Good day, and welcome to the QuinStreet Second Quarter Fiscal 2021 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Hayden Blair, Investor Relations for QuinStreet. Please go ahead, sir.

Thank you, Carina. And thank you to everyone joining us as we report QuinStreet's second quarter of fiscal year 2021 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 10-K filing made on August 28, 2020. 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 are 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.

Thank you, Hayden, and thank you all for joining us today. Our business momentum is strong. We delivered excellent results in fiscal Q2. Assure sign of the strong momentum is that revenue, excluding divested businesses grew sequentially 6% in the quarter. Significantly better than typical seasonal declines. Year-over-year, revenue, excluding divested businesses, grew 36%. The results are driven by strength in Insurance and Home Services, our two largest businesses. Auto Insurance once again grew 57% year-over-year. And Home Services grew 165%. All that, while continuing to show strong cash flow, and maintaining an exceptionally strong balance sheet. We continue to make excellent progress on a wide range of short- and long-term growth initiatives. And continue to strengthen our products, technologies and operations for future growth, competitive advantage and efficiency. Including, we are well ahead of schedule with our integration and synergies for the Modernize acquisition. Our tailwinds are strong. Marketing budgets and consumer activity continue to shift to digital at an unprecedented rate. And increasingly, to our core business of performance marketing and media. Within those megatrends, QuinStreet Performance Marketplace Solutions, are ever more recognized by the most advanced clients as their most productive and consistent digital marketing channels at scale. We continue to make good progress with QRP in the quarter, both with the agency client pipeline and with more and deeper carrier integrations. We are in process with integrations and ramps of several of the biggest opportunities in that market. Revenue is still early, but ramping. And our long-term expectations for QRP remain exciting. Trends in credit-driven client verticals specifically, personal loans and credit cards continued to improve in fiscal Q2. And I continue to be excited about our position in those enormous markets as the economy improves. They are future growth engines, highly synergistic with Insurance and Home Services. Looking ahead to the current quarter for fiscal Q3, we expect continued strong momentum and revenue growth in the Insurance and Home Services client verticals. Continued improvement in personal loans and credit cards and continued strong overall company performance as a result. We expect revenue in fiscal Q3 to be between $145 million and $150 million, which at the midpoint of the range, represents 34% year-over-year growth and revenue, excluding divested businesses. We expect adjusted EBITDA to be between $13 million and $14 million. With that, I'll turn the call over to Greg.

Thank you, Doug. Hello, and thanks to everyone for joining us today. We continued to see strong performance in Q2, feeding typical seasonality and once again exceeding our expectation and outlook for both revenue and adjusted EBITDA in the quarter. Total revenue was $135 million and grew 36% year-over-year, excluding divested businesses. Adjusted EBITDA was $10 million and adjusted net income was $7 million or $0.13 per share. Looking at revenue by client vertical. Our Financial Services client vertical represented 77% of Q2 revenue and grew 18% year-over-year to $104.2 million. Auto Insurance, our largest business, delivered another record revenue quarter and grew 57% year-over-year. This reflects strong spending and growth from a broad range of major carrier clients and excellent progress on a number of growth initiatives in the quarter. Also in Financial Services, our credit-driven personal loans and credit card businesses continued to improve in fiscal Q2. Combined, they grew 25% sequentially and were up 80% from the June quarter. We expect these businesses to be good, long-term growth drivers for QuinStreet as the economy improves. Our Home Services client vertical represented 22% of Q2 revenue and grew 165% year-over-year to $29.2 million. As a reminder, on July 1, we acquired Modernize to add to our scale and capabilities in Home Services. We once again outpaced our expectations in the quarter, demonstrating the continued success of the integration and capturing of synergies from that acquisition. Other which consists primarily of performance marketing agency and technology services was the remaining $1.6 million of Q2 revenue. Turning to the balance sheet. We closed the quarter with $102.6 million of cash and equivalents. During the quarter, we generated $5.6 million of operating cash flow. Normalized free cash flow for the quarter was $7.5 million or 6% of revenue. Most of our adjusted EBITDA drops to normalized free cash flow due to the low capital requirements of our business model. In summary, we continue to see strong performance from Insurance and Home Services, our two largest businesses, and are encouraged by the substantial improvement of our credit-driven businesses. This has all resulted in us once again being our expectations and outlook for the quarter. Our success in narrowing the footprint to our best-performing and fastest-growing opportunities is evident. Trailing 12-month revenue, excluding divested businesses, was $475.7 million, reflecting a three year compound annual growth rate of 30%. Looking ahead to the March quarter, we expect the strong momentum to continue, resulting in a record revenue quarter and expanding adjusted EBITDA. With that, I'll turn the call over to the operator for Q&A.

