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spk00: Thank you, Jenny, and thank you to everyone joining us as we report Quinn Street's first quarter fiscal year 2022 financial results. Joining me on the call today are Chief Executive Officer Doug Valenti 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 8K filing made today and our most recent 10K filing. 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. The 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.quinstreet.com. With that, I will turn the call over to Doug Valenti. Please go ahead.
spk06: Thank you, Hayden. Welcome, everyone. We continue to demonstrate the power of our footprint and advantages in FYQ1 and to separate ourselves throughout performance. No one else in our markets has our breadth and depth of advantages and capabilities for long-term success. We expect the trend of strong absolute and relative performance to continue as we ramp toward the full effects of our long-term investments in product, technology, and market initiatives. Our markets are growing. And we believe we are gaining share in every one of them. All of our client verticals grew at at least double digit rates year over year in fiscal Q1, including auto insurance. We are raising our outlook for full fiscal year 2022. We now expect revenue to be between 650 and $670 million. And adjusted EBITDA could be between $65 million and $67 million. The raise is driven by, one, specific indications from auto insurance clients of budget increases in the January to June period. Two, stronger than expected momentum in our credit-driven client verticals. And three, the acceleration of growth initiatives across the business, including QRP. Our full year outlook fully reflects the expected impact on auto insurance marketing budgets from increased claim costs, including from Hurricane Ida, whose losses were significantly greater than expected.
spk10: For the December quarter,
spk06: our fiscal Q2. We expect revenue to be between $130 and $135 million and adjusted EBITDA to be between $7 and $8 million. The Q2 outlook reflects normal seasonality and the short-term effects of higher claim costs on auto insurance client budgets in calendar year Our Q2 and full-year outlook also fully reflect the expected continued effects from the pandemic on our markets and operations and on those of our clients and partners. And finally, our Q2 and full-year outlook fully reflect expected effects from privacy changes to Apple iOS, from which we expect little impact. We do little to no cookie or tracking-driven ad targeting.
spk10: With that, I'll turn the call over to Greg.
spk01: Thank you, Doug. Hello, and thanks to everyone for joining us today. Q1 started off the new fiscal year on strong footing as we grew revenue to a record $159.6 million, representing 15% year-over-year growth. Revenue grew 25% year-over-year, excluding divested businesses. Gap net income was $3.1 million, or $0.06 per share. Adjusted net income was $9.4 million, or $0.17 per share. Adjusted EBITDA was $13.4 million. Looking at revenue by client vertical, our financial services client vertical represented 74% of Q1 revenue and grew 25% year over year to $117.9 million. Within financial services, all of our businesses grew at double digit rates or more in the quarter. Our home services client vertical represented 25% of Q1 revenue and grew 20% year-over-year to $40 million. As a reminder, we lapped the modernized acquisition on July 1st. We expect the strong double-digit organic growth trajectory in home services to continue throughout the rest of FY22, including in the December quarter. Other revenue, which consists primarily of performance marketing, agency, and technology services, was the remaining $1.7 million of Q1 revenue. Turning to the balance sheet, we closed the quarter with $105.9 million of cash and equivalents. During the quarter, we generated $5.8 million of operating cash flow and $11.4 million of normalized free cash flow. As a reminder, most of our adjusted EBITDA drops to normalize free cash flow due to the low capital requirements of our business model. Looking back, Q1 was highly representative of how we view our new footprint and the long-term vision for Quinn Street. All of our client verticals delivered double-digit revenue growth or more and represent massive market opportunities for Quinn Street. Our confidence and our growth initiatives has never been stronger. And we believe that we are better positioned to compete and execute against those opportunities than at any time in company history. With that, I'll turn the call over to the operator for Q&A.
spk02: Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. And if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. And we will go first to John Campbell of Stevens, Inc.
spk04: Hey, guys. Good afternoon, and congrats on great results. Thank you, John. Sure. I mean, I think considering the backdrop and obviously what some of your peers have reported, I think there was a lot of hand-wringing going into the results. So great execution by you guys. But, Doug, you highlighted that these results help you kind of separate yourself from the pack. I couldn't agree more with that statement, but maybe if you could unpack that a little bit more. So maybe what stood out as the, you know, specific advantages. And then, you know, you guys have outgrown peers by a healthy margin in recent quarters. There's been stretches obviously in the past where you've maybe trailed. So as you think about those advantages, was anything particularly kind of enhanced by the backdrop where it's just working in your favor or do you view these as kind of growing structural advantages?
