QuinStreet Inc. Q3 2023 Earnings Call
Speaker 2: Good day and welcome to Queen Street's third quarter and fiscal year 2023 financial results conference call. Today's conference is being recorded. Following prepared remarks, there will be a question and answer session at which time colors will need to press star and one on your telephone keypad.
Speaker 3: Again.
Speaker 4: Thank you operator and thank you everyone for joining us as we report Quinn Street's third quarter fiscal year 2023 financial results.
Speaker 4: Joining me on the call today are Keith Executive Officer Doug Valenti and Chief Financial Officer Greg Wom. Before we begin, I would like to remind you that the following discussion will contain forward-looking statements.
Speaker 4: For 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.
Speaker 4: Factors that may cause results to differ from our four-looking statements are discussed in our recent SEC filings, including our most recent 8K filing rate today, and almost recent 10Q filing. For 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 GAP and non- GAAP measures . A reconciliation of GAP and non- GAAP financial measures is included in today's earnings press release.
Speaker 4: which is available on our Investor Relations website at investor.quinstreet.com. With that, I will turn the call over to Doug Valenti. Please go ahead, sir.
Speaker 5: Thank you, Rob. Welcome, everyone. District 2, 3 results were strong, exceeding our outlook for revenue and adjusted EBITDA. Quarterly revenue was $173 million, growing 15% year over year, and setting an all-time company record. Adjusted EBITDA jumped to $9 million on the quarter. Once again demonstrating the strong operating leverage of our business model.
Speaker 5: Two-three's good results were driven by continued strength and non-insurance verticals.
Speaker 5: where revenue grew 34% over year and represented 58% of total company revenue.
Speaker 5: The good results were also driven by the strong early stages of the re-ramp of auto insurance.
Speaker 5: Auto insurance revenue surged 53% in Q3 over Q2.
Speaker 5: carriers from the challenges of the pandemic.
Speaker 5: of the pandemic, inflation.
Speaker 5: for the current quarter.
Speaker 5: for the current quarter or fiscal Q4.
Speaker 5: But the near-term insurance carrier spending reductions do not diminish our longer-term opportunity, expectations, or enthusiasm to that big and important market. The auto insurance reramp is pausing, not stopping.
Speaker 5: will continue to adjust and adapt. And marketing budgets will continue to shift from offline to online. Most consumers will continue to shop online for everything, including evermore so, for insurance. And digital performance marketing like that pioneered and enabled by Quinn Street will still be the most efficient marketing spend that scale for advanced market.
Speaker 5: In the meantime, Queen Street will keep doing what we have been doing. We will continue to make great progress on initiatives to broaden and diversify our revenue footprint.
Speaker 5: and to grow our market opportunity.
Speaker 5: and to grow our market opportunity. An insurance and an non-insurance client wrote us.
Speaker 5: We will focus investments on new technology, product, and business expansion areas that offer the best returns and the biggest opportunities.
Speaker 5: And we will maintain a strong fundamental financial foundation, including of course, cost discipline and a strong balance sheet. Of particular note, we will continue to stay spring loaded for strong leverage and rapid margin expansion as revenue grows or returns, as demonstrated last quarter. Starting now to our near term outlook. We expect out of insurance revenue to decline an FYQ-4 versus FYQ-3 due to the unexpected near term carrier spending reduction. For full fiscal year 2023.
Speaker 5: which ends in June . We expect revenue of $575 to $580 million. We expect positive adjusted EBITDA in FYQ4, despite the utter insurance challenges, and that adjusted EBITDA for full fiscal year 2023 will be between $16 and $17 million. We have also begun the detailed planning process for our fiscal year 2024, which begins in July .
Speaker 5: We expect revenue and adjusted even dot to grow in double digits in fiscal year 2024 And that we will be strongly cash flow positive
Speaker 5: We will update our outlook and be more precise.
Speaker 5: as the reramp of auto insurance continues to unfold.
