QuinStreet, Inc. (QNST) Q1 2027 Earnings Report, Transcript and Summary

Good day, and welcome to QuinStreet's Fiscal First Quarter 27 Financial Results Conference Call. Today's call is being recorded. Following prepared remarks, there will be a the question-and-answer session. If you wish to ask a question, please press 1 at any time. To withdraw from the question queue, At this time, I would like to turn the conference over to Vice President of Investor Relations and Finance, Robert Anthony Amparo. Mister Amparo, you may begin.

Thank you, operator. And thank you, everyone, for joining us as we report QuinStreet's fiscal first quarter 27 financial results. Joining me on the call today are Chief Executive Officer, Douglas Valenti and Chief Financial Officer, Gregory 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-K file. 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 Douglas Valenti. Please go ahead, sir.

Thank you, Robert. Welcome, everyone. The September quarter our fiscal Q1, was a good start to fiscal 27. We grew revenue 46% year-over-year to a record $416.7 million. And we grew adjusted EBITDA 108% year-over-year to a record $42.7 million We saw continued strength and broadening of carrier demand in auto insurance. Auto insurance revenue grew 42% year-over-year and is now running at over $800 million. Per year in revenue. We also made good progress expanding our footprint for future growth in that important client vertical. We continue to see strong momentum and to deliver strong results across our home services platform as well. In the core modernized business, with the HomeBuddy integration. And with the continued broadening generally of our product portfolio, to serve contractors. Home services revenue grew 86% year-over-year in the quarter. And is now running at over $500 million in annual revenue. Our overall company growth and expectations for continued strong performance short and long term, have never been greater. And that includes AI, We remain highly enthusiastic about the prospects and opportunities AI represents for QuinStreet. AI is a powerful tool in business systems that drive value with proprietary data integrations and workflows. And that is what we do at QuinStreet. We are applying AI across our business to improve productivity and impact with impressive results. And we foresee much more to come. We are also engaged with clients, media partners, AI platforms, and AI agents. On new ways to powerfully incorporate AI to expand and improve the digital performance marketing channel. And on ways to limit AI risk We plan and expect to be a critical partner to our clients in new AI channels. Providing the compliance, channel integrity, marketing optimization, and as always, unsurpassed media efficiency at scale necessary. To make them maximally productive just as we do in other areas of digital media. We also expect to partner and integrate with AI platforms and AI agents providing these structured data integrations, and workflows necessary for them to be effective and cost efficient performance marketing channels. We further expect that our growing AI applications and integrations will enhance our industry position as a technology leader and will strengthen our already formidable role as an acquirer and consolidator. Now what we do not expect and what you should not expect. Is that AI shopping agents will be allowed unfettered direct access to client systems. The security risks compliance risks, brand commoditization risks, and channel conflict risks among others. Are simply too great. Nor should any of us expect that AI agentic shopping for complex and custom products like those in our verticals. And scale affordably without access to the structured data proprietary workflows, and integrations we are so uniquely positioned to provide Turning to our Outlook. We expect revenue in fiscal Q2 to be between $360 million and $380 million. And adjusted EBITDA to be between $32 million and $33 million That represents 29% revenue growth year-over-year and 54% adjusted EBITDA growth year-over-year at the midpoints of their respective ranges. We are raising our outlook for full fiscal year 2027 We now expect full fiscal year 2027 revenue to be between $1.5 billion and $1.6 billion And full fiscal year adjusted EBITDA to be between $155 million and $165 million. That represents 20% revenue growth year-over-year and 42% adjusted EBITDA growth year-over-year at the midpoints of their respective ranges. It is still early in the fiscal year. We believe that there may be opportunities to grow revenue and expand margins even further. We will continue to refine our outlook as the year progresses. With that, I will turn the call over to Gregory.