spk06: Yeah, great points and questions. Most of the times when we traveled in the past, we were pulling along the education boat anchor, as you recall. So getting that out of the mix is super helpful to kind of clarify how well we actually are doing in the core verticals that don't have big structural industry problems, as you know. You know, we are seeing advantages across the board. We believe, and I think it's showing in our results, that we have the best products to both match and serve consumers but also match and serve our clients, the marketers, in the industry. We've talked about those for years. We've invested in those. They matter, and they're working. We have the best, broadest mix, and we have the ability to integrate any client and to match pretty much any consumer in the way they want to be matched. That matters a lot. We believe we have the best technologies in the industry for segmenting, for right pricing based on performance, for optimizing, the best algorithms for optimizing, and the best data analytics. We believe we have, on top of the data analytics, we think we have the best data experience. We've been doing this for 22 years. We started out as a company that said, you know what, we need to save this data and use it along with our clients' performance to drive results, and I think we've built up the best data base, and I think we have the best and most sophisticated team and technologies arrayed against that data for analytics and optimization, which really matter in a marketplace technology. We believe we have the deepest integration and the deepest relationships, deepest integrations and relationships with the biggest clients. I don't think there's any doubt about that. And it shows in the multiple projects that we're working on with them to continuously not only allow them to perform better in our marketplaces, but to add new business opportunities. And we have a number of those rolling out to market, only one of which we've really talked a lot about, which is QRP, which is really done in conjunction with the big carrier clients in partnership with them. And we believe that we have the deepest integrations and the best relationships with our big media partners. Again, a long, long list of initiatives to continue to help them strengthen their position in the market to better engage consumers, better optimize the results for those consumers, and then optimize the results for themselves. And as you know, in our business model, we have been investing in all of these areas, which we call growth initiatives, a subset of the growth initiatives, for years. And we've talked about them over and over and over again. And the compound effects of that experience and those investments and that execution are really coming together and inflecting for us in a lot of ways in a lot of different parts of the business.
spk04: That's a great answer, very thorough. I appreciate that. and then on the guidance, Greg, I just want to make sure I kind of understand it. I mean, obviously the full year, very impressive raise. So you guys expecting, it sounds like from client indications that you feel very good about the first half of the, you know, the upcoming calendar year, but, um, you know, the guidance for the next quarter, it looks like it steps down a little bit and then you've got the ramp and acceleration. Um, so I guess on the guidance for this next quarter, um, Is it more of a continuation? I mean, I guess when you're exiting this last quarter, was there a slowdown in spend? You're expecting that to kind of continue through the quarter? You're just being conservative there? Or does it require a ramp? Did you drop pretty sharply? Just kind of give us any kind of indications of movements within the quarter.
spk01: Yeah, I would tell you, John, two things on the Q2 guidance. The first one is it always reflects normal, typical seasonality that we see, which is going to be about down 10% or so sequentially. What we saw later in the quarter – was really the impact of Hurricane Ida on auto insurance client budgets, which are putting pressure from that standpoint in the December quarter. And again, we feel that that's short-term pressure. We have very specific budget indications of big budgets coming in the January through June time period, so we feel very good about the overall outlook for the year. But the Q2 outlook is a combination of typical seasonality that you see, which is going to be at about 10% down sequentially, as well as loss ratio impact on auto insurance carrier budgets.
spk04: Okay. That's very helpful. Thank you, guys.