Speaker 5: We expect double-digit annual revenue growth rates on average in coming years due to continued strong performance in non-insurance businesses alone. We expect auto insurance revenue to be up and to the right, eventually returning to and exceeding FY20-21 peak levels. We expect adjusted EBITDA to grow faster than revenue, eventually exceeding a 10% margin. Now we're just to be a non-mortem and March.
Speaker 5: come to 7% just from the early stages of the return of auto insurance revenue.
Speaker 5: demonstrating the leverage we expect in future course.
Speaker 5: and years. With that I'll turn the color over to gray.
Speaker 6: Thank you, Doug. Hello and thanks to everyone for joining us today.
Speaker 6: where we delivered strong results, including an all-time record revenue quarter, returned the double digit year-of-year revenue growth, and even stronger adjusted EBITDA growth. Total revenue was $172.7 million, and grew 15% year-of-year, despite the economic and early stages of the recovery and honor of insurance, as well as the shifting macroeconomic environment. Our non-insurance client verticals represented 58% of total Q3 revenue, and grew 34% year-of-year.
Speaker 6: delivered strong results, including an all-time record revenue quarter, or returned to double digit year-of-year revenue growth, and even stronger adjusted EBITDA growth. Total revenue was $172.7 million, and grew 15% year-of-year, despite the economic and early stages of the recovery and auto insurance, as well as the shifting macroeconomic environment. Our non-insurance client verticals represented 58% of total Q3 revenue, and grew 34% year-of-year. Looking at revenue by client vertical.
Speaker 6: Our financial services client vertical represented 70 percent of Q3 revenue and grew 11 percent year-over-year to $120.2 million. This was a result of continued strength in our credit-driven and banking client verticals, as well as an improving environment and insurance for the quarter. Our credit-driven client verticals of personal loans and credit cards, as well as our banking business, delivered excellent results in Q3. Combined, these non-insurance financial services verticals grew 48 percent year-over-year.
Speaker 6: We did see a significant ramp in revenue in the March quarter, though carriers have since unexpectedly reduced spending to assess and adjust to current market conditions and results. We still expect auto insurance to be up in the right over time and believe that it is a great long-term growth business for Quinn Street.
Speaker 6: The exact pace of carrier re-ramps is unclear. Revenue on our home services client vertical grew 24% year-over-year to $50.3 million, or 29% of total revenue. As we've discussed in the past, home services may be our largest addressable market and is run rating to an over $200 million business.
Speaker 6: of carrier re-ramps is unclear. Revenue in our home services client vertical grew 24% year over year to $50.3 million or 29% of total revenue. As we've discussed in the past, home services may be our largest addressable market and has run rating to an over $200 million business growing its strong double digits.
Speaker 6: Our strategy to drive long-term growth here is simple. One, grow our business from our existing dozen or so service offerings. Examples being window replacement, solar systems, sales and installation and bathroom remodeling.
Speaker 6: None of which we believe are anywhere close to their full potential.
Speaker 6: expanding into new service offerings, where we see the opportunity to at least triple the number of these sub-bureticles we currently serve. This multi-pronged growth strategy is expected to drive double-digit organic growth for the foreseeable future.
Speaker 6: Other revenue was the remaining $2.2 million of Q3 revenue.
Speaker 6: Adjusted EBITDAQ for fiscal Q3 through a 30% year of year and sequentially from $1 million to $9 million.
Speaker 6: demonstrating the significant operating leverage of our business.
Speaker 6: Turn to the battle sheet...
Speaker 6: We close the quarter with $63 million of cash and equipment and they'll bank that.
Speaker 6: Cash in the quarter was impacted by the timing of receivables, where we received over $15 million of payments.
Speaker 6: shortly after quarter end. Those payments would have typically been received before quarter end.
Speaker 6: So more normal ones view of our ending cash would be approximately $78 million.
Speaker 6: Normalized free cash well in the quarter was $5.2 million.
Speaker 6: Normalized free cash flow is our primary cash flow metric, as it removes the effects of current quarter working capital account fluctuations.
Speaker 6: to drive to the underlying cash flow characteristics of our business model.
