Good day, ladies and gentlemen, and welcome to the QuinStreet First Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I will now like the turn the conference over to Matthew Hunt of The Blueshirt Group. You may begin.

Thank you, and good afternoon, ladies and gentlemen. Thank you for joining us today to report QuinStreet's First Quarter Fiscal 2013 Financial Results. Joining me on the call today are Doug Valenti, CEO; and Ken Hahn, CFO and COO of QuinStreet. This call is being simultaneously webcast on the Investor Relations section of our website at www.quinstreet.com. Before we get started, I would like to remind you that the following discussion contains forward-looking statements that involve risks and uncertainties. QuinStreet's actual results may vary materially from those discussed here. Factors that may cause the results to differ from our forward-looking statements are discussed in our most recent 10-K filing with the SEC on August 23, 2012. Forward-looking statements are based on current expectations, and the company does not intend to and undertakes no duty to update this information to reflect future events or circumstances. Now, I'd like to turn the call over to Doug Valenti, CEO of QuinStreet. Please go ahead, Doug.

Thank you, Matt. Hello, everyone, and thank you for joining us today as we report our first quarter fiscal 2013 financial results. We want to acknowledge the difficulties caused by Hurricane Sandy. We know some of you may have been affected. Our thoughts are with you, your families and your colleagues and for your safety. We especially appreciate your time with us today. Revenue for the quarter was $79 million. Adjusted EBITDA was 15% of revenue. Normalized free cash flow was $10 million or 12% of revenue. Our results continue to be negatively affected by challenges and product and market transitions in our core Financial Services and Education client verticals. We are working through these challenges, and we remain confident in the size of the markets we are addressing, our competitive position in assets and the initiatives we have under way to best perform during this period and to return to growth in future periods. Performance marketing is the most important and effective means of reaching and acquiring customers in the digital era. Digital media is measurable. Spend not measured is disadvantaged. Digital performance marketing, our business, is a big and still early market opportunity. We are arguably already the most capable company in vertical performance marketing. And despite, in fact, partly because of current challenges, we are adapting and adding capabilities at a rate faster than at any time in company history. Now, a quick review of each client vertical. In the Education client vertical, for-profit schools continue to represent the majority of online performance marketing spending. Reactions and adjustments by for-profit schools to new regulations are reducing enrollments and straining marketing spend and the changing marketing practices, all adding to uncertainty and volatility in that business and negatively affecting our results. The client and industry changes necessary to…

Thanks, Doug. Hello, and thanks again for joining us today. For first quarter of fiscal 2013, we posted $78.6 million of revenue, 22% decline compared to the same quarter last year. Adjusted net income for fiscal Q1 was $6.2 million, $0.14 per share on a fully diluted basis. Adjusted EBITDA was $12 million or 15% adjusted EBITDA margin. On our last call, we guided to an approximately flat quarter sequentially for revenue. Instead, we saw a sequential decline of 8%. The Q1 performance was slightly below what we expected to see on the top line, largely due to the continued difficult market in auto insurance and a slower positive top line effect of expanded model revenue for that client vertical. I'll discuss that more, but our fundamental circumstance remains similar to what we described last quarter. We are still progressing in our initiatives to address the market issues in our 2 largest verticals: Education and Financial Services. We believe we are still on the right path with the actions we have been taking to navigate these challenges. We are coming closer to returning to top line growth. Our visibility remains limited as to when exactly we return to growth, so we're reticent to make any commitments on specific timing. However, again, to give you the best sense of management's outlook, we are beginning to see the results of our efforts to address our market challenges. It's been a difficult period over the last number of quarters. Declining top line is brutal and personal. We believe that the end of this period is within sight but not immediate. So that is the all-important overall context. I'll now discuss the details of our fiscal Q1 results. Please see the supplemental data sheets available for download on the Investor Relations page of our…

[Operator Instructions] The first question is from Carter Malloy of Stephens Inc.

So first, could you talk a little bit more about the structure of the COGS line? I know you guys are pulling minutes [ph] to EBITDA, but you're doing an exceptional job below the line in terms of OpEx. So I'm just trying to get more comfort around how we're going to get to a full year EBITDA of 20% just given where we are today.

So Carter, as we discussed -- this is Ken. As we discussed from the prepared remarks, we believe we're going to see the benefit of these investments we've been making along the new products, particularly in Financial Services. We're still dealing with some pretty difficult year-over-year compares from when we are first hit with the media shortages. Doug discussed that in fuller detail on last quarter's call, and we think we're going to get to the end of those before the end of the year. Again, we're also more positive with Education than we have been, and we're seeing the right moves. So it's about moving the top line. We control the cost pretty well, as you mentioned, and our current projections have us at 20% EBITDA. But it does require top line growth to be clear as you did the math.