spk06: Hey, John, and I know we just probably lost you, but just to – I didn't answer part of your question. It relates to the guide and the way you asked about the backdrop and whether or not it was helping or hurting us. In the performance marketing industry generally, when things get soft like they did in the last part of last quarter and they are for this quarter generally for auto insurers – the worst mixes and the lowest quality get cut first, always. And so we do know from our clients that we have been cut the least and that we have been told by all of them, and we know for a bunch of them just from the numbers that we have gained share As well, we have been cut some, and you can see in the guide that we expect to lose somewhere in the neighborhood of $10 million next quarter in revenue from the impact of auto insurance client budgets relative to where we might be in a normal 10% down scenario. And then we lose a little bit of EBITDA leverage on that. It's really a very, very minor impact relative to what you've heard from a number of the other industry participants. And that's because, you know, again, when things get tough, these clients cut the worst first, and they keep the best, and they cut at the least. So the backdrop in many ways is an advantage to us, relatively speaking. Obviously, we don't like losing to spend this quarter, but what we do have from the clients is assurances of having been cut by the lowest amount, having picked up share, and a very aggressive budget starting in the January period. It's important to understand that the loss ratios for these major carriers who are our big clients reset on January 1st. New calendar year, new fiscal year, new loss ratio calculations. So Ida, which was a hurricane that had a lot worse losses than the most, and I think it's at least in the top five, might be in the top two of all time, largely because not just because it hit the coast hard, and that's tragic for those folks where it got hit, but because it then worked its way to the northeast, which is the most populated area of the country, and sat there and flooded automobiles. And our clients cover that. And so very, very high loss ratios for a hurricane and for a storm of any type, but again, isolated and to calendar year 2021 for the purposes of our budgets and our clients' budgets. And a reset happens on January 1st. And our big clients are already talking to us, and we are already in the planning stages with them on how we're going to meet those budgets starting January 1st. And all of the big clients' budgets are not only up sequentially January 1st, but they're up pretty significantly year over year for the January quarter. So that's what gives us the confidence, is deep relationships, ongoing conversations, and actual planning with our clients of how we're going to meet their demand January 1st.
spk10: Thank you, Doug.
spk09: And we'll go to our next question from Jason Craig of Craig Hallam.
spk08: Hey, this is Bailey on for Jason. Thank you guys for taking my question.
spk07: Congratulations on the great quarter.
spk06: Thank you.
spk07: Just wanted to touch a little bit on QRP. I know with a more choppy backdrop for auto insurance, I'm just wondering what do you think the impact will be, if any, on the continued rollout there of QRP?
spk06: Yes, a great question. You know, we're so early in the rollout that we really expect little to no impact from the loss ratio issues that we experienced late last quarter and this quarter. The pipeline is stronger than ever. The market is bigger than we thought. We now have clients past integration and testing stages and into the ramp stages. and those ramps are going very well, so we're better able to begin to project. We were very conservative in our QRP estimates in the outlook that we gave last call, which, of course, was our first outlook for the fiscal year, so we're generally conservative anyway, but we were very conservative for QRP because, again, a new business still in the early stages. I would say that while we have pretty substantially increased our expectations for QRP in the revised outlook, it is still at the low end of the range that we actually think we're going to hit. So we're still being conservative, but we're also able to add pretty substantially because, as I said, we have a lot more real market data from clients that are now actually ramping And into that, and we're able to now begin to project and watch lines and curves. And we also have a couple of very big client projects that have been accelerated that we expect to be executed by mid-January so that they can hit the insurance shopping season, auto insurance shopping season, which kind of starts in mid to late January and runs into the spring. The carriers really want to hit that hard, including a couple of our biggest, in fact, I think our two biggest QRP projects and clients want to be up and running full scale for that January shopping season. So just a lot, a lot of good stuff going on with QRP, and we have pretty meaningfully increased our expectations in the outlook but only to the lower end of the band that we actually believe we're going to get to. But again, it's a newer business, so we're more conservative, and I think that's appropriate for everybody to understand and appropriate for us to do.
spk08: Well, that's great color and great to hear. I appreciate that.
spk07: If I could just squeeze one more in there. I was wondering if you guys might be able to frame the recovery in loans and credit card. I'm wondering how you expect that to progress with some of the volatility we've been seeing in the rest of the market.
spk06: Appreciate it. Yeah. We call personal loans and credit cards our credit-driven verticals, as you know. And they're pretty big businesses. They're our third and fourth biggest businesses, I think, after insurance and home services. And, you know, together they about doubled year over year in the quarter and continue to have a lot of tailwinds. The consumer is healthy. The credit is healthy. The credit card business is leading a little bit, which is what you would expect. Consumers in good financial shape begin to spend, begin to increase their activity levels, which we're seeing. other credit cards get used more and they shop more for more credit cards and that cycle begins and so credit cards is a little bit ahead of personal loans and what typically happens is then they build up credit card debt and it's followed by a cycle of looking for personal loans to consolidate and pay down often and lower the rates on that credit card debt which we haven't really gotten much into that cycle yet so We see, and the indications from our clients and from consumer activity are that credit cards is likely to continue to grow at a high rate, and we are beginning to see, and we have extraordinary activity amongst the personal loans clients as they are geared up and waiting for their part of the cycle to pick up more steam, and we're fairly early in that, so Our expectation and the actual results have been quite strong, and we feel very good about our position in those businesses and those markets, and we feel very good about the trajectory of those markets.