Speaker 6: In closing, we are excited about our business and financial model as we move forward.
Speaker 6: Our diversified portfolio of client verticals has enabled us to drive double-digit revenue growth and expansion of adjusted EBITDA.
Speaker 6: despite being only in the early stages of the recovery and insurance.
Speaker 6: We expect the driving with stronger total company revenue growth and further expansion of both adjusted EVA DAW and CAST-WELL.
Speaker 6: As insurance revenue renews its path up into the right.
Speaker 2: If you have a question, please press the star followed by the one on your telephone keypad. You will hear a three-tone prompt acknowledging requests. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two.
Speaker 2: If you are using a speakerphone, please leave the handset before pressing any keys. One moment please for your first question.
Speaker 2: Your first question comes on the line of Jason Crayer from Craig Hallum.
Speaker 2: Your first question comes on the line of Jason Crayer from Craig Hallum. Your line is now open.
Speaker 7: Hey gentlemen, thank you for taking my questions. Wanted to start out just to see if you could give some color on your expectations on just the cadence of auto insurance as we move forward. Obviously, you've given us a guide for Q4, but as we get into Q24, just curious how much visibility you have.
Speaker 7: and really what your thoughts are on auto insurance, you know, relative to your statement on double-digit growth for next year.
Speaker 5: Hey Jason, yeah happy to. We don't have a lot of visibility in auto insurance right now. Carriers have indicated that they expect to continue to make progress, that they don't expect to be...
Speaker 5: meaningfully changing their spending in the channel before July the earliest. And we assume that it probably could be until January , at least, before they significantly re-increased spending, just like they typically do in January with the resetting of loss ratios and over that same period of time in between a course.
Speaker 5: What also happens is the commitments they've made to spend in other areas that they can't pull out of as quickly as they can pull out digital kind of run off. So that also creates room for spending. So long way of saying not a lot of visibility in the near term, likely progress and better opportunity for them to increase spending.
Speaker 5: not getting any better from here.
Speaker 5: We've kind of taken it out of the forecast, if you will. We just don't have enough visibility. I think that's overly conservative. But just so you know, you can put a floor under it. We can pull it down to where we are now and deliver what we describe.
Thank you. Wanted to also maybe get thoughts from you on personal loans and credit cards. Specifically, we've been hearing that kind of credit has been tightening or the credit tightening trend has moved out of just subprime and moved into prime, which I think is an area you participate in. It doesn't seem like you're seeing any pressure.
We are seeing some.
We are seeing some slight tightening.
particularly for more risky credit cards and for more risky loans.
And that is baked into our forecast as well. We do not expect that personal loans and credit cards will grow nearly as fast in the coming fiscal year as they did last fiscal year, largely because of that, but we do still expect to have good strong growth there.
based on the indications we're getting from clients about where they want to focus in the budget that they're likely to have.
So right now again, we think there's there has been a little bit of tightening not not to the point of significantly Affecting of course our results yet. You
And we can perform at really strong levels with that tightening at this point. And still, but not to the level we've been performing lately, but still really strong levels to deliver the outlook that we gave you.
Thanks Doug, appreciate all the color.
Thanks Doug, appreciate all the color. Thank you Jason.
Thank you and your next question comes from the line of Jan Cumpel from Stiff and Sink. Your line is now open.
Hey guys, it's Jonathan Bass on for John . Broadly from a cost and employee headcount standpoint, I know you've been carrying higher than usual costs on the insurance side as you're awaiting a more meaningful turn in the cycle. If the reduced spend environment holds on for several more quarters, would you look to address the insurance support costs? We're pretty tight.
to take advantage of the resurgence of spend that we expect. And as you just saw last quarter, you saw last quarter we were, you know, when we were barely into the reramp, and even though it was up 53% quarter to quarter, we were, you know, I think half or less.
of what we expect the full re-rent to represent, and the company jumped to 7% even in the month of March.
just with that. So I think we're well positioned. I think we'll stay tight. I don't think we're going to see us adding a lot.
But I don't think you're going to see us reducing a lot either. I think if we do that then.