[Operator Instructions] We'll go ahead and take our first question from John Campbell with Stephens. Please go ahead.

Congrats on a phenomenal quarter. Absolutely. So growth, obviously, for you guys really good right now, you still got personal loans and credit cards that kind of weighing down that overall growth rate. I think you guys said it was up 25% sequentially. Just curious if you could kind of unpack that. If you could talk about kind of progression month-to-month, how that's looked thus far into January? And if you could maybe piece out which of the two is rebounding quicker?

We're continuing to see good improvement incrementally and sequentially, whether it be kind of month-to-month or quarter-to-quarter. So we continue to see improvement trends. In both of those businesses, we've gone from most of the clients being out of the channel, just a quarter to two quarters ago to pretty much all of the clients being back in the channel now. And now it's a matter really of them continuing to expand their filters and their budgets, they're spending. And they'll do that as the economy improves and as they get more comfortable with the environment. And in terms of between the two, I don't know, Greg, it's been pretty similar trends in the two in terms of the -- again, and the other thing Greg pointed out, they're up 80% from the June quarter, which was the bottom of the two. But Greg, do you have any more for John, on the split between the two. But from a -- looking at the business progression from my seat, and the numbers are pretty similar to pretty similar progression.

Yes. I mean, for the most part, personal loans has probably progressed a little bit faster, but we're seeing progression across all our both credit cards and personal loans. And John, just to give you a little color, what we saw in the June quarter of last fiscal year, we were down combined 70% on those businesses. In the September quarter, we were down 60% of those businesses. This quarter year-over-year, in the December quarter, we were down about 42% year-over-year.

Okay. Great. I'm in the right direction. Last question for me. On Home Services, you guys I think your -- the core base business you guys have always had -- was growing nicely, and then it seems like Modernize's, obviously, to seeing that growth up of debt. You guys have done your integration work. But I know once you've done some of the integration, it gets tough to kind of piece out which is which at this point. But am I kind of in the right territory, calling for like 30%-or-so organic growth out-of-home services. Is that in the right kind of ZIP code?

It's just -- I think you hit on it, John. It's hard for us to pull it apart. We had an integration plan for Modernize before we even closed the deal. And we hit the ground integrating. And so just very tough for us to suss out what's organic cost is not organic, but I can tell you that it's good, strong double-digit organic growth. I don't know that it's -- I don't know, 30% is accurate or not, but it is good, and the organic growth is coming from combination. And by the way, that organic growth is coming in a COVID environment. And it's -- but we're seeing it from a lot of great synergy work where 1 plus 1 really is equaling 2.5 or more, as well as some good strong execution work on the core business, expanding that core business. But we are seeing good organic growth as well as, of course, the inorganic growth and synergies are working out extraordinarily well, and we're way ahead of our schedule and our expectations. So we could not be happier to Modernize, and we couldn't be more excited about Home Services overall. It's just a massive market. Probably our biggest TAM and one where we think we are pretty uniquely suited to continue to grow at really good strong rates and deliver great results for the clients, for our media partners and financially. So I love where we are in Home Services, super excited about Modernize and could not be happier with how that business has gone for us and about our future prospects with it. And yes, we are seeing good, strong organic growth as well.