spk08: Well, that's good to hear. Thanks again. Congrats.
spk10: Thank you, Bailey. Thank you.
spk09: And we'll hear next from Jim Goff of Barrington Research.
spk03: Hi, this is Pat on for Jim. I just had a question on the auto insurance protocol. I was just wondering in prior periods when you've had issues with the loss ratio driving reduction in budgets, what was sort of like the timeframe of that kind of recovering? And I guess, is there any sort of issue potentially with supply chains or anything like that that could cause it to take a little bit longer or anything else I could shorten it just in terms of, you know, better understanding of pricing and policy?
spk06: Yeah, between us and the predecessor company that we acquired when we got into the auto insurance market, we've got about 22 years of experience in the auto insurance market. And so we've seen a lot of cycles. Most of them, similar to what I've described, will reset in January at a relatively short term if you have an event-driven issue like we just had. And so what the clients are telling us relative to next year into January is very consistent with an event-driven in a given year event issue. There have been times, and the biggest time was really in, I think it was 2016, where it took longer, and that was when there were structural issues with the client's underwriting models, which we do not have today. The clients are very comfortable with their underwriting models. They're very comfortable with their pricing. They just had an event that cost more than everybody thought it was going to cost, and therefore they have less money to spend on marketing because they have to spend more money on the claims themselves. in 2020, in calendar year 2021. But in 2016, it was a structural thing and that was a little bit more difficult for them to work through because what was happening was they were seeing higher incident rates that had crept up on them due to distracted driving and more and more people with their cell phones in their cars, their smartphones in their cars and doing stuff in their cars they shouldn't be doing when they're supposed to be driving. And that kind of broke through as a major issue that had fundamentally changed underwriting models and consumer incident rates. And that was combined with high repair costs, which had also kind of crept up on them, which as you got more and more cars into the market with smart bumper technologies, there were what used to be a fender bender, became a $5,000 repair or a $3,000 repair because you had all those sensors in the bumpers that had not been in cars before. So that cycle was longer. That one took, as I recall, somewhere around a year to work itself out. But it was very fundamental. They had to rework the underwriting models, rework their profitability models, rework their risk models, reprice their policies, and get those all approved. We're not in that cycle. There was an event last year that cost more than they thought. The underwriting models are fine. Their pricing is fine. They may lift it a little bit more reflective of general trends rather than gradual trends rather than one-time things. And they fully expect, and it's consistent with past behavior, that they would, based on that type of an issue, come back very strong in January. So very consistent with what we know to be the case, what the rationale is, and what we've seen in previous cycles.
spk10: Okay. Thank you. You bet.
spk02: And we'll move to our next question from Max Nicholas of Lake Street Capital Markets.
spk05: Hey, guys. This is Max. I'm for Eric. Congrats on the quarter. My first question is related to... Have you guys seen any change in your ability to acquire high converting media?
spk10: No.
spk06: Okay. Not anymore. I mean, we're always seeing changes in the high quality media market, but we are not having any issues acquiring high quality media to meet our plans and our outlook and our objectives. There's nothing unusual. I guess there's always stuff going on, but nothing meaningfully or unusual relative to the consistent historic general trends.
spk05: Okay, and then if I could just squeeze a couple more in. My second one's related more to a model. Have you guys noticed any OPEX inflation, you know, regarding to more talent acquisition as well as more travel and entertainment expenses?
spk06: No.
spk05: Go ahead, Greg.
spk01: Yeah, I wouldn't say anything material, no, from an operating expense perspective. I would tell you as we get into the back half of the year, you do have slightly seasonably higher operating expenses just because things like on January 1st, payroll taxes reset. And so they are at a higher rate earlier on in the year. And we also have some regulatory work we do because we're a junior end. So we do a little more regulatory work on the back half of the year. So seasonally, we're slightly higher in the back half than we were on the first half, but we're not seeing anything major from current events.
spk06: Yeah, the seasonal thing is every year, so there's nothing unique about it or new about it.
spk05: Okay. Thank you, guys. And then just my last one, and then I'll jump back into Q here. Are you guys seeing at this time any near-term M&A opportunities?