Thank you, Douglas. Hello, and thanks to everyone for joining us today. Fiscal Q1 was another record quarter for QuinStreet. For the September quarter, total revenue grew 46% year-over-year to $416.7 million Surpassing $400 million in quarterly revenue, for the first time. Adjusted net income was $29.2 million or $0.50 per share Adjusted EBITDA grew 108% year-over-year to $42.7 million and came in at a 10.2% margin. A 300 basis point expansion over the year ago quarter. Looking at revenue by client vertical, our financial services client vertical, represented 65% of Q1 revenue and grew 31% year-over-year to $271 million a record revenue quarter for that vertical. Auto insurance, remained strong in the quarter and grew 42% year-over-year driven by continued strong broad based demand. Our home services client vertical represented 35% of Q1 revenue and grew 86% year-over-year to $145.7 million also another record revenue quarter for that business. Turning to the balance sheet, we closed the quarter with $141.5 million of cash and net debt of $10 million We continue to have a rigorously disciplined approach to capital allocation. And continue to prioritize 1, investing in new products and initiatives for future growth and margin expansion. 2, accretive acquisitions. and 3, share repurchases at attractive levels. Right now, our priorities are to invest in a wide range of attractive growth initiatives and in our active acquisition pipeline. We believe that using cash for growth initiatives margin expansion, and accretive acquisitions are likely the best drivers of long term shareholder value. All that said, we will remain flexible in allocating our capital as opportunities and markets change. And we certainly believe that our shares are trading at a significant discount given our numbers and the value we are creating. As we look ahead into Q2, I would like to remind everyone of the seasonality characteristics of our business. As I do every year at this time. The December quarter, our fiscal second quarter, typically declined sequentially This is due to reduced client staffing and budgets during the holidays and end of year period. A tighter media market, and changes in consumer shopping behavior. This trend generally reverses in January Moving to our outlook, for fiscal Q2, our December quarter, we expect revenue to be between $360 million and $380 million and adjusted EBITDA to be between $32 million and $33 million As Doug mentioned, given the strong results in Q1, and continued momentum we see in the business, we are raising our outlook for full fiscal year 2027. We now expect full fiscal year 2027 revenue to be between $1.5 billion and $1.6 billion The full fiscal year adjusted EBITDA to be between $155 million and $165 million And we believe that there may be opportunities to grow revenue and expand margins even further. And we will continue to refine our outlook as the year progresses. With that, I will turn it over to the operator for Q&A.

Thank you. And ladies and gentlemen, we will now begin the question-and-answer session. To ask a question, you may press the star followed by the number 1 on your telephone keypad. To withdraw your question, please press the star followed by the number 2. With that, your first question comes from the line of Jason Kreyer with Craig Hallum. Please go ahead.

Good afternoon, guys. Really great quarter. Nice work.

Thank you, Jason.

So Doug, you would mentioned, you know, being a critical layer in AI channels. Wanted to see if you can break that down further. And I am I am kinda thinking about this from the perspective of the role you play today. With you know, in AI with AI platforms and what you think that role evolves into over the next few years.

