes sense thanks, guys.
And well move next to Jason <unk> of Craig Hallum.
Thank you gentlemen, apologies I hopped on late so I apologize if you've ever.
Already touched on this but given you've been at the auto insurance business for a long time I'm. Just curious when you start to see contraction on that that acquisition spend does that usually happen across like one or two large carriers and then flow into the smaller carriers and then.
If there's a specific pattern on how that flows across the industry. I mean can you talk about where we're at in terms of your customer base large and smaller are you seeing that kind of across the entire stack.
No. That's a great question, Jason I want to talk generically because of course it's.
Huh.
We're very careful to try not to to to talk about specific clients for obvious reasons.
But generally speaking.
They don't all act at once.
Often there will be and I'm talking mainly the big carriers by the way, which really dominate the market. So you did mentioned the smaller carriers, but they are relatively unimportant.
Overall scheme of things in terms of supply and demand in media pricing and utilization. So I'll focus mainly on the larger clients, who dominate our budgets didn't dominate everybody's budgets in this in this channel but.
Typically they don't all act at once.
Because they all have very different economics, and very different pricing and very different models and variant and intermodal even all in the same states. As you know so that does tend to be a kind of a ripple effect that you will get some that will move sooner than others.
And then then you'll get the Dell raised prices sooner.
Well initially lose a little share because of that.
And then very quickly thereafter, you'll see others begin to raise their prices as soon as they can <unk> stop marketing, where they havent, yet because they can't make any money.
Current pricing and then you'll see that debt.
That will turn a little bit and the ones that initially raised prices and maybe lost a little bit of conversion share begin to start gaining traction because they are present in a market where others aren't and then they they may gain even more share when the others come in with their price hikes. Because then you start seeing.
<unk> start to shop. So you get this dynamic with prices going up and pausing and stopping and across various clients in and it kind of ripples through the market, where we are right. Now is we think we're we're somewhere in the middle of that.
We have seen as I said.
A lot of examples now finally.
For a while it was just it was we were seeing nothing but reduced budgets reduced pricing.
And stoppages in terms of marketing activities in certain geographies.
And lately, we have been seeing and you have a lot of examples where folks have very successfully re rated.
In in states have gotten much more active.
Active.
They've got an active again in those states.
And have begun to re ramp their spend.
And various in various Ross segments in certain geographies and in multiple geographies. So we're we're very much seeing the first pattern of one carrier. The stopped early went in and started fixing their rates and the others haven't gotten to it yet we originally had seen the.
We've seen.
Successful re rating successful repricing and re ramp of marketing and others are still in the process of beginning to do all of that what we havent seen lately, especially with some of the middle of that.
I don't.
I don't know.
Most if not all.
We have now.
They're pulled back their marketing spend or stop their marketing spend where they haven't been able to reprice.
And are unlikely to begin to ramp that spend until they do get repriced and they are in that repricing cycle now.
So long way of saying, we're finally seeing some upside from some carrier clients.
And the other carrier clients that we're not necessarily seeing upside from yet.
We don't expect to see more downside because they're out of the market. So we're in the middle.
Again, as I said, we certainly feels and looks to us like we're beginning to climb back out and coupled with that caught US work, we're not going to try to be heroes and can predict exact timing.
I mean, that's the spot, but I will give you a couple of data points.
One of our competitors.
Said on their call recently and their discussions with clients and they thought that the client would begin.
In the second half of 'twenty, two and that would then market will be normalized by January I believe on quoting incorrectly.
Perhaps you can certainly check if not pretty but I read that pretty carefully.
For us what that's what they said based on their discussions with clients and then another large carrier client.
Said just recently.
They did expect to be ramping their marketing spend and trying to get back into what they call a growth mode.
Or words to that effect.
In the second half of 2022, so those two things would also imply.
That were you know were at or near bottom and beginning to ramp back up.
