QuinStreet, Inc.

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good day and welcome to Queen Street's fiscal third quarter, 2024 Financial Results Conference Call. Today's conference is being recorded. Following the prepared remarks, there will be a question and answer session. If at any time during the call you require operator assistance, please press star zero. At this time, I would like to turn the conference over to Senior Director of Investor Relations and Finance Robert Amparo. Mr. Amparo, you may now begin.

Thank you, Operator, and thank you everyone for joining us as we report Quinn Street's

fiscal third quarter 2024 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 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 is included in today's earnings press release, which is available on our Investor Relations website at .quinnstreet.com.

With that, I will turn the call over to Doug Valenti. Please go ahead, sir. Thank you, Rob. Welcome, everyone. Company revenue grew about 40% sequentially in fiscal Q3, fueled by significant positive inflection in auto insurance carrier spending, as we had forecast. The ramp of auto insurance carrier spending continued through Q3 and has extended into the current quarter, fiscal Q4. Auto insurance carrier activity and spending are broad-based and continue to be supported by reports of good carrier results. We expect the ramp of auto insurance spending to continue in coming quarters,

as carriers expand their product and market footprints and are enabled by

increased rates and improved profitability. Overall, we expect auto insurance revenue to grow for the foreseeable future,

as the fundamental shift of budgets to digital and performance marketing reasserts

itself as the dominant long-term trend. Adjusted EBITDA jumped to almost $8 million in FYQ3 due to the leverage from the higher revenue. We expect adjusted EBITDA margin and dollars to continue to grow as revenue continues to ramp. Turning to our outlook for the current quarter, or fiscal Q4, we expect revenue to be between $118 and $190 million, a quarterly record revenue for Quinn Street, and implying -over-year growth of over 40% at the midpoint of the range. We expect adjusted EBITDA to be between $10 and $11 million, implying -over-year growth of over 400%. Our fiscal year 2025 begins this July 1st. I would point out that the annual run rate of our fiscal Q4 revenue outlook already implies growth of 20% or more over full fiscal year 2024. We are excited about the size of our market opportunities, about the resilience

we have demonstrated in our business, about our plans and initiatives to keep growing revenue and profits into the future,

and

of

course about our continued strong financial position. With that, I will turn the call over to Greg. Thank you, Doug. Hello and thanks to everyone for joining us today. Fiscal Q3 was another solid quarter for Quinn Street. Total revenue was $168.6 million. Adjusted net income was $3.4 million, or six cents per share. And adjusted EBITDA was $7.9 million. The significant positive inflection in auto insurance client spending has indeed begun. In fiscal Q3, we saw auto insurance

revenue continue to ramp throughout the quarter.

That said, we are still in the early innings of the re-ramp of auto insurance and continue to expect growth for many quarters ahead. Looking at revenue by client vertical, our financial services client vertical represented 67% of Q3 revenue and was $112 million. Our home services client vertical represented 32% of Q3 revenue and was $54 million, a record quarter for that business. Other revenue was the remaining $2.4 million of Q3 revenue. Turning to the balance sheet, we closed the quarter with $40 million of cash and equivalents and no bank debt. A more normalized view of random cash balance would be approximately $48 million. We received a payment of approximately $8.5 million two days after quarter end. Moving to our outlook for fiscal Q4, our June quarter,

we expect revenue to be between $180 million and $190 million,

and adjusted EBITDA to be between $10 and $11 million. As Doug pointed out, the annual run rate of our fiscal Q4 revenue outlook already implies revenue growth of 20% or more over a full fiscal year 2024. We also expect adjusted EBITDA to continue to expand faster than revenue. In closing, our outlook on the business has never been brighter. We expect a record revenue quarter in fiscal Q4 and further margin expansion. We remain well

positioned to benefit from the re-ramp of auto insurance client spending and are seeing continued momentum in our non-insurance client verticals.

