Good day, and welcome to the QuinnStreet Third Quarter Fiscal 2022 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Hayden Blair, please go ahead, sir.

Thank you, Jenny. Thank you to everyone joining us as we report QuinnStreet's Third Quarter Fiscal year 2022 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. Our 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.quinnstreet.com. With that, I will turn the call over to Doug Valenti. Please go ahead, sir.

Thank you, Hayden. Welcome, everyone. Increased claims costs continue to suppress insurance carrier marketing spend and in turn, revenue in our auto insurance client vertical. The good news is that those effects on our insurance clients and their business economics are transitory. Further good news, is that revenue and our insurance client vertical appears to be at or near a bottom. Carriers are working diligently through the well-honed process of rerating or repricing their policy products to reflect the new environment. We now have a number of examples of successful client rerating where they have reestablished or increased marketing spend that had been previously paused or reduced. That's another way the environment and insurance remains generally complicated and dynamic, but the client back out to the other side of this adjustment and transition period certainly appears to have begun. Importantly, we and carriers continue to expect strong marketing spend and consumer shopping on the other side of this rerating cycle. Carrier economics will be renewed and consumers are expected to shop aggressively in response to higher rates. As a reminder, our auto insurance revenue doubled within 12 months of the end of the last major rerating cycle. In the meantime, revenue from our non-insurance client verticals continues to perform well. It represented 50% of total revenue and grew 35% year-over-year at the quarter. All in all, we remain highly enthusiastic about our business prospects and are focused on the projects and initiatives to achieve them. Overall, I'm really pleased with how our team and business are navigating and performing in this complicated environment. Strong trends in our non-insurance client verticals, combined with the eventual resurgence of insurance bode well for future. A return to insurance revenue, just to the levels prior to current industry challenges would imply total annual company…

Thank you, Doug. Hello, and thanks to everyone for joining us today. Revenue in the March quarter declined 2% year-over-year to $150.7 million. GAAP net income was $2.2 million or $0.04 per share. Adjusted net income was $4.9 million or $0.09 per share. Adjusted EBITDA was $6.9 million. Looking at revenue by client vertical, our financial services client vertical represented 72% percent of Q3 revenue and declined 7% year-over-year to $108.3 million. Doug will cover the details of what is going on in the insurance client vertical in his remarks. Within our credit driven client verticals of personal loans and credit cards, progress and revenue growth continue well ahead of our initial outlook for the year growing 89% year-over-year and eclipsing a $100 million annual run rate in fiscal Q3. Our home services client vertical represented 27% of Q3 revenue and grew 16% year-over-year to $40.7 million. We continued to expect this early stage-client vertical to deliver double-digit organic growth for as far as the eye can see. Other revenue which consists primarily of performance marketing agency and technology services with the remaining $1.7 million of Q3 revenue. Turn of the balance sheet, we generated $3.6 million in normalized free cash flow and closed the quarter with $109.5 million of cash and equivalents and no bank debt. In summary, we continue to be pleased with our diverse footprint of client verticals. Non-Insurance client verticals grew at 35% year over year in the quarter, and we believe that will support a period of fantastic growth when we get to the other side of this challenging macro environment insurance. In the meantime, we will continue to focus on execution and expect to aggressively execute on our recently authorized share repurchase program at current valuation. With that, I'll turn the call over the operator for Q&A.

[Operator Instructions] And we'll go first to John Campbell of Stephens.

I might have missed this, but could you guys maybe talk a little bit more, maybe unpack the guidance and specifically just around the insurance trends. I know the FY3Q is your seasonally strongest quarter, so I'm assuming that's down from that level. Maybe if you could just talk to what you're considering on the year-over-year decline basis?