Always appreciate the incremental color. So thank you for that I do have a follow up just given the choppy backdrop in auto insurance can you maybe talk about what you think that means for <unk> is there an opportunity for carriers to view this as an opportunity and more.
<unk> times and lean into <unk> more in this environment than they would in a more robust environment.
I think the momentum and interest in <unk> is super high.
Regardless of the environment.
And we've spent some time in the past month, or so and I have personally visiting with.
Big partners.
To reconfirm that end and I would say never seen more enthusiasm from the partners that matter most.
So the success long term success of that product and really leaning in to help with that.
That said, we're seeing a little bit.
While we are continuing to be up into the right sequentially every month and pretty significantly so in terms of the activity in volumes through PRP coupons soup TRP.
And last month was our biggest month.
That's the slope of that pretty steep ramp has certainly been diminished by the current period and.
For these reasons.
The agencies themselves are losing budget and carrier coverage as carriers pull out of certain states until they get re rated.
And that just diminishes the activity level and the economics and the opportunity for those agencies.
Also.
Implied in what I, just said there are carriers, who arent as active on the platform because they are still getting re rated in certain states and so we've lost that activity. So we have definitely lost activity in the market on both the agency and the carrier side, which has reduced the slope.
The slope is still well up into the right and again our outlook.
In.
In the overall scheme of things for TRP.
It remains as good or better than it ever has been so I wouldn't say that there's bad market is necessarily helped us <unk> ERP, but it hasnt.
It hasnt turned the slope downward.
And it has not diminished anybody's.
Medium to long term, depending on how you define that and I defined that in quarters and years not decades enthusiasm.
For the product and what it means to <unk>.
Agent channel.
Perfect. Thanks for all your comments, Doug I appreciate it.
Thank you Jason.
And well go next to Jim Goss with Barrington Research.
Thank you.
I agree Doug there was a great description of the process.
It also so thank you.
It also sounds like welcomed it also sounds like it could be quite extensive.
And quite variable.
Our opportunity in terms of marketing cost might be.
Less tied to Hello, the insurance carriers are doing.
Then just whether there's a level of activity of the search process and I'm wondering is there some phase of this that's a better or worse for you and how long do you think are the duration of this process might be.
Yes.
Thank you Jim It's a good question I don't think we know how long it would be so that's why I gave up and again I don't want to predict it because I don't think anybody can precisely that's why I gave a couple of data points I did in terms of.
What are these one of our competitors so I'm.
Confident enough to say and what.
One of the largest carriers.
Just said I think it was yesterday in their call. So.
But I would say that.
What we're seeing by way of consumer activity is that we did see.
A pretty normal shopping cycle in the February March timeframe.
Which we expected from consumer activity and I think Greg correct me, if I'm wrong, but I think we had a peak volume ever.
Of.
Inquiries or clicks to our marketplaces in auto insurance was that March Gregg.
Yes, that's correct.
And so we're seeing pretty strong consumer activity.
It was it was on trend line it was in the right.
Cycle time, so we haven't seen any diminishment of consumer interest we did see a reduced conversion rate of those of that activity because there are less offerings there were fewer carriers.
The market for all the reasons, we just talked about.
Two matched to those consumers or for those consumers to choose from.
What we expect as we dynamically as you think about the rating process and the rolling rating process I described.
We have seen historically and it was 2016 when there was a pretty major re rating cycle and what carriers have described to us.
Based on their experience is is that as.
Companies increase their rates and as more companies increase their rates and remember I noted that most companies now have either increase their rates for their pausing their aggressive marketing activity into they do get their rates increased so what we're seeing now is we're on the second half of the wave where the first half was people kind of closing down their activity.
Because their rates economics didn't work and now we're beginning to see people either.
Begin to re rating process or having finished the re rating process and begin to increase their marketing spend and as I said.
We now have examples of the early movers getting to that point.
More and more consumers are going to get their rates increase when those consumers get their rates increased.