We expect strong total company revenue growth and adjusted EBITDA expansion driven by our diversified portfolio of client verticals. With that, I'll turn it over to the operator for Q&A.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you're using a speakerphone, please lift the handset before pressing any keys. Your first question is from the line of John Campbell from Stevens. Please go ahead.

Hey guys, good afternoon. Hey John.

Hey, so, you know, over the last year you guys have talked to getting back, you know, eventually to, you know, the 10% EBITDA margins. I guess as the insurance channel just normalizes, I mean, you kind of rebuild the top line scale. I'm not asking you to really pinpoint exactly, you know, when all that comes together, but just based on the fixed cost base you guys have now, what you, you know, the plans you have to grow it from here. I'm hoping you guys can maybe outline the level of it or the degree of revenue you'd need to get back to those kind of low double digit EBITDA margins.

Sure. I'd say I'm hard to pinpoint the exact level of revenue,

John, because it depends so much on the mix. As you can see, we'll get up into the mid to high single digits in terms of percentage next quarter. And we have a lot of growth beyond that, that we can, that we're, we can see coming given the demand that we're seeing and the initiatives that we have. So I, again, I have a hard time giving you the exact number because in terms of revenue, but it's not too far off. If that's helpful, I would say it's likely to be in, you know, very likely to hit next year. Next fiscal year is my opinion, but we'll have to wait and see what the mix looks like and the planning and the forecast. And of course we'll give you a more precise view of that in our next call as we, as we look out to fiscal 25.

Okay. That's, that's totally fair. And then Doug, you know, if you take, you know, your guidance, the high end, which you guys have pretty consistently outpaced your high end of your guidance. I mean, that puts you well above consensus for next year. Obviously that's annualizing that on a kind of an early cycle or early stage of the cycle recovery for insurance. And, you know, I think it's helpful for investors to maybe kind of size up where we're at as far as that recovery cycle. I know you guys mentioned early that can be defined a couple of different ways, but maybe if you can start off with like the progression, like month to month increases, I don't know if you want to get granular to the percent increase, but just maybe broadly the acceleration throughout the month, whether that's continued in April. And then as you look out past, you know, couple years where we are coming today versus past, you know, prior peaks.

No, it's a great question. We did see growth throughout the quarter. February was bigger than January. March is bigger than February. April was bigger than March. We expect May to be bigger than April and June to be only because it has fewer days in it. So we're pretty consistent with maybe a little bit higher. And then we, as we look out, we've done the early looks at our forecasting for next year. Despite historic seasonality, we expect next fiscal year that we will have sequential growth every quarter. So every quarter will be higher than the quarter before, despite the fact that, as you know, we often have seasonality in both the December and June quarters. So we will over, we will be a lot better than seasonality this quarter over last quarter. And then we expect that to continue throughout next year. So it's a pretty relentless ramp. We have extraordinary activity and demand from the clients. And we're, we are all ramping our media into recover and regrow it out of the, you know, more dormant period we've been through as fast as we can. So just a lot of vectors going up and to the right. And so, yeah, the notion of annualizing the fourth quarter is just to kind of give you what we would perceive to be a floor. We have a lot more coming, not just, certainly in auto insurance, which I know is what you're asking about, but a lot more coming from the other businesses as well next fiscal year. I think there's another part of the question, though, in terms of where we are that, oh, in terms of the rate, we ramp to the previous peaks, maybe as part of, I think, part of your question. We're about 60% back from where we bottomed to the previous peak. So that also gives you a sense for why we are so bullish about what's coming in the future. By the way, despite that, we grew, we've now listened to the calls from the other folks in our space, of course, and we grew much faster in auto insurance sequentially than anybody else. We are well over 100%. And we, in our forecast, is embedded the assumption that, again, we've listened to the others and looked at their numbers. We will once again grow much faster in auto insurance than they will in the current, our fiscal Q4 or calendar Q2. So we're doing very well with the ramp and there's a lot more to come.

Great to hear. Thanks for all the color, Doug. Really appreciate it. You bet. Your next question is from the line of Jim

Goss from Barrington. Please go ahead.