Okay. And then also just inside of the quarter from when you guys gave guidance until recently, what actually happened in terms of client budgets and pricing of your volume on the insurance business? And then as a follow-up to that, I noticed the real-time quote is up on Insurance.com and good traffic there. So what does that mean for pricing and monetization going forward?

Sure, Carter. The -- and this is Doug. In terms of what we -- the drop-off from the guidance we gave to the actual results really was primarily driven by slower progress in auto insurance and a more difficult continuing trend in the traditional or in the historic auto insurance business. And that continues to be driven by the fact that there's a lot less quality media available. There's always been a limited amount, and there's a lot less of that available now given the moves of, what you talked about in the past, bank rate pulling volumes in-house, the effects of Canada on the publisher community. So those things, reducing the amount of available media current monetization rates that can produce good quality results, coupled with increased competition for that media, primarily from players in auto insurance who have -- are seeking to grow by shifting their volumes over to those sources from sources that have been cut off because of quality issues. And so you've got this increased demand and competition for a smaller amount of media, and that just continues to deteriorate and has deteriorated at rates that were faster than we anticipated while the expanded model, and you're right, you're seeing the real-time quote is up and launched, which is a big part of the expanded model, is growing quite rapidly but on a small base since it was just taking a lot longer to get to the point we're just going to catch up enough to overcome those negative effects. And exactly the slope of those lines were in one case steeper and the other case shallower than we hoped is the basic answer to that. The path out for us as we've discussed for some time now is the expanded model because it does…

And in terms of the existing or one of the old school type of affiliate monetization, just given that competition in the price of media. Are we at risk or just having structurally lower gross margin going forward?

No, we don't think so. We don't see that at all. We think we're in a phase where media margins, which is a big contributor to gross margin, of course, because media is our highest cost, are badly constrained by that phenomenon. But that's why we spent the last couple of years putting together the plans and assets and investments to overcome that, and we think we can see a path to -- we're already much better this quarter than last quarter in terms of media margin for that business just because of some things we've done, and we just see it continuing, expanded in better paths. So we -- very importantly, we think at 20% adjusted EBITDA margin for our core business remains structurally sound for as far as we can see into the future. In the short-term, it's being challenged by revenue softness and some media margin pressures in auto insurance, and we think that, that's something we're just going to have to execute and then grow out of. And we feel very strongly and confident that we will.

The next question is from Doug Anmuth of JPMorgan.

This is Shelby Taffer calling in for Doug. Can you talk more about the demand you're seeing for your click-based Education product and when you expect that to become a more material contributor to revenue?

Sure, Shelby. We're seeing extraordinary demand. In fact -- and again, it's not unlike our expanded model in auto insurance is growing very rapidly. And if you look at the curve, it is an exponential curve, unfortunately, it's coming from nothing. So it's still on a relatively small base. But it's into the millions of dollars a year now in terms of the run rate, just like the expanded model in auto insurance is also into the millions of dollars a year. I don't want anybody to think that these are businesses that are kind of bumping along in immaterial volumes. But we're seeing great demand. The results for the clients that have -- that are participating in our pilots and our early rollouts have been very strong, and we're -- we have a lot more orders than we do inventory to fill those orders. And we're working very hard on growing the inventory to catch up to demand. So it's -- we're in that business. We're very excited. We have gotten the kind of response and results that we hoped, and we see the demand that we expected. And it's just a matter again of getting far enough quarters ahead that the growth rate can get to be a more significant volume -- get us to a more significant volume.

The next question is from Shyam Patil of Raymond James.

For the fiscal second quarter revenue number run rates you've given, can you help us maybe understand a little bit better what assumptions you're making for the various segments? And then second part of that is, for the year, you talked about expecting revenue growth to get to the margin target. Can you talk about when that growth -- where and when that growth will come from and why?

You bet, Shyam. In terms of Q2, the revenue number assumptions pretty much assume a flat, continue kind of flat performance in the auto insurance, flat to what we just had this past quarter. Some improvement in Education, which is counter to traditional or historic seasonal trends and really reflect progress in a number of the initiatives, including the one Shelby asked about in terms of the click product, and continued growth in B2B, which grew, I think, about 19% year-over-year last quarter or thereabout -- so I'm looking at Ken. And we don't break it out of other typically, so I'm...

19% it was.