A very large number of them go and shop and when they go and shop, it increases activity pretty dramatically and <unk>.
A large portion of the folks that go on shopper going to end up on our markets and our marketplaces and so.
Thats why you keep hearing us talk about hey, the other side of this.
The other second half of this cycle and the other side of this cycle get very good for us because you have the combination of carriers, who have increased their rates are that the economics work and they have therefore, the surplus to spend on marketing combined with and motivated consumers seeking alternatives because their rates just got increased that creates a bit of a super cycle and as I mentioned in my.
<unk> remarks in 2016, the last time, we saw a cycle like this.
Within 12 months.
At the end of that cycle.
Whenever that happens if you assume that.
Our competitor said that January is that then say within 12 months of January our auto insurance revenue had doubled because of the combination of those two factors, we expect and our clients are articulated to us. They expect a very strong cycle for those very reasons at the end of this period as well.
Okay.
Thanks for that.
I wonder to IFF.
If they're there.
Thanks to describe the rest of the financial services Besides insurance.
It is proceeding and also what are the key drivers right now in the home services category are there certain certain groups that are sort of carrying the.
The increases are creating the increases rather.
Yes in terms of the rest of the financial services as Greg mentioned, if you look at the.
A credit driven.
Verticals, which are the next two biggest verticals within financial services for us personal loans and credit cards.
Those two businesses combined grew I think great 85% year over year in the quarter, 89%, Yes, 89 days.
And and are now and we're run rating at well over $100 million per year in annual revenue.
In the quarter. So those businesses continue to do very well as we see.
Increased consumer activity.
Broadly in the economy.
And therefore.
Would that activity comes.
The.
Requirement.
Our desire to access credit and to use credit.
I think we are and we feel very good about the outlook.
Continued outlook for those businesses, so that's and that's that dominates.
Rest of the financial services.
Home services drivers. It's we're in we're in a lot of different trades, a trade we'd be like window replacement work in tubs home security silver.
When a number of trades.
In home services, and we're seeing a.
We're performing as long as we are despite the fact that the market is not easy right. Now there are still a lot of supply chain problems labor problems installers need to be hired sometimes our clients were shutting down in various geographies because they don't have enough installers or they're not able to fill orders because we supply chains not.
Not yet working like it should be or not caught up so.
We're seeing good activity generally across the spectrum of trades that were in I think we are in about 10 trades Notionally maybe 12.
And four of them were pretty big and pretty pretty mature in.
And for the most part we're seeing.
Particularly across all those trades, but that activity has been constrained and complicated.
By again supply chain and labor issues, so despite that.
We continue to grow at a good clip.
And we continue to be to generate good margins. There. So we expect.
That as we continue to come out of.
This period, this period being COVID-19 and supply chain.
Issues in Covid, driven potentially partially COVID-19 driven labor shortages.
That we're going to get more and more wind at our back and now all the while were continuing to do things. We can do and then execute against we are adding more clients getting more budget from those clients, we are adding more media getting more yield and consumers matched in that media.
Are working diligently to fully apply all of the our marketplace technologies and capabilities in home services. Because you know its home services is mostly our modernized acquisition and we have to.
Integrate all of our technologies into our modernize operations and where we're long way from getting all that done and what we know is when we do that we get a big surge in a big lift in performance.
So.
<unk> home services as a <unk>.
Really big.
Opportunity will continue to be driven by our continued to execute better on.
On the product median client side combined with our continuing to add more trades. We believe we can be in dozens.
In about a dozen and we're only really big big defined as.
What we think is at least a scale that's debt.
Is it reasonable midlife scale for us in about four so.
Again I think.
I think Greg said, it and I would second that we have a long long time of runway.
A lot of upside in home services, where as far as I can see.
Okay, well I appreciate your color. Thanks framework, you bet Youre welcome.
Yes.
As a reminder, this star one for questions.
And we will go to Chris Sakai of singular research.
Hi, good afternoon.