Yes. Great work across the board. And once you guys get personal loans and credit cards back as a tailwind, you guys are going to really be cooking. So nice work.

We'll go ahead and take our next question from Jason Kreyer with Craig-Hallum.

Just taking the Home service for a second. The -- just is there anything you can call out in terms of specific categories that you operate in that are showing particularly strong growth right now? And then kind of along with that, just any lingering COVID impact on any specific categories that aren't performing well because they're inside that may have some pent-up demand in the next couple of quarters?

Yes. Absolutely. We kind have kind of six core trades that we're in, in Home Services, and those are all going super well. And they're -- and I think where trades we've talked about before, but the -- and then we have a number of growth trades that we're expanding into, which count somewhere between 5 and 10 more that matter. And then we have a tale of other growth trades that we're going to get into a trade would be like home security, solar, HVAC roofing siding, those would be what we would call trades in Home Services. In general terms, most of the growth right now is coming in the core trades. And just better executing synergies in the core trades as we execute to scale those. And then we're seeing good progress in the growth trades that I talked about in terms of continuing to expand the footprint. And we believe we can be in dozens of trades. So we think we're very early in our migration and our journey to get our footprint expanded where we want it to be in Home Services. Just why I talk about it being such a big TAM. In terms of general trends, you are -- you touched on it. If there's a general trend, it is besides the fact that strong growth in the core trades due to the synergies and bringing our media to their clients and their media to our clients and product back and forth in executing the synergies, it would be that the internal projects tend to be softer. The end the house projects than the outside the house of projects. So we are seeing greater strength in projects that involve the exterior, and there is still a lot of softness in projects that involve the interior because, again, end folks just don't want strangers in their home with COVID. So again, we do believe that the growth that we're seeing, while strong in Home Services is actually reasonably constrained by COVID and its effects on demand and consumer activity in a number of the trades. And if you'd asked me the trades, I'd say it's probably half and half, Greg, is that -- I mean, I'm sure that's not 100% accurate, but it's probably a good enough in terms of how many trades we're in that are exterior, how many trades were that are interior.

I think that's right.

I appreciate that. Greg, one for you. Just curious if you had any call-outs on the margins we talk a lot about your semi-fixed cost operating structure. And typically, when we see the growth acceleration like we did this quarter, the gross profit usually follows that. Kind of broke away from that a little bit. So you saw the nice profit on the bottom line, just not as much quarter-over-quarter on the gross margin side. Just wondering if there's any influencing that number?

No, not really, Jason. On a quarter-over-quarter perspective, it's really, as we talked about, it's a seasonally lighter quarter. So it's really the loss of top line leverage on a very similar fixed cost from that standpoint.

We'll go ahead and take our next question from Jim Goss with Barrington Research. Please go ahead.

Okay. The half a dozen core segments you're operating in the Home Services area. Could you say about what share of the revenue base in that categorization are in those six segments? And then also in terms of the likelihood of how you pace yourself in executing a growth strategy in that area? Understandably, there are hundreds of categories you get into. How do you intend to pursue it in terms of selectivity within those categories before you and filling those out before you move into new sub verticals because I'm sure you can't be spread to then and be effective.