19%. And so we expect a continued good growth trends in B2B tech. As we've indicated again, that's early, but the winds are more at our back there at least from a near-term opportunity standpoint. So those are the -- and then we expect Home Services to be down again slightly because we're really not managing that business for growth right now in a relatively difficult environment where it's -- we're working it hard to contribute and support the other initiatives. And then medical, again, is -- will be up but only up -- it's not -- it's only a single digit, somewhere between -- I think it's about a $10 million run rate business for us. So it's not going to be up enough to make much of a difference. So those are the components in the -- in next quarter or this -- the current quarter. For the second half, the assumptions are a lot more of the same. We do expect some improvement and progress in auto insurance in the third and fourth quarters based primarily on initiatives we have in place, a number of them, including, but not exclusive to, the expanded model. We do expect continued good progress in Education based on indications we've gotten from clients in that business. So their demand in the second half and what we expect to be doing there, we expect B2B tech to continue to progress at about the same pace it has been. We don't expect Home Services to do much for us in the second half, and we don't expect a lot out of medical. If we get it from those 2, and medical has been a little bit of an upside surprise again on a small base for us slightly, but if we get it, it will be upside to the plan. And the plan I'm talking about is the second half plan. It gets us to the current model to get to 20% EBITDA. And then we have a -- the operating plan is a greater revenue number than that, so that we have a relatively -- we think relatively conservative plan to get the 20% EBITDA for the year, for the second half. And I say that with trepidation given that this is a -- the outlook continues to be difficult or the visibility continues to be difficult. But that's the -- as transparently as I know how to give it to you. Those are the components of the plan.

Great. That was very helpful. This is my last question. How do you guys -- or how should we think about the use of cash just going forward?

I think you should expect us to begin to accumulate cash. You probably noticed we've made no acquisitions last quarter. We are -- we have completed the big initiatives and acquisitions that we had planned for capital, which were, of course, an insurance and B2B. We're very pleased with both in terms of how they position us for the future. You've heard me say before, we really don't have any other major initiatives and acquisitions planned. That, of course, does not mean that we won't make any acquisitions. Things come along periodically, opportunistically, but I don't think you should expect us to spend at a rate anywhere near where we did the last few years. We made no acquisitions, as I said, last quarter. This quarter, I don't think we'll make -- if we make any acquisitions, they will be on the small end of our historic range or at least on the small end of the more recent range. And so I think you should expect us to accumulate cash for quite some time and then to, over time, look at where the business is and where the stock price is and ask ourselves what the best use of that cash is from a shareholder standpoint.

The next question is from Genna Sankin of Crédit Suisse.

Last quarter, you had discussed the irrational competitive environment. Do you have any updates in terms of that competitive landscape that you could tell us?

Yes, there, we were talking about auto insurance. In particular, we still consider the behavior of at least one of the competitors to be irrational and hard-pressed to understand. They've admitted to, I think, some of the analysts that they're bidding media down to a 10% to 15% margin and that they're pleased to do that. If you do that, then you really don't have enough money to invest in doing much else. And I guess -- I think the theory is grow the top line and somehow something good will happen, and they continue to pester us to try to convince us or our constituents to get us to buy them, which isn't going to happen. In our business, if you spend too much on media, you pretty much just spend too much on media. You really aren't going to turn that into profits in the future because as soon as you stop spending too much on media, you just lose the volume. So it's kind of a silly strategy where it's kind of painful in the short term, but we'll just beat them in the longer term because we'll continue to generate enough surplus to invest in capabilities that allow us to get more and more out of the business and to compete at a higher and higher monetization rate. And all signs indicate they won't be able to keep up. So we continue to see the behavior. We think it's -- we do believe it's irrational. I don't think it's a good way to get bought, but we'll just have to beat them the old-fashioned way, which is keep -- actually, generating enough money to invest, as I said, and grow the -- grow our ability to invest in media and actually make money. So yes, it's still out there.

And you've mentioned a bit about Brazil and India, but do you think you can give us more detail and update on your international initiatives?