Yeah, Jason. I think it is it is an extension of what we do today in all digital media channels. You know, we provide our clients with a what I call, a control layer that allows them to access highly fragmented media with a lot of. That combines a lot of integrations that they do not want to have and do not have for lots of reasons, including security, brand, all the things I listed. And then allows them to work through that layer to access that broader spectrum of media in a safe way in a way that allows control and things like compliance and allows segmentation matching for media optimization and scaling. And so the AI, from our perspective, as we have been in deep conversations and integration with a number of these platforms. Is the same thing. Clients are not in a position to want to have integrations with particularly, AI agents. Directly because of the reasons I listed. There are there are security risks There are brand commoditization risks. What I mean by that is if you allow an agent to go directly into your system and fill out forms and get a quote and bring that quote back hey. You do not know if it is really accurate. Depiction of that situation. And b, you are then being shopped completely on price and that is not. it is something that the carriers have fought hard for good reason to resist over time because of the broader value proposition and with other big digital players who had every bit as much in fact, more market power than any of these AI agents have, which, of course, are at this point quite small. In the overall scheme of things. So you know, having that, again, what I call a control layer, but other may call other things what you call, you know, kind of a critical layer between is going to be important for them and it is important for us, and we are completely set up to do because we do it in all the other media channels. We can allow them to get at that traffic, have access to that traffic and vice versa. But to be able to do it in, again, a secure way, a compliant way, a brand protection way, and a way to also protect by the way, their current channels because their current channels of distribution are important as well. And like any business, you need to control your channel conflicts so you can destroy your legacy business in the pursuit of a new channel. So I think it is a. It. To us, and in all the conversations we are having, it is straightforward to everybody. On the other side of the equation, you have the 8 AI platforms and agents themselves. Who, you know, the cost to compute is not zero. And being able to access or the idea that they would access clients directly and have to run-in all these run their agents into all these systems uniquely to iterate in many cases a quote or pricing. And bring it back and, hey, make it comparable for shopping purposes. Is beyond formidable from a cost of compute standpoint. And really makes no sense when you look at the economics of the overall system and search and value to them or to a consumer in that process. But we already have. We have already got the segmentation and the integrations and we have refined them so that a shopping agent or a shopping. Or an agent or an AI platform can go into our structured data and our systems and very quickly and very easily access the right data access it accurately, and bring it back much, much faster so that the cost to compute and the accuracy are both dramatically better than they could have been otherwise. And so the, you know, the economics if you follow the money economics do not make sense, And if follow the technical requirements, they do not make sense. And if you follow the brand protection and compliance protection, security protection, from the client standpoint, it makes sense. So we are just trying to and you have heard others in our industry know who explained this as well, and I heard Orlando Bravo talk about it today and said, listen. These platforms are going to be great infrastructure. They are not gonna be able to do everything because they do not have the capacity the cost or prohibitive, and the economics are not there to do so. So you need folks at our level that are vertically oriented and deeply integrated and have those structures on the data side the integration side, and the workflow side to make the whole thing work. And that is that is where we fit, and that is where I. We are fully confident that is where we are gonna continue to fit and that we are. As a result, I think AI is all obviously very promising as applied to our business model, but it is also incredibly promising as a new a new channel. Into digital for us and our clients.

Very comprehensive response Douglas. I appreciate it. Wanted to pivot a follow-up over to Gregory just on numbers. And you talked about seasonality for expectations. As we look over the last couple of years, we have seen the December quarter be a little bit more you know, consistent or slightly better than the September quarter. So curious your thought with that perspective and kind of what dove with that is. I know the last couple of years have had somewhat of a budget flush in auto insurance. I do not know you are factoring it in, but I am just curious what you think the prospects are for something like that occurring this year.

Yeah. You are exactly right, Jason. What you saw over the last couple years is really a budget flush in auto insurance in the December quarter, which is completely, not in line with the seasonality that we have seen over you know, decades being in business. And so as you can imagine, no, we are not, including in our outlook any type of budget flush happening in the in the December quarter. Could it happen? Sure. Yeah. I can, but we are not gonna count on it in our outlook.

Alright. You guys, appreciate it.

Thank you, Jason.

And your next question comes from the line of Horton with Northland Securities. Please go ahead.

Congrats on really nice quarter here. Just wanted to touch on the margin expansion here. So on adjusted EBITDA, like 300 basis points of margin improvement. Year over year, and even more on the gross margin side. I guess how much of that expansion is coming from the mix shift with HomeBuddy included? Versus just kind of efficiencies throughout the business or AI driven kind of cost improvements?

Yeah. it is tough to quantify the next loop, but it is all of the above. You know, of course, there is the basic operating leverage of having a lot more volume of revenue and margin dropping into the business while we are you know, at a at a good growth rate while growing our semi fixed cost base very much slower and, in fact, pretty much flat year over year. But for the acquisition effects, On top of significant margin improvement, initiatives. In places like auto insurance. Combined with, you know, a heavier mix or more home services in the mix generally, which is helpful. But this quarter, you know, we also had very strong auto insurance in the mix, and we expect that auto insurance is going to continue to be fairly strong. I mean, given it was so strong this quarter, even if it is seasonally down next-- this-- In the existing quarter, the December quarter, you still have a good amount of it in the mix. So all of the above. You know, we are working hard on volume. Growth. We are controlling our expenses. We are applying AI and other things to be more productive and efficient. In other. In the on the expense side of the business. And we are. You know, we have good margin mix in all of the businesses. So I would say it is a exactly how to quantify them. And, Gregory, I do not know if you have a better idea. I would. I would not be able to do that, but we are working every lever. And, obviously, and clearly, it is having a good impact.