What we do is when spending and when an ad spending comes back, we're just not positioned taking full advantage of it. And worst case, we lose share of that spin. So I think we got about the right balance right now. And mainly because we're always at a pretty dark cost.
When an ad spending comes back, we're just not positioned, taking full advantage of it, and worst case, we lose share of that spend. So I think we got about the right balance right now, and mainly because we're always in a pretty dark cost discipline.
We didn't get way out of our skis. We want to maintain enough capacity, as I said, to do well as it comes back and to not have to take a few steps backward or lose shear when it does. Okay, thanks. And we haven't talked much about QRP in recent quarters.
I'm hoping you can provide the latest state of things with QRP and when you think that could rise to a more meaningful driver. Yeah, that's a good question. QRP, we've continued to make great progress with clients, with the product, with carrier integrations, with the application of the product to the ecosystem, which really represents how DT lesley
broader market.
QRPs' progress is blunted by the fact that their overall market is challenged.
as carriers have reduced their spend, reduced their coverage, and therefore agencies have had to reduce their spend in their agent accounts and their activities. You know, the pipelines have really, really bogged down. We have a lot of activity, a lot of conversations, or it feel like that's a coil spring for sure, as the market comes back and that.
as it comes back it trickles down into particularly the agency side where when they start adding activity and agents and the ability to spend but yes super excited about where we are the product is further and better than it's ever been the the support from the industry and the carriers is better than it's ever been the uniqueness and defensibility of that product over the long
in scaled zone.
But yeah, love it. Love the product, love where it's going and excited about it.
Okay, thank you guys. Thank you Jonathan. Thank you and your next question comes to the line of Eric Martin Easy from Lake Street. Your line is now open.
Yeah just curious to know the progressive what percentage of the business was progressive this quarter?
Eric, this is Greg. Progressive was about 25% of revenue for the court. Okay, and then, you know, they're typically kind of a leader as far as both ramping up and pulling back. What was the, I guess, the cadence sounds like March was there and then April , they pulled the rug. Was it for they kind of the...
the primary driver of that pullback in April or was it across your customer base?
It's been across the customer base, but Progressive was way out further than anybody else to begin with. The other pullbacks are much, much less material.
But to us and to everybody, as you'll see in the numbers going forward. So, I mean, they do a phenomenal job of getting their product adjusted, get their rates adjusted, and doing what they do. And so they were just further out than everybody else. So when they pull back, it matters more.
Yeah. The, uh,
I guess the historic pause length, I was kind of surprised to hear it talking about January of 2024 before we'd be kind of.
normalize or return to some sense of normalcy, what are the gating items between here and there? Are those auto insurers just needing to get comfortable with the loss ratios?
Yeah, and again, I don't have any particular information about the time it's going to take from eight to come back. I just think we have to be really cautious about guessing when they haven't told us either. The only information we've got for most of the carriers is that it's not imminent.
So, you know, our best guess, and some indications have been that they think some budgets will start loosening up in July . I think the cadence of what's going to happen, as best we can read it again, you know, the securities themselves are sorting it out and figuring out what they need and want to do.
They have to continue to make progress on the economic side, both on the rates.
We're getting to make progress on the economic side, both on the rates and on the costs.
Some of that's in their control. Some of it's not. The costs that aren't in their control are probably trying to pick with more, but take a more rate. The costs that are in their control, and some of them have some costs that, you know, they're addressing and working on. They also have costs on the marketing side that they can't reduce like they can.
marketing spend or at least digital marketing spend. And so they'll work on some of those costs and or some of those costs will run off. When I say runoff, I mean particularly commitments they may have made to marketing spend that can't be reduced immediately like digital can. And so that will run off so that those will be gating items over the next number of months.
a big gating item for the industry. And as they make more progress, just like this year was better than last year, January through March, next year will probably go longer and bigger yet, and then we'll keep going up and to the right from there. They'll just keep adapting. So I think that's as best we know from what they've told us from industry data, from industry experts, and from all the other things we've seen.
you assume that that does not.
that that does not happen.