Thank you. This is Pat on for Jim. I'm just wondering with the improved trajectory in insurance spending, I'm just wondering if you could provide an update on the development of additional efforts within insurance such as QRP and getting that back into a growth stage.

Yeah, good question, Pat. QRP was obviously went kind of dormant during the insurance downturn. We talked about that. Just wasn't any product for the agencies. The agencies were cut, had to cut way back because they didn't have product. So the reramp and rescaling or getting back on track to scale QRP is going to lag the overall market coming back for those reasons because the agencies now have to get product and they still don't have a full footprint product. And they have to restaff and retool and get geared back up. So just a natural lag to it before I think we'll start seeing a return to strong ramp there. And that said, we have two big clients of QRP going live. One's already live with a pilot that will be ramping over coming months. And another will be going getting live with their pilot and reramp starting in June. And they are two of the biggest players in the industry and certainly are two biggest clients in terms of their scale in the channel or in the industry. So we expect that it will return. We'll get back on track. We'll get back on the ramp. It's been delayed, obviously, and it's going to lag a little bit. But we're excited. We're as excited as we've ever been about that product and what it represents in the future for the future of the channel. And we're super excited to have two big clients beginning their activities again in

a pretty earnest way beginning in June. Okay.

It's sort of building off of the prior question on EBITDA and margins. I was wondering if you are seeing anything in terms of media costs or talent retention that kind of limits some of the flow through versus historical trends?

No, not really. Again, as I told John, it's really going to depend on the mix that we're still fully staffed in our insurance because we want to take full advantage of that industry coming back, which I indicated when I gave you the numbers on how we're doing versus others. We are taking full advantage, but we're only 60% back. And then you've got a different mix of different other businesses. But there's nothing structural or fundamental that would indicate that we're not going to have all the top line leverage that we would have had historically and that you would expect from us.

Okay. And just the last one for me. Within home services, when you launch a new service availability, I guess, is there any sort of like ramp up, like startup cost to that for reaching sort of like an initial level of profitability? And how some of those services may differ in consumer and customer profile? Yeah, it's a

great observation slash question. Yes, is the answer. And so we manage that mix pretty carefully. But when you begin to build out a new trade, you're initially quite inefficient from a media standpoint because you just don't have coverage. And that's more the case in home services than is in other client verticals because home services is such a fragmented industry. And so we have to be kind of step by step, build up the client coverage, get more media, then get more client coverage and get more media. But it does create some inefficiencies for the period of time where we're in the ramp because we don't have full coverage yet. So that is part of the formula. We still do quite well in terms of our media margin and home services, but it absolutely is the case that when we're in new trades, they have less media efficiency and then the more mature trades. But we manage that and balance that and still maintain very good,

strong media margins and home services. Okay. Thank you.

Thank you. Your

next

question is from the line of Zach Cummins from B. Riley Securities. Please go ahead.

Hi, good afternoon. I apologize. I was late joining the call hopping on from another one. But Doug, could you go into any sort of impact that you saw in the home services vertical in the current quarter? And what are your expectations for what we should be assuming for a sustainable growth rate on that side of the business moving forward?

Sure. First of all, last quarter was a record revenue quarter in home services.

We expect another record revenue quarter in home services this quarter. We will return once again to double digit -over-year growth again this quarter, fiscal Q4. And we will grow home services in the fiscal year, double digits over last year. So long way of saying we still have the same outlook we've always had, which is we think home services gives us a scale and we have the opportunities and the initiatives to grow in double digits on average. Of course, last quarter grew 7% year over year in the quarter. For as far as we can see into the future, it is a massive, massive business opportunity. I think we just size it again at $69 billion of addressable market. And we are what running now 200 and something million and have a lot of wind in our backs and a lot of demand and a lot of opportunities, really more of making sure we're focusing on the right things and the right ways at the right time than it is any lack of opportunity or capabilities to deliver against that opportunity. So we're, you know, we love that that opportunity. We love that business. We love where what we have in terms of product footprint and where we're going with it. And we think double digits is the is the right expectation

for many, many years to come. Understood. And just one question for

Greg. And in terms of free cash flow generation, how should we be thinking about that as you start to hit the up cycle in auto insurance? What's your typical conversion from adjusted EBITDA to free cash flow? And how are you thinking about putting excess cash to use since your balance sheet is already pretty strong?