Just had a quick question on.
Hi, Doug.
Question on.
Insurance.
How much of that what was financial services financial services.
Oh, how much of financial services does insurance represent.
Right is that the question.
Historically, it's been about 70% seven zero percent of financial services.
With the downturn.
Do you know you have a round number for what insurance represented of financial services.
This past quarter, yes, it's pretty similar Doug, it's 70% financial services right around there and then you know and it can vary quarter to quarter.
But as we discussed and you can see in the bullets or the press release, it's 50% of total revenue non insurance businesses.
Now 50% of revenue that grew at 35%.
Okay great.
My other question was on.
Home services.
I know.
In previous calls you might have talked about this that I can't remember for sure, but I mean, we're seeing now we're in a rising rate environment.
Now how would this affect home services if at all.
And what other time periods.
I mean, if you can remember that home service, how did a rising rate environment exact home services and what was the outcome.
Yeah, and we just went through an analysis of this because we were doing some continues.
Z planning.
Partly as we were putting together the cash flow models for the buyback.
Just kind of consider worst case scenarios to make sure we still have lots and lots and lots of margin.
In terms of cash.
To fully execute the buyback and we did some planning around recession.
Interest rate driven recession, and as we went through that process with the team the answer was pretty flat.
Not not significantly down not significantly up we have some trades within home services that we would expect to be negatively impacted.
And we have.
Some trades and home service that we would expect to be positively impacted there are lots of lot of different themes to that because home services is quite a diverse set of trades.
But a simple example, I might give you is that.
We are likely to see.
You were new.
New homebuyers.
Would mean that projects too.
To work on.
And remodel dress up existing homes.
Many types will go up.
So.
The general answer is.
A recession.
We're a rising rate environment, which could push us to a recession.
Just rising rates alone have very little impact generally, which still at rates that aren't going to have a big impact. We don't believe on any of our businesses, but to the extent rates get quite high <unk> drive a recession.
The business, we think would suffer most of the credit cards.
We would expect to see a pretty significant downturn, we've modeled that into our downside scenario planning.
And then.
I guess home services.
<unk> was the other one that we had relatively flat to down as much as 20%.
In that environment.
Yeah.
Is that right thats, correct and to add onto that we.
We did in the contingency planning that said if you look at recessions historically that we've been we've been in home services for a long time, we have not seen an impact from historical recessions on the growth of our home services business.
Yeah, Let me let me say this then don't take that negative 20% as a sure thing that we're trying to be conservative and come up with a we're doing modeling to protect our make sure could massively protecting our cash position.
Making sure, we're leaving lots and lots of cushion, which we did.
Half.
But.
We have not seen historically in the last recession, a meaningful negative impact on home services. I think is for a couple of reasons. One is we're not so penetrated that the macro effects.
Our rule.
In home services and I don't expect we will leave for a very long time and the second is as I mentioned home services is a very diverse set of trades and what we will do.
We will focus on the trades least affected.
Or even that get tailwind from recession.
And we will.
Deemphasize those that are affected negatively so we have levers that we can pool given the nature of that marketplace. Just like we do anyway, but again if you wanted to what we think was a worst case downside for again very conservative contingency planning for.
Assessing cash positions and making sure we have lots and lots of room for cash no matter what happened.
I think we had at worst case down 20%.
Okay, great well thanks for that.
Thank you Chris.
I might also add by the way, while we're talking about the recession.
That generally speaking historically, we've been in insurance, a long time auto insurance does very well in a recession.
Because consumers shop aggressively to reduce their costs across the board, including the requirement to spend on auto insurance.
And driving activities reduced.
Auto insurance carriers tend to do well.
In recessionary type periods generally speaking.
And as a reminder, this star one for questions.
And thank you a replay of today's call will be available for a week starting at five PM Pacific time today. The replay can be accessed by calling 17194570820 and entering pass.
Code 739 6520. This concludes today's call you may now disconnect.
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