Yeah. What's in the guidance for this quarter is really what we've been experiencing since February and that's pretty flat insurance revenue. So we have been for the past four months or so and expect to be through the end of the fiscal year through June flat in insurance, which does beat by the way, typical seasonality in terms of the way we know it normally works. As you know, January was an outlier, but February forward has been plus or minus a very small number in terms of the revenue and insurance. And it's one of the reasons we point out that we feel like we're bouncing along the bottom here and that combined with recent moves by some of the insurers and recent announcements by some of the insurers of success in rerating and intentions to begin to raise their marketing budgets in the second half of 2022. One of the reasons we, again, have talked about we're certainly believer at or near bottom and bouncing along that bottom. That's a main component. The other businesses in the guide we're assuming are showing pretty much the same pattern they've been showing for the past year or so in terms of their growth rate year-over-year, but with some seasonality associated with that to your point, they move from the March quarter into the June quarters, typically a little bit down because the strength of the March quarter. Pretty normal recent patterns, which have been quite strong in non-insurance and flat and insurance because that's what we've seen since February and that's what we are forecasting and as we get indications and run rates for the business through June.

Okay. That's helpful.

Let me add one other thing, John, I'm sorry, just so I don't forget to mention this. The remaining we're -- the pressure we're seeing on margins associated with insurance is twofold. One is, of course, we've lost a lot of top-line leverage because of the loss of that revenue, and that's reflected in the guide because we're not restructuring to accommodate that. We are investing through this cycle because we know it's temporary, we want to be ready to take full advantage of the other side. But the other point is with the remaining insurance revenue auto insurance revenue, which is dominant, of course, with us pricing and filter. Filters are tighter and pricing is down so we're getting a little bit of a double whammy on margins right now that will cure itself as we come out of this period in insurance.

Okay. That's helpful. Then a similar vein around just the year-over-year growth of insurance, you guys don't specifically break that at all. We've done back of the nap in math, I feel like we've gotten pretty close to that over time. But if I look at this on a two-year stack obviously, FY21 was a very good year, but on FY20, even with the decline in insurance here, it looks like you're still may be up 10% or so, 11%, 12% or so over the last two quarters relative to FY20, is that directionally correct?

I don't have that in front of me, John. Greg, do you have that in front of you?

No, I do not have that in front of me right now. I apologize, John.

Okay. That's fine, but I think the point I'm making here is it just feels like there's some investor concerns around potentially over-earning an FY21 getting outsize industry trends and helping on the insurance side. But it sounds like for you guys that you really do believe that the transitory issue, otherwise you would be maybe making some cost measures, you wouldn't have a buyback in place because of it. Is that fair to say?

Yeah, absolutely. I don't know where that comes from, by the way. That's not consistent with anything that we hear from, know about our clients plans and business, anything any of our clients have said about their business and their intentions and their plans, and anything we have that we are doing that would have an impact on that. That does not sync up at all with reality as we know it and expect it. I don't know where that came from. I know sometimes the investment community people have something that takes on a life of its own, but that has zero credibility.

And we'll move next to Jason Kreyer of Craig-Hallum.

Thank you, gentlemen. Apologies. I hopped on late, so I apologize if you've already touched on this. But given you've been at the auto insurance business for a long time, I'm just curious when you start to see contraction on that acquisition spend, does that usually happen across one or two large carriers and then flow into the smaller carriers? And then if there's a specific pattern on how that flows across the industry? Can you talk about where we're at in terms of your customer base, large and smaller or are you seeing that across the entire stack?

That's a great question, Jason. I'm going to talk generically because of course, we are very careful to try not to talk about specific clients for obvious reasons, but generally speaking, they don't all act at once. Very often there will be and I'm talking mainly the big carriers by the way, which really dominate the market so you did mention the smaller carriers, but they're relatively unimportant in the overall scheme of things in terms of supply and demand and media pricing and utilization. So, I'll focus mainly on the larger clients who dominate our budgets and dominate everybody's budgets in this channel. Typically, they don't all act at once because they all have very different economics and very different pricing and very different models and do not all even all in the same states as you know. That does tend to be a kind of a ripple effect that you will get some that will move sooner than others and then you'll get they'll raise prices sooner. They'll initially lose a little share because of that and then very quickly, thereafter, you'll see others begin to raise their prices as soon as they can and/or stop marketing where they haven't yet because they can't make any money at the current pricing. Then you'll see that we will turn a little bit and the ones that initially raise prices and maybe lost a little bit of conversion share, begin to start gaining traction because they're present in a market where others aren't. And then they may gain even more share when the others come in with their price hikes because then you start seeing consumers start to shop. You get this dynamic of prices going up and pausing and stopping and across various clients and it ripples through the…

