Prepared remarks
Good day, and welcome to QuinStreet's Fiscal Third Quarter 2024 Financial Results Conference Call. Today's conference is being recorded. Following prepared remarks, there will be a question-and-answer session. 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 begin.
Thank you, operator. And thank you, everyone, for joining us as we report QuinStreet'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 8-K filing made today and our most recent 10-Q 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 investor.quinstreet.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 a 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 $180 million and $190 million, a quarterly record revenue for QuinStreet and implying year-over-year growth of over 40% at the midpoint of the range. We expect adjusted EBITDA to be between $10 million and $11 million, implying year-over-year growth of over 400%. Our fiscal year 2025 begins this July 1. 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 QuinStreet. Total revenue was $168.6 million. Adjusted net income was $3.4 million, or $0.06 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 at $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 ending 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 million 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 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.
Questions and answers
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question is from the line of John Campbell from Stephens. Please go ahead.
Hi, guys. Good afternoon.
Hi, John.
So over the last year, you guys have talked about getting back to eventually reaching the 10% EBITDA margins as the insurance channel normalizes, as you kind of rebuild the top line scale. I'm not asking you to really pinpoint exactly when all that comes together. But just based on the fixed cost base you guys have now and the plans you have to grow it from here, I'm hoping you guys can maybe outline the level of revenue you need to get back to this kind of low double-digit EBITDA margins?
Sure. I'd say it's hard to pinpoint the exact level of revenue, John, because it depends significantly 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 foresee given the demand we are seeing and the initiatives we have. So again, I’m having a hard time giving you the exact number, but it's not too far off, if that's helpful. I would say it's likely to be very possible to attain next fiscal year, in my opinion, but we'll have to wait and see what the mix looks like and the planning and the forecast. Of course, we'll provide a more precise view of that in our next call as we look out to fiscal 2025.
Okay. That's totally fair. And then, Doug, if you take 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 an early cycle recovery for insurance. I think it's helpful for investors to maybe kind of size up where we're at as far as that recovery is, like you guys mentioned early that can be defined in a couple of different ways. But maybe if you can start off with like the progression in 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 couple of years, where we are coming today versus past prior peaks?
No, it's a great question. We did see growth throughout the quarter. February was bigger than January, March was 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 than it’s pretty consistent with maybe a little bit higher. And then we look out, we've done early looks at our forecasting over 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 overcome our previous performance. We will be much better than seasonal this quarter over last quarter and 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 are ramping our media to recover and regrow out of the more dormant period we've been through as fast as we can. So just a lot of vectors pointing up. The notion of annualizing the fourth quarter is to provide what we perceive to be a floor; we have a lot more coming not just from insurance but also from other businesses as well next fiscal year.
Great to hear. Thanks for all the color. Really appreciate it.
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, 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.
Yes, good question, Pat. QRP was obviously dormant during the insurance downturn. We've discussed that this was because there wasn't any product for the agencies. The agencies had to cut back significantly because they didn't have product. So the re-ramp and rescaling are getting back on track. QRP is going to lag the overall market recovery for those reasons because the agencies now have to regain product and they still don't have a full-scale product, and they have to restaff, retool, and prepare themselves. So there is a natural lag before we start seeing a return to a strong ramp there. That said, we have two big clients of QRP going live: one is already live with a pilot that will ramp over the coming months, and another will be going live with their pilot and re-ramp starting in June. They are two of the biggest players in the industry and certainly our two biggest clients in terms of scale in the channel or industry. So we expect that we will get back on track and achieve ramp-up. It's been delayed, obviously, but we're as excited as ever about that product and its future for the channel.
Okay. And sort of building off of the prior question on EBITDA and margins. I'm just wondering if you're seeing anything in terms of media costs or talent retention that might limit some of the flow-through versus historical trends?
No, not really. As I told John, it's really going to depend on the mix. We're still fully staffed in our insurance because we want to take full advantage of that industry coming back. I indicated that the numbers we're reporting compared to others reflect that. We are fully leveraging the opportunity and we are only 60% back. There's a different mix of codes in other businesses. So there's nothing structural or fundamental that would indicate that we're not going to achieve all the top line leverage that we would historically have had and that you would expect from us.
Okay. Just the last one for me. Within home services, when you launch a new service availability, is there any sort of ramp-up or start-up cost that you face in reaching an initial level of profitability? And how do some of those services differ based on consumer or customer profile?
That's a great question. Yes is the answer. We manage that mix pretty carefully. 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, which is more so in home services than our other client verticals because home services is such a fragmented industry. We have to step-by-step build up client coverage, increase media, and then increase client coverage and media. But it does create inefficiencies for the period of time where we're in the ramp because we don't have full coverage. This is part of the formula. We still do quite well in terms of our media margin in home services, but it absolutely is true that when we're in new trades, they are less media efficient than the more mature trades. However, we manage that and balance that while maintaining strong media margins in 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 year-over-year growth again this quarter, fiscal Q4. We will grow home services in the fiscal year, double-digit over last year. So, in summary, we still have the same outlook we've always had, which is we think home services provides us scale, and we have the opportunities and the initiatives to grow in double digits on average. Of course, last quarter we saw 7% year-over-year growth in the quarter. For as far as we can see into the future, it is a massive business opportunity. I think we've sliced it again at $69 billion of addressable market. We are currently running $200 million and have a lot of wind at our backs and a lot of demand and opportunities; it's more about ensuring we are focusing on the right things than any lack of opportunity or capabilities to deliver against that opportunity. We love that opportunity. We are passionate about that business and our product footprint, and we believe double-digit growth is the right expectation for many years to come.