But that doesn't mean it won't have. Yeah, that was just predictably unpredictable.
Yeah, no, just predictably unpredictable. Yes.
The other parts of the business, the non-insurance business, terrific growth there. That's 58% of REVs and up 34%. Any cracks in the home services side? I know you talked about, hey, we're growing windows and solar and bathroom, and we're expanding into new, but we're also expanding into new.
We've been asking the question for a year and a half.
and a half. What what we have.
appear to be seeing a main driver appears to be
Just the opposite with interest rates. As interest rates have gone up, homeowners are less likely to sell their home.
because they're in a good rate on their mortgage and they don't want to take on a worse rate or higher rate for a new home. And so we're seeing a lot more folks staying in the homes they're in and choosing to invest in that home rather than buying another home.
And so we're actually seeing a very high activity level and high demand in home services pretty much across the board because the other factor is that even though rates have gone up, most of these, these are homeowners, and they have built up a lot of equity in their home over the last number of years. And these folks' balance sheets and, frankly, their income statements, as we all know, are actually in really good shape.
the folks that are being hurt most in the current environment and are likely to be hurt most if and as there's a greater slowdown, recession or not, where the lower end of the income spectrum intend not to be the kind of homeowners that spend on these projects anyway.
Okay, well, let's consistent with the answer you gave last quarter. So just like you're saying on top of it, I want to stay on top of it. Thanks for taking my question. You bet. Thank you, Eric.
Thank you once again, Dr. Starr, and one to ask a question. And your next question comes from the line of Jim Goss from Barrington Research. Please go ahead.
Hi, I don't want to beat this to death, but it sounds, Doug, that there's no magic trigger in terms of combined ratio that will be an on or off switch in terms of greater marketing expenditure. For more information head to t Doc clin espe ordinarily asge How to provide immune health information green.
Historically though, has there been some range around the, the, the magic 100% that, that might make the, the carriers more inclined to try to advertise.
you know for new customers or are they they reluctant to go into a negative position even though that might be the right time to try to sell their product.
No, that's a great question. It really differs by carrier and where they're in their own long-term trajectory and strategy, Jim. Some have very firm targets for combined ratios, and they will hit that number for the year come hell or high water. But some have closer goals than others.
have a different strategy and there are times when, depending on where they are on the market and where they want to be in terms of market share and other considerations, they are willing to go negative for longer, they have the capacity to go negative for longer in order to achieve other objectives or other goals. So it really does depend on the carrier. So I think what we're gonna see is continued.
for them to have to deal with and for all of us to have to deal with.
trying to get less predictable like we all are, and harder to navigate like we all do. But I'd say that no magic bullet, I think continued progress for sure, because they're all working hard on it. They all want to, you know, the number of public companies and a lot of big neutrals and they have constituencies to serve.
and they want to grow and they want to get paid too, and they want to serve their shareholders. So they're working hard on it, and I think they'll keep making progress. But again, it depends on the company. Some are very, very specific and very driven by a particular number. Some are not. But in the mix overall, they're all trying to fix it as best they can, and they'll start getting in the market.
or when they can. We are, I can tell you that the activity levels of some of the carriers, even those that are not spending much at all again in the channel yet, we have very high activity levels with a number of them and they are, they have a lot of budget that they will deploy. So they're doing the work to be ready to spend it. They're just kind of waiting to get to the point where either
other costs are where they need them, or loss ratios are where they need them, or rates are where they need them to really start ramping quickly. But from our seat, working with them, things look really good. And like I say, we're spring-loaded. It's going to come. It's a question of exactly when and where.
In all likelihood, we begin to see some progress.
in the fall, but probably not the inflection type progress until January . And then we have a good shot of seeing a lot of it then. But we just, given what the ups and downs we've seen in the past couple years as they tried to navigate this environment, we're reluctant to guide to that. So we'd rather just say, let's assume it stays challenged for the fiscal year and then.
What can we do with all the other businesses in that environment? And that's what we gave you. And when you say next year, just for clarity, you're talking about calendar 2024? Or is it fiscal year? Yeah.