Yep. No. That makes sense. And then just on the auto insurance side, are you seeing any difference in spending from the large carriers versus the smaller carriers Or what did you kind of see during the quarter?

Not really. The. Obviously, the large carriers dominate generally speaking because they just move so much more budget. But I think we had 8 or so carrier clients that spent over $1 million a month with us. I would say that we are seeing very strong demand across the board and across the risk spectrum. If you think about, you know, the way auto insurers think about who they want to write for. So I am not perceptively. Perceptively, no, but I would say the industry is. Generally speaking, the industry is in great economic shape. And they are very much in growth mode. And we are. We. there is certainly much more demand than we can fill and we are working very hard to be able to continue to create capacity to fill us more. So it is. But I did not I do not think I perceived any big difference between, you know, carrier clients based on their size.

Okay. Fair enough. And then last 1 just on the home services side. I guess, how are you guys kind of budgeting or thinking through just from a macro perspective with the rising rate environment maybe a little softer consumer just kind of the puts and takes that you guys are kinda budgeting for going forward.

Yeah. it is a great question. I cannot-- a couple of things. 1 is we are still in market penetration mode in home services. so we think we will be driven more by the. Or continue to be driven more by our own execution and penetration than anything else. As interest rates rise, you will. If and as interest rates rise, it would the effect you would likely see is that homeowners will continue to stay in place rather than move because of the not wanting to pick up a higher mortgage. Rate, a higher mortgage rate, which means that you will see more nesting and more aging in place. Those are big drivers of our business mix in home services. If interest rates were to come down, then you might see the opposite. You may see more mobility. And then a big driver of home services in our mix of business is when-- when homeowners pick. Go move into a new home. And they decide they want to customize it, upgrade it, fix things. When they move in. So we kinda. At this point, you know, rates going up, rates going down unless there is very, very severe in either direction, to the extent that the effect consumer. You know, homeowner purchasing power. And as you know, homeowners right now are great financial shape. So that would have to be pretty extreme. We kind of got you coming and going on interest rates.

Yep. Fair enough. Well, thanks for taking the questions, and congrats again on the quarter.

Thank you, Luke.

And your next question comes from the line of Patrick Scholl with Barrington Research. Please go ahead.

Hi. Thanks for taking the question, and congrats on the strong results in the quarter.

Thank you, Patrick.

If I could follow-up on AI, could you just maybe provide a little bit more color on just where that stands on as a customer funnel And, I guess, maybe, like, the testing and learning phase on getting on the. And, I guess, like, sort of, like, the profitability of that of that customer file.