Understood. And just one question for Greg. In terms of free cash flow generation, how should we be thinking about that as you start to hit the upcycle 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 that 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 receivables, we could be like this quarter; we collected $8.5 million two days after the quarter-end, which we typically would have received earlier. Typically, if you look at our adjusted EBITDA, less CapEx is how we transition to free cash flow. Our CapEx right now will run anywhere from $11 to $15 million 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, Zach.
Your next question is from the line of Mark Hagen from Lake Street Capital Markets. Please go ahead.
Hi. Thank you for taking my question. I'm just curious if you're seeing any impact from the higher for longer rate environment compared to some of the other financial services businesses, maybe ex-auto insurance and perhaps even home services as well?
I think it's a mixed bag really, Mark. Higher for longer is not a bad thing for home services. We believe an industry report suggests that consumers are spending more on their existing homes. So our results are vertical by vertical. In credit cards, higher for longer is not a bad thing. Our core credit card consumers are prime consumers in our mix. Those consumers are in very good shape, and the higher interest rates for longer allow banks to make significant profits on the outstanding balances they have, enabling them to continue marketing. For personal loans, we have seen that the higher rates are affecting the demand for and underwriting models of the lenders. That said, we have observed decreased demand for lending but increased demand for other credit solutions. Once again, we are the strongest in the industry for other credit solutions, and we outperformed the results reported by others in our industry once again this past quarter. The higher rates do put some pressure on consumers at the low end, leading to increased shopping for auto insurance, which remains a dynamic we’re observing. According to J.D. Power, they recently reported the highest level of shopping behavior by consumers for auto insurance they've ever documented. Given how far and quickly insurance rates have increased, this is not surprising. Overall, we are quite pleased with QuinStreet's profile.
Fair enough. Thank you, guys.
Thank you.
Your next question is from the line of Jason Kreyer from Craig-Hallum. Please go ahead.
Great. Thank you. This is Cal Bartyzal on for Jason. Just to start, as the auto space picks up, could you speak to any pockets where spending has yet to return and how the expectation of these revenues returning contributes to confidence in a long-duration tailwind for auto resurgence?
We've gathered a lot of data points on this. First of all, last year was a concentrated ramp primarily from the biggest player in the channel. They accounted for around 60% of auto insurance revenue in Q3, reporting mid to high-90s combined ratios. This year, that same client is now under 50% of revenue, though still performing strongly. We have a broader array of other clients and carriers now spending over $1 million a month with us than ever before in the company's history. Each of those carriers is seeking significantly more than we can currently deliver. Therefore, we are currently working to ramp up our media based on demand from clients, rather than the other way around. Our relationships are more extensive, the demand is greater, and we have a wider array of products available. Again, regarding the combined ratio reporting, most major players have reported combined ratios in the mid-80s to low-90s, indicating stronger underlying economics, increased client demand, and heightened spend. We have no signals to suggest this will not be sustainable, and we remain optimistic about the acceleration of this ramp going forward.
Perfect, thank you. Also, it seems like you guys are broadening out the home services offering with some new verticals. Can you talk about the ambition for vertical expansion there and the opportunities you see in broadening this offering?
We were present in around 14 or 15 verticals with some level of presence. We believe we can expand into dozens more. I can't be more precise on the exact number since we are still analyzing and testing various segments. Of those 14 or so verticals we are in, only two operate at any reasonable scale; one of those represents roughly 40% of total services revenue. Thus, we are relatively constant right now. These two vectors will continue to expand as we aim to enter more trades. However, we are more focused on scaling the trades we're already involved in. This scaling requires us to focus efforts and initiatives while also ensuring we are signing more clients and increasing media efficiency. Achieving this requires us to work on both sides of the market and manage the sequencing and iteration carefully. We have no concerns about executing this effectively, but it naturally takes time. We prefer not to launch numerous trades simultaneously to ensure we maintain various stages of growth and profitability. We are confident in our ability to do this.
Very helpful. Thank you.
You bet.
Operator Instructions. Your next question is from the line of Chris Sakai from Singular Research. Please go ahead.
Hi, Doug and Greg. I have one question. It looks like back in last quarter you had 2024 revenue growth at about 5% to 15%, but now you’re guiding for Q4 revenue of $180 million to $190 million, which puts the year-over-year revenue growth at about 2.5% to 4.5%. Can you explain what's going on and why there is somewhat of a guidance lower now for the year revenue growth? Please help me understand. Thanks.
Yes. Hey, Chris. I think it comes from a couple of factors, but we're pleased with the ramp, first of all. We just drew as quickly as we did sequentially at 40% and over 100% in non-insurance. We had a record quarter in home services, a record quarter in non-insurance, and we are on track for a record total company revenue quarter in Q4. We are also expected to have another record quarter in home services and non-insurance in Q4 as well. So we're performing exceptionally well. That said, the exact pace of the ramp at interest is hard to predict. The level of demand and activity is extraordinary, but the ability to convert that demand through such a complicated dynamic system is less predictable. We aim to provide comprehensive guidance and currently, we don't feel the need to forecast excessively above our actual performance. The upper end of our current range aligns closely with the bottom end of annual growth expectations. We'll assess how well we perform from there. However, it’s important to note that we are already pacing at 20%-plus faster growth for next year, compared to this year. Our achievements in different business sectors provide ample evidence of our overall strong performance. I wouldn’t read too much into the latest guidance numbers.
Okay. 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 QuinStreet's Earnings Call. Replay information is available on the earnings press release issued this afternoon. This concludes today's call. Thank you.