spk06: We are constantly looking. We looked really hard at a couple – This past quarter that I really liked. One that gave us some new capabilities in media. That one, they decided not to do anything. Looks like we're going to have a partnership there, which is good, but I wouldn't mind owning two. Another one that was an extension of one of our verticals of business. It would have added more scale and a lot of synergies with one of our businesses. That one, too, decided not to do anything. They took a little bit more private equity, and they're going to do some stuff on their own. We're continuing discussions, and we'll continue to talk to both of them, and we will continue to look at – there are always going to be, and you've seen us do it, consolidation acquisition opportunities, which are created in performance marketing. We will continue to be active, and we'll also continue to have a very high bar, but we did not do anything. this past quarter, any size. I can't remember if we did any real small ones or not because we sometimes do. We'll scrape up some little ones too, but I don't recall us doing any of those. But we are looking. We are seeing some. We didn't get any done last quarter, but you should expect us to continue to be actively looking and active when we find something as good as the AM1 and modernized type acquisitions that we've made historically.
spk05: All right. Thanks, guys. Congrats on the quarter.
spk10: Thank you.
spk09: And we'll hear next from Chris Sockeye of Singular Research.
spk10: Hi, Doug and Greg.
spk06: Just a question. In your opinion, what's driving the increase in auto insurance marketing budgets? In general? Yeah. In the January to June period or just overall generally over time? Oh, in the last period. The increase in the last period for us was a combination of more budget penetration and greater share of wallet for us with a number of the larger clients as we've continued to roll out with them mostly a lot of the analytics programs that we work with them on to help them best segment, optimize, and write price the consumers in the marketplace, along with some new initiatives that expand our media footprint, a couple of which are in partnership with specific clients that we're quite excited about. And then when we do that, we also pick up more budget for those media initiatives. So, you know, more general budget increases and penetration of budgets and share increases to us for the programs that we're running with them and then new projects and initiatives with them. And, of course, in the longer run, those also will be compounding as well as the just general shift of budgets to online and online to performance and from performance to us. Because we're usually the last stop for those most sophisticated big budgets. Okay, great. And then, are you guys looking to go into any new verticals? We are adding contiguously in the verticals we're in. So, for example, in insurance, we're auto and home, of course, our biggest. We are... aggressively expanding in life, health, and some of the even smaller ones like pet, motorcycle, RV, and home insurance, home service, excuse me. You've heard me say before we're in, you know, four or five of our verticals are kind of at pretty good scale. We're in another, call it 10, and those are earlier stage, and we're expanding those, and we think we can be in dozens at least, and I used to say 100. I think that's still the right number, but let's say dozens for the kind of scale I'm talking about over time. And those are trades, like windows would be a trade or a subvertical, doors, bathroom remodeling, you know, kitchen remodeling. Those would be solar, home security. Those would be what I would call. So taking all those and ramping them up so we're continuing to enter new verticals in home services or trades is what we call them in home services. We are entering new verticals in our banking vertical. We have expanded beyond traditional source of funds accounts like deposit accounts into money market accounts, investment accounts, retirement accounts, advisor accounts, and fintech and beyond. So we've dramatically expanded that footprint and are entering, depending on how you call, you know, what you decide, what you decide, want to call it vertical. We call the whole vertical banking, but within banking. So at the highest level, we are not adding any new major vertical headings beyond, you know, insurance, home services, credit cards, personal loans, banking. I think I mentioned personal loans. But within them, we're expanding pretty aggressively into new segments of them. expanding their footprint, and, of course, getting a lot deeper in them. So we have plenty of growth capacity to keep working on for, you know, I'd say that we could feast off of what we've got, the footprint we've got now and the expansion opportunities we have, because I haven't even talked about the broadened product offerings in those verticals like QRP and insurance, and we have a couple very much like QRP right behind QRP that we haven't started talking about that apply to a couple of our other verticals. coming as well. So we could feast off of that for at least the next decade and grow really, really well. So the answer is kind of a no and yes. No but yes. No more big ones right now. But yes, because we're filling out the ones we're in.
spk10: Okay. Great. Well, thanks. Thank you, Chris.
spk09: And as a reminder, it is star one for questions at this time. That is star one. We'll pause a moment.
spk02: And with no other questions in the queue, that concludes today's question and answer session. The replay for this call will be available as of 7 p.m. Central Time today. To access the replay, please dial 888-203-1112, and the confirmation code to reference is 580057. That concludes today's call. Thank you for your participation. You may now disconnect.
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