QuinStreet, Inc.

Good day, ladies and gentlemen, and welcome to the Queen Street Second Quarter Fiscal 2022 Financial Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Hayden Blair. Please go ahead.

Thank you, Laura, and thank you to everyone joining us as we report Queen Street's Second Quarter Fiscal Year 2022 Financial Results. Joining me on the call today, our 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 8 filing made today and our most recent 10Q 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. 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.quinstreet.com. With that, I will turn the call over to Doug Valenti. Please go ahead. Thank you, Hayden.

The December quarter, our fiscal Q2, was a more difficult quarter than expected in the insurance client vertical, as auto and home insurance carriers reduced spending aggressively through the end of the calendar year to offset high 2021 claim costs. Insurance client spending bounced back strongly in January, up almost 80% over December with the reset of the calendar year and as we had expected and had been communicated by carriers. Combined with the strength we were seeing in the rest of the client verticals in business, we were on a run rate in January to more than meet or beat the full fiscal year forecast we provided last quarter. Auto and home insurance carrier clients have once again significantly cut budgets and pricing in February. We have just been digesting the adjustments this past weekend and through today. The immediate impact of the insurance client cuts is a reduction in our outlook for this quarter and the rest of the fiscal year to reflect the lowered spending That is reflected in the outlook numbers we put out today, with which we are obviously disappointed. That said, due to the diversity of our business and the resiliency of our team and model, we still expect to grow revenue and generate between $40 and $45 million of adjusted EBITDA this fiscal year. we will also remain nicely cash flow positive with a strong balance sheet, even as we weather this continuing, but still likely relatively short-term storm in insurance. Our medium to long-term outlook remains exceptionally positive. So, What is happening in auto and home insurance? Why are carriers cutting spending and pricing? While we are not privy to all of our clients' inner workings, nor would it be appropriate for us to share any nonpublic details if we had them, some trends seem clear and publicly known. The claim cost environment is difficult and dynamic. Rates that worked for the past couple of years are no longer working, and factors are changing rapidly. There is increased frequency of claims as more folks go back to work and become more active generally. Costs to repair are higher due to supply chain issues, demand outstripping supply, inflation generally, and inflation specifically in the new and used automobile replacement market. Carriers have begun to raise rates to reflect these increased costs, but we appear to be closer to the beginning than the end of that cycle. And in some cases, rate increases have not been enough to offset rising costs. Carriers are pausing writing business in entire states and therefore cutting marketing spending while they analyze these factors and work to find new higher rates to reflect the changing economics. In addition, consumers are balking at switching or buying new policies as they encounter the initial wave of higher rates, making marketing spending less effective Net, we are in a period of a lot of uncertainty, change, and importantly, transition in the auto and home insurance market. And it is being reflected in pauses, reductions, and volatility generally in marketing spend. How long is this transition period in auto and home insurance likely to last? We have served the auto insurance market for almost 15 years, and well over 20 years, if you count the predecessor company we acquired to enter the client vertical. So we have seen some of these adjustment cycles. The last one was in or around 2016, when higher incident frequency due to distracted driving from smartphones usage, combined with higher costs to repair bumper sensor technologies, to significantly change underwriting economics. That cycle affected us for about six months. Then, like now, no one is closer to or in closer communication with auto insurance carrier marketing clients than we are. Based on our actual past experience with similar cycles and based on discussions with carriers, these cycles typically most negatively affect marketing budgets for somewhere around six months. And based on that, we hope to be back to a more normalized market and positive to a more normalized market and positive momentum in the auto insurance client vertical somewhere between late spring and early fall. Why six months? Two reasons. First, that is typically long enough for most carriers to analyze, adjust, and file new rate models. And second, that is the length of a typical consumer policy period. So new rates will typically kick in no more than six months after the cycle starts. What happens next? The further we get in the transition period, the more consumers reach their renewal period and the more they get hit with increased rates from their current carrier. That usually drives a gradual then accelerating increase in the number of consumers that shop with other carriers and begins a positive super cycle in our business. We clearly saw that and experienced it after the 2016 transition period. Why is our medium to long-term outlook still exceptionally positive? Well, I just noted one key reason. This difficult transition period is likely to lead to increased consumer shopping activity in auto insurance in coming months and quarters. And that should be a strong tailwind for our insurance business. Like we have seen before, and especially when combined with the gains we have made and expect to continue to make in market share, quality results for clients, technology, and media. A second reason our medium- to long-term outlook is still exceptionally positive is the strong momentum that continues in our non-insurance client verticals. Credit-driven client verticals continue to recover nicely, with client budgets and consumer activity growing at high rates. Progress in home services, Perhaps our biggest long-term market opportunity continues to be strong and steady. Overall, non-insurance client vertical revenue grew 36% year-over-year in the December quarter. Those strong trends, combined with the eventual resurgence in insurance, bode well for coming quarters and years. The third reason our medium to long-term outlook remains exceptionally positive is the progress we are making with big new growth initiatives, especially right now with QRP. QRP revenue is accelerating despite the current challenges in auto insurance, which do affect the activity of our agency clients. Multiple clients, have moved into the ramp phase of their implementations of the platform. The pipeline also continues to grow and progress well, broadening our footprint for future growth and scale. We now expect QRP revenue to exceed $1 million per month by June, based on actual projections from ramping agency clients. Looking beyond this auto insurance transition period, we have never had a better combination of market opportunities, competitive advantages, and exciting growth initiatives in the history of Quinn Street. I hate what is happening in auto insurance right now because of its near-term impact on our results. but I could not be more pleased with our position overall and our outlook for the future. And I could not be more proud of our team, which is easily the best in company history, and how they have navigated and executed to continue to deliver results and progress for long-term value creation in such a complicated environment.