QuinStreet, Inc.

Will you stand by? Good day and welcome to the Quinn Street Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Quinn Street Investor Relations. Please go ahead.

Thank you to everyone joining us as we report Quinn Street Fourth Quarter and 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 AK filing made today and our upcoming 10K. Forward-looking statements are based on assumptions as of today, and the company undertakes no obligation to update these statements. Today, we will be using both GAAP and non-GAAP financial 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'll turn the call over to Doug Valenti. Please go ahead, sir.

Thank you, Lane. Welcome, everyone. As indicated in our press release, fiscal Q4 played out pretty much as expected. Monthly auto insurance revenue in the quarter stabilized at a level generally flat with February and March. Results on auto insurance are likely to continue to essentially bounce along the bottom for the next couple of quarters as carriers continue the process of raising their rates in response to inflation and supply chain pressures. We expect a positive inflection in auto insurance marketing budgets and revenue in January, as one, carrier combined ratios reset for the new calendar year, and two, consumer shopping for insurance increases in reaction to the higher rates. Our non-insurance plant vertical revenue results were good. We grew revenue there at a strong double-digit rate year over year. Even given current conditions in auto insurance and the complicated macro environment generally, our team executed well, and our results and outlook are good. We are EBITDA and cash flow positive with a strong balance sheet containing over $95 million of cash and no bank debt. and we continue to invest aggressively in a long list of exciting big growth initiatives. We are investing across the business, including to be ready to fully benefit from the other side of this rate transition period in auto insurance. I think it's important to note that our investments have been paying off. We now have three nine-figure revenue legs on our more balanced and diversified business platform. They include auto insurance, home services, and what we call our credit-driven client verticals, comprised of personal loans and credit cards. All three represent big total addressable markets and enormous untapped opportunities for our future growth. Also, our new product pipeline is easily the most exciting ever, adding new dimensions and vectors of growth and promising transformative new levels of value to our clients and the channel, and competitive advantage and increasing margins to us. Overall, we have the most balanced business and best mix of big-scale opportunities in company history. The future is really bright. And not just the long term. We are very likely to be growing at strong double-digit rates at big scale with rapidly expanding margins and cash flows in the back half of this fiscal year as the auto insurance market normalizes. That is the most likely scenario. And we are well positioned for it. We plan to continue to invest aggressively in these big opportunities and growth initiatives and in our product and technology capabilities to scale profitably and sustainably for the foreseeable future. We also plan to remain nicely EBITDA and cash flow positive while doing so and to maintain a strong balance sheet. Turning to our near-term outlook and a reminder, we just entered our new fiscal year, fiscal year 2023, on July 1st. We expect revenue and EBITDA results for the full fiscal year 2023 to be at least flat to fiscal 2022. In other words, we expect to grow this year. Auto insurance challenges will likely continue through the end of the calendar year and then inflect positively beginning in January. our second half. Non-insurance client verticals are expected to continue to grow at strong double-digit rates throughout the fiscal year. It is hard to give more specific guidance given the complexity of the environment. And remember, we are only one month into our new fiscal year. We will, of course, update our outlook for the full year as the year progresses. We expect business dynamics and results for fiscal Q1, the current quarter ending in September, to be similar to what we saw in the June quarter. With a little added conservatism in auto insurance as carriers enter the heavy weather season, and with a little lower EBITDA, mainly reflecting that auto insurance conservatism, but also the impact of routine annual increases in employee compensation. Coincidence. with the beginning of the new fiscal year. So, specifically for fiscal Q1, we expect revenue to be between $135 and $140 million, and adjusted EBITDA to be between $3 and $3.4 million. I want to reiterate that, overall, we expect to remain EBITDA and cash flow positive throughout fiscal 2023, despite the challenges in auto insurance. And we expect to maintain our strong balance sheet while continuing to invest aggressively in opportunities and future capabilities across the business. Now, I wanted to make a few more comments on our business relative to the macroeconomic environment. First, we have included contingency planning for a possible recession in developing our FY2023 expectations. In the event of a recession, we would still expect to be at least flat in FY23 revenue versus FY22, with still positive cash flow and EBITDA. We have grown through both of the two previous recessions. Remember, we have been around for over 23 years. Performance marketing is typically one of the last budgets to be impacted as the economy softens because, by definition, clients can tie their spend directly to revenue. Further, our business helps consumers better shop and save for needed products and services. In particular, consumer shopping for insurance tends to increase significantly in a software economy. Even more generally, our business footprint is well positioned for a downturn, leverage more to prime and homeowner consumers in our insurance, home services, and credit cards client verticals, and to helping lower income consumers deal with the financial pressures of inflation or a downturn in our personal loans client vertical. A second comment regarding the macroeconomic environment. Specifically, with respect to the more direct effects on us from inflation. We are not seeing, nor do we expect, a big impact on our costs. Media is our biggest cost. It is largely unaffected by inflation and is actually typically more affordable in a softening economy. Increases this year to employee compensation Our second biggest cost will be less than 1% of revenue, up a little from a more typical 1.5% historically, but still quite manageable and largely immaterial. A third point on the macro environment, with respect to the strong dollar, we have essentially no international revenue. and we are actually positively leveraged to the strong dollar because almost one-third of our employees are in India. Fourth, regarding the macro context. As we have noted in the past, we have little exposure to display advertising or Apple iOS tracking changes, and we would not expect challenges in those areas to represent a meaningful risk to or impact on our business or results. I would note that trends in advertising are indicating some softening of display advertising and social media budgets. But again, those areas are not our domain. Performance marketing, search traffic, and higher intent media are our domains. Finally, an update on our share repurchase or buyback. We bought back 1.7 million shares of our stock or approximately 3% of the shares outstanding last quarter for a total of $17 million, aligning our actions and money with our confidence in our business and opportunities.