Yeah, it's a great question. If you look at it, the general model is the bulk of our adjusted EBITDA, less capex drops to free cash flow or normalized free cash flow. As you can see, depending on your working capital and your in your receivables, we could be, you know, like this quarter, we collected eight and a half million dollars two days after the quarter end, which we typically would have gotten before the quarter. But typically, if you look at our adjusted EBITDA, less capex is what drops to free cash flow. So if you look at our capex right now, it's going to run anywhere. I would say a good model to look at is, you know, eleven to fifty million dollars a

year. So that's kind of how I think about the conversion of EBITDA to cash flow. Understood. Well, thanks for taking my questions and best of luck with the rest of the quarter. Thank you, Zai. Your next question is from

the line of Mark Hagen from Lake Street Capital Markets. Please go ahead.

Hi, thank you for taking my questions. Just kind of curious if you're seeing any impact on the, let's call it higher for longer rate environment on some of the other financial services business, call it maybe ex auto insurance and and maybe even home services as well.

I think it's a mixed bag, really, Mark. Higher prolongers, not a bad thing for home services. We believe an industry report suggests that consumers are spending more on their existing home. And so I sort of kind of vertical by vertical on credit cards. Higher prolongers, not a bad thing. The our core credit cards consumer is a prime consumer in our mix. And so those consumers are in very good shape. And the higher interest rates for longer, actually the banks are making a lot of money on the outstanding balances. They have a lot of money to continue marketing. In personal loans, we have seen that the higher for longer is having an effect on the demand for and the underwriting models of the lenders. So I think we talked about this in past quarters, but we've seen less demand for lending, but more demand for other credit solutions. And we are the strongest in the industry at other credit solutions. And we once again, this past quarter, way outperformed the results reported by everybody else that we know in that in our in our industry in that business. And then it doesn't really affect much in our insurance, except that to the extent it puts pressure on consumers at the low end, which it does, We see increased shopping and for auto insurance and that continues to be a dynamic we are seeing. There is a J.D. Powers puts out a report. They just put out their most recent report on insurance shopping habits a couple of weeks ago. And it was the highest level of shopping behavior by consumers for auto insurance they'd ever seen in their history. And the report, not surprising, given how far and fast, you know, the rates have come up on insurance. And so I guess net net overall pretty

good for Quincy's profile.

Fair enough. Thank you, guys.

Thank you.

Your next question is from the line of Jason Crayer from Craig Hallam. Please go ahead.

Great. Thank you. This is Cal Bardazol on for Jason. Just to start kind of as this as autos kind of picked up, can you just kind of speak to any pockets where spend has yet to return and, you know, how these eventually coming back that expectation contributes to confidence in this being a long duration tailwind of auto resurgence?

We've

got a lot of data points.

First of all, we now have more. Last year was pretty concentrated ramp from mainly the biggest player in the channel. And they were 60 something percent, I think, of auto insurance revenue in the third quarter. And we're reporting mid to high 90s combined ratios. This year, that same client is well under 50 percent of revenue, although still very strong. And it's really because we have more other clients, other carriers now spending over a million dollars a month with us. And we've had in the history of the company period. I mean, we've got much broader footprint, much bigger spend from, you know, a lot and a lot more carriers. And so I mean that and then we have activity wise. Every one of those carriers is asking for a lot more than we can actually deliver right now. So we're really more, you know, we work in on the other side of the market ramp, the media ramp that we are the client demand ramp at this point because our, you know, the breadth of our relationships, the breadth of the demand for breadth of our products. And again, as I said, the demand for those clients. So and then you have the combined ratio reporting. My ratio is being reported this year. Are the, you know, in the mid 80s to low 90s, which again, that's right lower is better. And when you talk combined ratios, insurance and that's from all the significant players who make a report, they're there combined ratio results publicly. So you've got better fundamental underlying economics, a broader footprint with more clients with more demand from all those clients and higher spending from all those clients and big indications from all those clients for coming quarters and years. So we really don't have any indications of anything but not just sustainability, but acceleration of the ramp going forward.