Always appreciate the incremental color. Thank you for that. I do have a follow up, just given the choppy backdrop in auto insurance, can you maybe talk about what you think that means for QRP? Is there an opportunity for carriers to view this as an opportunity in more challenging times and lean into QRP more in this environment than they would in a more robust environment?

I think the momentum and interest in QRP is super high regardless of the environment and we've spent some time in the past month or so, and I have personally visiting with big partners to reconfirm that and I would say never seen more enthusiasm from the partners that matter most for the long-term success of that product and really leaning into help with that. That said, we're seeing a little bit -- while we are continuing to be up to the right sequentially every month and pretty significantly so, in terms of the activity and volumes through QRP [indiscernible] through QRP and last month was our biggest month. That's the slope of that pretty steep ramp has certainly been diminished by the current period and for these reasons. The agencies themselves are losing budget and carrier coverage as carriers pull out of certain states until they get rerated and that just diminishes the activity level and the economics and the opportunity for those agencies. Also, imply on what I just said, there are carriers who aren't as active on the platform because they are still getting rerated in certain states and so we've lost that activity. We have definitely lost activity in the market on both the agency and the carrier side, which has reduced the slope, but the slope is still well up into the right. Again, our outlook in the overall scheme of things for QRP remains as good or better than it ever has been. I wouldn't say that this bad market has necessarily helped us in QRP, but it hasn't turned the slope downward and has not diminished anybody's medium to long-term, depending on how you define that and I define that in quarters and years, not decades on enthusiasm for the product and what it means to the agent channel.

Perfect. Thanks for all your comment, Doug. Appreciate it.

Thank you, Jason.

And we'll go next to Jim Goss of Barrington Research.

I agree, Doug, that was a great description of the process. It also sounds like it could be quite extensive and quite variable. Now, your opportunity in terms of marketing costs might be less tied to how well the insurance carriers are doing than just whether there's a level of activity of the search process. I'm wondering, is there some phase of this that's better or worse for you and how long do you think the duration of this process might be?

Yeah, thank you, Jim, it's a good question. I don't think we know how long it will be. That's why I gave, and again, I don't want to predict it because I don't think anybody can precisely. That's why I gave the couple of data points I did in terms of what at least one of our competitors felt confident enough to say and what one of the largest carriers just said, I think it was yesterday in their call. But I would say that what we're seeing by a way of consumer activity is that we did see a pretty normal shopping cycle in the February, March timeframe which we expected from consumer activity. I think, Greg, correct me if I'm wrong, but I think we had a peak volume ever of increase or clicks through our marketplaces in auto insurance. Was that March, Greg?

Yeah, that's correct.