Sure. The most advanced, as you would imagine, is Google AI search results. Now you know, vast majority of the searches on Google now have an AI answer. AI driven answer as a component of that. that is going very well. What it we are a big participant in SEM on Google. And that part of our business continues to grow And the AI search results create a lot of very strong ad inventory. In which we are participating and profiting. So that would be. And that right now is by far in a way, the biggest part of what is going on with AI in the channel from a marketing commerce standpoint. The second place, would be, the promise and the development, I think, of the AI platforms most prominently, of course, ChatGPT. Or OpenAI. They are. They have an ad platform now They continue to iterate it. We are integrated with it, and, virtually, I think, in all of our verticals, and we are working closely with them It is not that big yet for anybody. And it is not nearly yet. As productive or effective as what Google has of course. Right? Google has been doing this a very long time. But they are working their way up the curve, and they are working their way up the curve very rapidly, and we and they have a good strong user base. So we expect them to continue to grow at very strong rates in terms of both their volume and their effectiveness, and we, you know, we are committed and close with them in terms of being a part of that platform and making sure that we are able to capture and make productive that channel and their platform and their user base for our clients. Super important. We think it is gonna be huge. it is not huge yet. But I think it is on it is on it is on the journey there. it is gonna take a while. But they are on that journey. it is a big complicated ecosystem. The third place, I guess would be agents. And some of the, you know, like, news for example. And we think some of. And while there have been enough. There are even much, much smaller, of course, than, say, the OpenAI ad platform at this point. And you really just have the free versions that are going to be that active, and they are the only ones that are ever gonna be big in scale, by the way. I do not think you are gonna have huge consumer adoption of paid agents. For shopping for things like insurance because it really does not make sense at big scale. Economically. But those are going to be important as well. They are gonna be a part of the ecosystem and it is going to be and we think that again, it will be eventually a big channel with big opportunity for our clients to integrate with and engage with very, very early at this point. And you have heard from others in our industry, and you have heard and read that a lot of clients are blocking the agents and they are blocking the agents for all the reasons I talked about. Listen. there is just too much security risk, compliance risk, brand commoditization risk. Channel conflict risk, there is just risk after risk after risk But over time, as the. And today, that channel. Agent channel from consumer shopping standpoint is tiny for our verticals. But over time, the agents and folks like us who will-- can give them a gateway that solves those that long list of risks for our clients we will develop and evolve. And that is gonna be a meaningful channel. And we are in very active discussions with a number of them about how that would work and we have gotten for all the reasons we knew, and they are all the reasons that would push them to someone like us, like the fact that they get blocked, a very productive, promising discussions and are moving forward on a couple that I think we will have some. Have a real role in And over time, I think we will have a role in all of them for our clients. So that is kinda how I would think about the current landscape or ecosystem of AI in the in the marketing channel in our verticals.

Okay. Thank you. Then maybe sort of related like, on the other financial services side, I guess, you just talk about how, like, the current macro environment is shaping up for those verticals? And you know, I guess that was actually 1 of the vertical I was seeing the most frequently of blocking the AI agents. I was kinda curious how they if said that you are, you know, integrating with some of the AI channels on for across your verticals, how they value that type of traffic or if it is kind of just again, just another consumer funnel since it is not an agent.

I am sorry. I did not quite understand the. In terms of the other financial services verticals, very same story in terms of kind of how we-- The outlook for AI and for. And in terms of how they think about the AI channel versus, say, the application of AI. And I think we are what we are talking about here, of course, is the AI channel versus applying AI to the business model. Credit card is going very well for us. Strong growth in the quarter year over year. The interest rate environment had a little bit of effect on what we call our banking or source of funds client vertical. That business was down some year over year because of, you know, the rates looking like they are going down, then looking like they are going up. You know, we had some pauses of budgets as people tried to figure out what product made sense, which is, of course, has to align with the interest rate environment and once it was pretty clear that rates were probably going up, we saw a new good surge there. And a very strong growth. Sequentially in that business. And then the personal loans business, which are. Or the. Which is the third piece of that other financial services other than insurance business. We are still. it is a good strong business for us. it is the biggest of the 3 it is a and it is been a very strong growth business for us over the last number of years. Lately, it is been more flat for us as we have, and I think I have said this on previous calls, we are really focused more on a couple of things in that business. We are retooling it to have a higher quality revenue in terms of its sustainability and margins. And a broadening of that business. We are actually really narrow now. We do about a million dollars in it, but it is a really narrow footprint. We think it could be and I am not exaggerating, we think it could be 5 to 10x that footprint. And we have we are we are working on that, and I am very excited. Again, we had good strong sequential growth in that business. This quarter again, and we have a new leadership team in there with a lot of experience building these kinds of businesses and taking it to the next level. So I think you will hear a lot more about that. That business, what we call our m 1 business. In coming quarters and years as we aggressively expand that. But in terms of their interplay with AI, very similar story to the-- You know, in terms of the channel dynamics. As we just talked about more broadly.