In terms of, and let me clarify that and I apologize, I know that's always confusing. I get confused myself. But the next year, in terms of when they're like, we're likely to see, when I say next year in terms of when we're likely to see more inflection and progress, I meant as in calendar year, the January with the change of the loss ratios. When I talk about the guide for the year, the fiscal year, for now, this coming July through June .
That's where we really haven't assumed a progress in insurance in order to give you the outlook we gave you. So the guide I gave you was for fiscal, but the pipe but and we've assumed no real progress during the fiscal and auto insurance to get to the double digit number that I gave you for revenue and EBITDA growth, or not number but an indication I gave you for revenue and EBITDA growth. But we do expect if everything goes according to Hoyle and the way it's done historically.
is probably when we're going to start seeing a reinflexion. It's not a bad guess given history.
options or fewer options.
Both, yeah. Fewer and more costly is exactly what they're going to be seeing. And in fact, we've seen more shopping because of that, but we've seen when they shop, they don't find a lot of options and they find a lot of expensive options. So we think the shopping behavior will continue as more and more consumers get renewed at higher rates.
But for now, their options are much more limited, and those that are available are considerably higher in terms of the rates than they would have seen, say, last year at this time, or certainly the year before.
All right, thank you. Thank you. Thank you. And your next question comes from the line of Chris DeKay from Cingular Research. Please go ahead. Hi, Doug and Greg.
Hey Chris, just had a question on the car insurance. You know, what drove the fact that it was so unexpected? It seemed like last quarter you guys weren't expecting this. You were expecting just more growth. Why was it such a sudden unexpected decline?
I wish we knew. I mean I can tell you what the carriers have said and because it was unexpected to them as well, right? And you've heard that from everybody in that industry and everybody in our industry.
But again, that's their business. But what they have said is that the loss ratios were higher than they expected when they went to revamp spend.
both because of the repair and claims cost being higher than anticipated and because the rates, while in many cases they had taken or increased their rates, those rates were not high enough to offset those costs being higher than they expected.
You know, you and I could both, in terms of the details of why that is, it's...
It's everything to do with the inflation, underlying inflation that everybody else is dealing with. It's probably also the nature of the new consumers that they're signing initially. In some cases, there's been indication it was the nature of the operations.
or at least less lucrative, I guess, to sue the insurance companies once the law goes into place. And the deadline, I understand, I've been told, I'm not an industry in this, I'm not that wonkish in the insurance industry. But I'm told that that expiration for submitting those lawsuits was like March 31st. So apparently that created a rat that's got to work its way through the snake.
So, lots and lots of stuff, but I'd summarize it and better ask the actual insurance carriers themselves or folks that follow that industry in a more rigorous research way. But the gist of it is, you know, they've taken rates that look like things were good. They started to ramp. They ramped hard.
The results started coming in, the results were a lot worse than they expected, and here we go again.
But they had every indication and they'd given us every indication and given the markets every indication that they were going to be, you know, pedal to the metal. And they were for three months or so and then, you know, it all started coming in. And this isn't just one client. We're seeing this type of behavior.
across the industry, it's just that one client tends to, when a particular client happens to with us, it has more of an impact on us. It's not isolated to one client. This is a whole bunch of carriers working to a very complicated environment, and they will work through it.
some mandated product, their for-profit, and or constituency serving institutions. They work through, you know, other challenging stuff. This one just...
has been a little bit more complicated and difficult obviously. Okay, thanks for that. And then what are some of the other service offerings that Greg mentioned? Can you shed some light there?
We're really early in a very big market at home services. And we have a couple of big vectors for growth. One we'll grow the service areas that we're in today by adding more clients, more media and doing more, getting more budget from those clients as we optimize performance for them. That's one leg. The other, or one vector, the other vector is we'll get into more service areas. We'll add more areas of, you know, or sub-verticals if you will. So a lot of expansion opportunity and potential and long-term growth baked into our strategy and to our approach in home services. Okay. Thanks for that. Thank you, Chris.