You bet. The Brazil and India, we both -- we have offices now in both countries, staffed with, I think, 6 or 7 people in each office at this point. We also have made acquisitions in both markets. We own considerable amount of online Education traffic in Brazil. I'm told and we believe we own more online Education traffic than any other, certainly Internet marketing and media provider in that country, Education-specific media. We're engaged with 5 or 6 fairly large clients. We have significant business from 2 or 3 of those at this point, still early but good relationships building, and we're very pleased. Some of the clients are divisions of companies over here, a couple -- one of the larger clients is actually the largest player down there. So the engagement is good. With the right clients, we have a good position in the channel, we have a good team on the ground and we're just doing a lot of hard work to test and prove performance marketing as a viable channel and then to work with those clients to hopefully continue to invest in growing that. But we think the Brazil Education market structurally and from a size standpoint, it's extraordinarily attractive, and we expect it to be a very big business in coming years. It's not going to come overnight because there's a lot of work to be done, not unlike there was in the early days here. But we're very excited there. Similarly, in India, we acquired a company, indiaeducation.com and indiaeducation.net, portfolio of assets. That's one of the largest players in online Education media in India and has been engaged with a number of clients in India for a number of years, primarily selling advertising in a display format. We're continuing to do that, but again, we're working very hard with those clients to try to transition to a more of a performance marketing format, which we and they both believe is going to be the more scalable and effective form going forward. But again, an extraordinarily big market, a lot of structural attractiveness for us and one that we are well into in terms of beginning the hard work of establishing and growing an effective performance marketing channel. So again, we expect that will be a very large business in the future for us. Again, I think that's years out, not months or quarters out, but it's -- now is the time to be doing it. So those are the -- those are our 2 main international initiatives.

[Operator Instructions] The next question is from Nat Schindler of Bank of America Merrill Lynch.

Just want to go over this again. You said that you expect -- in order to make your 20% margin target that you have been really good at maintaining in the past, you said that you expect growth in revenue. Is that growth for the whole year or is that growth just in the second?

No, it's not growth from where we are today.

It's not. Nat, it's not growth for the whole year. It's a good question and sorry if we were unclear. It's growth from last -- this past quarter.

So quarter-on-quarter growth from here?

Yes.

Okay. Even doing that to get your -- if you do that, even -- you get your margin up to 20%.

Yes.

Given that you're already down at G&A is quite low, quite a bit below where you were last year. And marketing is -- doesn't seem to be as flexible. Where are you going to get that? I mean, unless your gross margin comes way back, and I don't see how you're predicting that next quarter with mid to high teens. So I'm trying to see how you could possibly get to 20% for the full year?

Yes, it's going to be -- as I think Ken pointed out, about 3.5 points of the gross margin drop this quarter were fixed cost-related. So we think revenue growth is a big lever, and we do think we'll have considerably better revenue in the second half relative to the quarter we just finished. And as I indicated, our expectation for the current quarter is that we'll be in the range I gave, which is better than what historic seasonal trends would indicate. And so that's one component. The other component is just the mix of business and media margin. We had a much lower media margin last quarter than we expect to have this quarter. For example, mostly due to some things that went on in auto insurance that have already solved themselves this quarter. So we think it's a fairly conservative model. We don't require that we get to significant revenue growth to get to it. It's a mix of some top line coming back and media margin components. We do not expect to have to reduce any other fixed costs. We don't expect to have to reduce staffing. We think we're at about the right level of staffing for where we are and for what we need to get done. If the top line doesn't come, I think we'll be challenged. Again, it doesn't have to come in great volumes, but if it doesn't come even in the relatively modest growth that we're modeling, then we're going to have an issue getting to 20% EBITDA margins. And it may be that we'll choose not to get there rather than to abandon the initiatives that we think have the most shareholder value in the future. But we have a plan that we think is a conservative, quite realistic plan for the second half that gets us to 20% adjusted EBITDA margin and gets us there with what we have today is pretty high confidence. By the way, the other piece to that, that I should point out, I guess, is that growth in B2B is extraordinarily high margin growth because there is no media cost component to that, and that might be part of what isn't syncing up for you. Remember, we own the database for our B2B registration base, which is the -- which is -- from which we monetize. So there essentially is no media cost component to B2B. So when B2B revenue comes in, it comes in like an 80% contribution margin. And B2B is currently our only -- or one of our only growth vertical of any significant size. So that's another piece that might be helpful.

Doug, a quick follow-up on that. It's Nat. If B2B is growing, what is the part of the other that is falling off so much? Down -- so overall, you're down 8%.

Yes, it's Home Services. Medical is actually up a little bit, I believe.

A little bit.

B2B grew at 19-point-some percent. The only component is in others, Home Services. And Home Services has been down quite a bit, partly due to some market challenges and partly because we're -- we've really taken that -- our resources in that organization down to the point where it's going to be difficult for them to grow particularly in a difficult environment. But we thought that was right return on investment strategy. We really want them to contribute, and they aren't driving very strong contribution margins primarily right now, and to help fund the loss of surplus in the other businesses and the growth initiatives in the other businesses. So that's really been kind of a portfolio decision we made.

There are no further questions at this time. Ladies and gentlemen, this conference will be available for replay after 8:00 p.m. today through November 6 at 11:59 p.m. You may access the replay system at any time by dialing 1 (800) 585-8367 or (404) 537-3406 and entering the access code 37918925. That does conclude our conference for today. You may now disconnect. Good day.