Yes. I don't have the exact numbers in terms of that split in front of me, Jim, but it's more than 50% of the revenue today in Home Services is in our six core trades. The trades that are -- have gotten to some semblance of scale, although they are still well short of the scale we believe they can eventually be and still ramping pretty aggressively for us. In terms of it, you're exactly right, part of the magic in executing in that business is making sure that we have a smart alignment of resources with how much goes into scaling the core trades, how many new growth rates do we take on? And at what rate do we pace them with how many resources. And that's a decision that's done very iteratively with that management team and that leadership group. But you can imagine, in general terms, it has to do with the attractiveness of a new trade to us, generally speaking, which usually has to do with marketing budgets, annual marketing spend, lifetime value of customers, media availability and media economics. These are the main kind of screens we put them through. And then there's the tactical considerations like have we been able to sign enough a clients in a particular trade to give us critical mass of demand that we can then use to get media efficiency that we can then use to go get more budget that we can use to get more media efficiency and start working that virtuous cycle up. And so, it's a combination of top-down assessment of the attractiveness based on the metrics that matter to our business. And so, every Home Services trade is not attractive to QuinStreet. We need things like strong lifetime value, strong marketing spend, good media availability in digital and the ability to make the media economics work in digital. And then sort of top down. But again, even with that, you go from there being hundreds to, we think, dozens that we can be in. Doesn't hunters that exist in dozens we can be in. And then, again, it's the tactical work is as you have some groups focused on the core, some groups focused on the new, how much progress do we make with specific client demand which will put -- if you’ve got seven candidate new growth verticals you're working on at any given moment. And then one of when you happen to sign a national service provider or a superregional service provider, then that was going to get more attention. And that sometimes just has to do with pipeline flow, client activity, client personnel, client priorities, things like that. So that's how we look it.

Okay. And just a couple of other things. One other thing in Home Services, I was wondering if you could describe the competitive situation there, now that you've merged one of your existing key competitors. How does that stack up relative to what you do with on the Insurance side? And then on the Financial Services area, within personal loans and credit cards, is there a concentration with a number of large customers in the way progressive and a couple of other insurance companies factor in, importantly, in the your insurance group?

Sure. In Home Services, it’s much, much less competitive intensity than we see in most of our other verticals, including Insurance, of course, which is highly competitive. The -- it's a tougher business to execute in because it is represented by so many more service -- service trades and so therefore, a lot more clients. You have to be able to go kind of multi-vertical in Home Services. And it's the clients themselves are much more fragmented and the media is much more fragmented. It aligns very well with our operating capabilities and our technology platform, which was built to be multi-vertical. So we think we're advantaged to there, and I think that helps explain why there's less competitive intensity. I mean, in Insurance, you got -- if you get the 10 biggest carriers, you can make an insurance marketplace. You might argue do that with less than that. In Home Services, you get 10 clients, you haven't even started. You have -- you kind of have not gotten going. Maybe if they're all in one trade, you can get going. But we have -- we think we have to get to thousands of clients in Home Services to eventually get where we want to get where I think we're already out of thousand versus, say, 50 carriers in Auto Insurance, which includes a lot of smaller carriers. So very different operating requirements aligns very well with our technology, our capabilities and the way we implement and execute. And I think that's part of the reason we see a lot less competitive intensity. The biggest player in the vertical, of course, is Home Advisor Angie HomeAdvisor or Angie Services, very different model than us. Obviously, they are in hundreds and hundreds and hundreds of trades, and they are much more…

And we'll go ahead and take our next question from Eric Martinuzzi with Lake Street.

A follow-up there on the personal loans, credit card side of the house. Just wondering, you've obviously seen a sequential step-up there on the demand side. If we were to focus on one or two kind of leading indicator, does that business get better if we're to look at stimulus or employment numbers or vaccine rollout? What's a good indicator as to where that business is going?

Yes, Eric, I think the best indicator is probably just economic activity and employment. As the employment numbers get stronger, then consumer credit will tend to get stronger and demand in those businesses tends to get stronger. Interestingly, stimulus doesn't really help persons because it tends to -- people tend to put off personal loan if they think they're going to get a stimulus check. It's probably good for credit cards, though. So they don't operate -- they don't -- they're not lockstep in terms of what's good for them. But I would say that it's -- the best indicator because both of these, again, that's why we refer to them as credit-driven businesses. As anything that makes consumer credit better broadly in the Middle America, anything that makes credit -- consumer credit better in Middle America is going to make those businesses stronger, credit cards and personal loans.

Okay. Curious to know, this one is for Greg. It looks like based on the guidance, we've got a nice adjusted EBITDA margin expansion in -- baked into the Q3 guidance. Now I know Q3 is seasonally, I think it's your strongest. Is that just a result of the incremental step-up in revenue? Or are there other things going on in that margin expansion?