Okay. Okay. Thank you.

Thank you, Patrick.

And your next question comes from the line of Naved Khan with B. Riley Securities. Please go ahead.

Hey. Thanks a lot. I think you said, you know, in talking about Google, you would mentioned that they are doing great job with their AI mode And the leads you get from them are good. But maybe just talk a little bit about. Is it a trade-off between volume versus quality? Meaning, quality of the leads you get from AI mode maybe a lot higher, and maybe the volume is not that much. Maybe just help us clarify, you know, with that. And the other question I have is just on the sort of M&A pipeline and broadly, how does it look? And you know, how much kind of patience you are having today with respect to, like, valuation and such? Thanks.

You bet, Naved. Generally speaking, the quality of what we are gaining out of the kinda Gemini driven search results on Google is as good or better than we have ever seen out of Google search. Obviously, there is very high intent traffic And very often, and I think this might be what you are alluding to, Naved, that very often in an AI format the consumer will ask follow-up questions to clarify and narrow and refine their query. And as they do that, it gets even more high quality. And that is something I think that folks are seeing we and others are seeing on the OpenAI platform as well, by the way, very, very promising in terms of the further refinement with for us equates to further qualification and. Of consumers as they come to those platforms. Volume wise, you know, that SEM for us in the in the Gemini driven search results world is up. Quite nicely for us. So we have not seen a diminishment of volume And recall that we mainly do SEM in that environment, not SEO. If we were SEO, the you know, zero click searches are a big, big deal for people who have historically relied on Google search to drive traffic to them on an organic or a non paid basis And that business is, you know, in a Gemini format searches. You know, there are very, very few clicks. We know people in that world, of course, because we grew up with that world around us. And have partnered with them historically And, you know, it is not unusual for those types of web properties to have their volumes down 80% to 90%. So. But that does not affect us because we are really not driven by SEO it is something we had deemphasized, you know, over a decade ago. And just thought of the material part of our mix. So volume for us is good enough. Because SEM campaigns in the in that. In the search results the ad search results. Have a lot of opportunities for great ad programs in SEM, search engine marketing programs, and we are a big participant there. And quality is as good or better and the more consumers refine their search, the better the quality gets. So that is kinda how I would, characterize that. On the m and a front, strong pipeline, active pipeline, You will see when we file our queue in a week or so, or less than a week. Sorry. That there was a subsequent event to the quarter where we did make an acquisition, a home services acquisition, that we are very excited about, smaller than. Much smaller than HomeBuddy. This 1, you know, totals to somewhere around, you know, high single digit millions and then an opportunity for the seller to maybe double that over time with earn outs just like we did the ABM acquisition. But a very good add on to our product suite in home services called Get The Referral. Which is a platform that had already sold into a number of the larger contractor clients that we serve. That we think we can roll out across the contractor base. It really leverages up what we do for our clients in customer acquisition and allows them to manage and make productive referrals from their existing customer base. Hopefully, most of which we help deliver to them. So we like to get the referral acquisition. Again, you. You. We will see that in the queue as a subsequent event. Pipeline broadly is strong. Both from a. There are proactive things we are looking at where we have identified strategic priorities add on to certain of the verticals. And we are working through those pipelines and are pleased with what we are getting done there. And also, opportunistically, we are a known acquirer. In these verticals, of course, and we have had some inbound of some very interesting and very attractive opportunities and, again, most prominently right now in home services. And as I think I have said in other calls, you know, priorities right now what we will look at acquisition opportunities across the performance marketing spectrum, and particularly in our current verticals, of course, my priorities right now are to add on to the home services platform. And potentially a couple of our other newer vertical platforms. So very strong, very active, and it already had, you know, again, a good success in Get the referral very recent. Thank you, Douglas. Thank you, Naved.

Alright. Thank you. And that concludes the question-and-answer session. 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 conference call. Thank you all for joining. You may now disconnect.