Perfect. Thank you. And then it just looked like you guys have been broadening out the home services offering recently with some new verticals. Can you just kind of talk to the ambition for vertical expansion there and home services and what opportunities you're seeing in broadening out this offering?

Yeah, we, you know, we're in maybe 14 or 15 verticals with some

level of presence. We think we can be in dozens. I can't really be more precise than that because we don't mean it's, you know, we have hypotheses about which we can be and we don't really know until we start doing more work in analysis and actually start doing some testing. But the 14 or so and I think it's a little bit more than that actually if you count everything that we're in now, only two are at any reasonable scale. I wouldn't call either of those even mature. One of them I think represents 40% of home services revenue or something in that vicinity. So we're actually relatively constant. It happens to be the one we've been in the longest really in a meaningful way. And so it is the two vectors are going to continue to be getting into more trades. But right now we're more focused on scaling the trades we're already in and that scaling is a matter of focusing our efforts and initiatives and teams as well as, you know, getting signing more clients, getting more media that can be efficient with that client. And then that client based on going sign more still more clients and getting more media and kind of working our way up that whip. You know, we've got to work both sides of the market as we talked about earlier. It's and I think it was Pat that asked the question that there is a sequencing and an iterating aspect to that as you try to work your way up to media efficiency. Now we don't have any concerns about being able to do that. It just is something that does take some time. So one of the reasons you want to have as many a lot of trades going on at once so you can you can have different ones at different stages delivering different growth rates and profitability. You know, we

think we're pretty good at that. All right. Very helpful. Thank you. You bet. Ladies and gentlemen, just

a reminder. If you have a question, please press star zero star one. Your next question is from the line of Chris Sakae from Singular Research. Please go ahead.

Hi, Doug and Greg. I just I've got one question. Looks like back in last quarter, you had twenty twenty four revenue growth about five to fifteen percent. But now you're guiding for Q4 revenue of one eighty to one ninety, which puts the year revenue growth at about two and a half to four and a half percent. So I want to know, I mean, what what's going on? Why why is there somewhat of a guide lower now for for the year revenue growth? Please help me understand. Thanks.

Yeah. Hey, Chris. I think a couple of things.

We're pretty pleased with the ramp. First of all, we just grew as fast as we did, you know, so much the 40 percent and and over 100 percent. Not insurance. And we had a record quarter in home service. We had a record quarter in non insurance and we had a wreck and we're going to have a record total company record this quarter. Q4. We're going to, by the way, have another record quarter in home services and Q4 as well and another record quarter non insurance in Q4. So we're firing on all cylinders. That said, as we have we indicated last couple of quarters, the exact pace of the ramp and auto insurance is really hard to predict because the demand and activity there is just extraordinary. But the ability to convert that demand in a very complicated dynamic system and channel is less predictable. So we try to continue to give you guys the full range. And and I would say that and we also don't feel the need, given how well we're performing to get way out of our skis. So I'd say that the upper end of the current range gets to the bottom end of the annual. And maybe we'll see if the slope with the slope actually looks like and if we how we do from there. But I wouldn't read anything into that at all. I think what I would would remember is we're already pacing at 20 plus percent plus faster growth for next year than we are this year. And we've got a lot to build on that. So we'll probably do much better than that. And all the record quarter in numbers that I just gave you in all different businesses, which gives you full indication just how well everything's going. But I wouldn't I wouldn't I would not read anything more than that into into that

number. OK, thanks for that. You bet. Ladies and gentlemen, there are

no further questions. At this time, thank you, everyone, for taking the time to join Queen Street's earnings call. Replay information is available on the earnings press release issued this afternoon.

This

concludes today's call.

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