Yes, Eric, the biggest component is just exactly what you said. We're in -- our top line leverage-driven model. So as the more revenue you drive, the more margin or you see the margin expansion happened because you have a very similar semi-fixed cost base. So really, the margin expansion that you're seeing is driven by a better top line.

Okay. Right. And then lastly for me. We -- we're benefiting from a shift to digital marketing over the past three quarters. It's -- certainly, you guys are benefiting most digital marketing, performance marketing, business models are benefiting. In your world, specifically Financial Services, are you concerned at all about swings back, economy reopens, more sporting events, more live broadcast. Is there a shift back to traditional advertising and away from performance marketing is at risk here?

It's a great question. And the short answer is we dig into this with clients is no. These do not appear to be temporary shifts. These appear to be and make sense to be, if you look at kind of share of spend based on activity in the channel, permanent changes that we've accelerated the already -- the migration curve that was already happening. So we do not expect that. We expect that these shifts will stay with us. And that this has just kind of taken a curve that was already moving up into the right in digital marketing and increase the slope of it because it caused companies to have to go faster and to adapt faster. So we do not expect a meaningful shift back to nondigital channels.

And just to add on to that, Doug, as well as, Eric, we've been growing even pretty pandemic. You've been seeing that shift. This is just an acceleration of that shift. Of offline online. You could see that in our three year compound annual growth rate in our business now, our current footprint, has been 30%. So we've seen that -- that shift has been happening, and we've seen long-term growth out of those businesses already.

We'll take our next question from Chris Sakai with Singular Research.

Just had a question. I just had a question on for your Auto Insurance and Home Services are growing pretty well now. I wanted to see what you guys thought about post pandemic. Will you -- do you think you'll see maybe a switch maybe to more credit-driven businesses growth? And less of the Auto Insurance and Home Services. I just wanted to see what you thought there.

Hard to say, Chris, we think some of the -- you can't get to put the genie back in the bottle on a lot of the shift that's happening to digital that was spurred by or accelerated by COVID. So as I responded to Eric's question, we do not expect a significant retrenchment of the nondigital channels post COVID. Whether or not we'll still be growing it. These rates was going to be, I think, less COVID-related than other activity and other initiative related as we continue to expand -- as we continue to do things that we're doing that are allowing these clients to spend more in digital. I think those will drive as much of the activity as COVID has spurred the inflection in that activity. I do expect that the credit-driven businesses will return to growth as the economy improves for sure, so they will contribute more to growth. And then, of course, we will lap the Modernize acquisition on July 1. And so I think that net-net, I like the timing of the credit-driven businesses and the progress we've been making there and what we're seeing in front of us at Insurance, that what clients are telling us they're going to do and the momentum we have with the initiatives. So we feel very good about our growth prospects for as far as we can see.

Okay. All right. And then one thing I just wanted to ask about the Home Services segment. Could that be, I guess, is it related or negatively related to the interest rates. So as interest rates are down, Home Services up and vice versa.

Not clear. I would say that I don't expect that would be a big impact because we're still so early in the penetration of Home Services. Home Services is a massive market and we're early in the penetration, performance marketing and digital advertising penetration, insurance still after a couple of clients. And the Home Services is not earlier than we are in Insurance. So I think that macro effects like that are unlikely to be a big driver relative to just continued natural migration and penetration of marketing budgets for digital performance marketing going forward. So I don't -- I would not expect -- we don't expect that, that's a major driver of these demand for these services now.

And it appears that we have no further questions at this time. And everyone, there will be a replay available for this call. It will be available today at 7:00 p.m. Central Time, and it will -- the availability will end on the 10 of February 2021 at 7:00 p.m. Central Time. The phone number you can call is 1 (719) 457-0820. Toll free is (888) 203-1112, you will enter a passcode, and that passcode will be 1730393. Thank you so much for your participation. You may now disconnect your phone lines.