We're seeing pretty strong consumer activity. It was on trend line, it was in the right cycle time. We haven't seen any diminishment from consumer interest. We did see a reduced conversion rate of that activity because there were less offerings. There were fewer carriers in the market for all the reasons we just talked about to match to those consumers or for those consumers to choose from. What we expect as we -- dynamically, as you think about the rating process and the rolling rating process that I described, what we have seen historically, and there was 2016 when there was a pretty major rerating cycle and what carriers have described to us based on their experience, is that as companies increase their rates and as more companies increase their rates. Remember, I noted that most companies now have either re-increased their rates, or they're imposing their aggressive marketing activity until they do get their rates increased. What we're seeing now is we're on the second half of the wave where the first half was people closing down their activity because their rates economics didn't work and now we're beginning to see people either begin the rerating process or having finished the rerating process and begin to increase their marketing spend. As I said, we now have examples of the early movers getting to that point. More and more consumers are going to get their rates increased. When those consumers get their rates increased, a very large number of them go in shop, and when they go in shop, it increases activity pretty dramatically and large portion of the folks that go in shop are going to end up on our marketplaces. That's why you keep hearing us talk about, "Hey, the other side of this, the other second half of this cycle, and the other side of this cycle get very good for us because you have the combination of carriers who have increased their rates so that their economics work and they have therefore the surplus spend on marketing combined with a motivated consumer seeking alternatives because their rates just got increased." That creates a bit of a supercyclic. As I mentioned in my prepared remarks, in 2016 the last time we saw a cycle like this within 12 months at the end of that cycle whenever that happens it's assumed that what the other, our Confederate said that January is that, then say within 12 months of January, our auto insurance revenue had doubled because the combination of those two factors. We expect and our clients have articulated to us that they expect a very strong cycle for those very reasons at the end of this period as well.

Okay. Thanks for that. I wonder too if there are things to describe the rest of the financial service besides insurance, how that is proceeding. And also, what are the key drivers right now in the home services category? Are there certain groups that are carrying the increases or creating the increases rather?

Yeah. In terms of rest of the financial services, as Greg mentioned if you look at the credit-driven verticals, which are the next two biggest verticals within financial services for us, personal loans and credit cards those two businesses combined grew, I think, Greg, 85% year-over-year in the quarter?

89%. Yeah, 89%.

And we're run rating it well over $100 million per year in annual revenue in the quarter so those businesses continue to do very well as we see increased consumer activity broadly in the economy, and therefore, with that activity comes the requirement or desire to access credit and to use credit. I think we feel very good about the continued outlook for those businesses and that dominates the rest of the financial services. Home services drivers, it's we're in a lot of different trades, a trade would be like window replacement, walking tubs, home security, solar. We're in a number of trades in home services and we're seeing -- we're performing as well as we are despite the fact that the market's not easy right now there are still a lot of supply chain problems, labor problems, installers need to be hired sometimes. Our clients are shutting down in various geographies because they don't have enough installers or they're not able to fill orders because the supply chains not yet working like it should be or not caught up. We're seeing good activity generally across the spectrum of trades that we're in. I think we're in about 10 trades, notionally, maybe 12 and in four of them we're pretty big in pretty mature in. For the most part, we're seeing activity across all those trades, but that activity has been constrained and complicated by again, supply chain and labor issues. Despite that, we continue to grow at a good clip and we continue to generate good margins there. We expect that as we continue to come out of this period, this period being COVID and supply chain issues and COVID-driven potentially, partially COVID-driven, labor shortages, that we're going to get more and more wind at our back and all…

[Operator Instructions] We will go to Chris Sakai of Singular Research.

I just had a question on insurance. How much of that was financial services?

How much of financial services does insurance represent?

Right.

Is that the question?

Yeah.

Historically it's been about 70%, 7-0 percent, of financial services. With the downturn, Greg, do you have a round number for what insurance representative financial services this past quarter?

Yeah, it's pretty similar Doug. It's 70% of financial services right around there and it can vary quarter to quarter, but as we discussed and you can see in the bullets of the press release, it's 50% of total revenue. Non-insurance businesses are now 50% of revenue they grew with 35%.

Okay. Great. My other question was on home services and I know in previous calls you might have talked about this, but I can't remember for sure. But we're seeing now we're in a rising rate environment, so how would this affect home services if at all? And what other time periods if you can remember that home service, how did a rising rate environment affect home services, and what was the outcome?

Yeah. We just went through an analysis of this because we were doing some contingency planning partly as we were putting together the cash flow models for the buyback just trying to consider worse case scenarios to make sure we still had lots and lots of more margin on terms of cash to fully execute the buyback and we did some planning around recession and an interest rate-driven recession. As we went through that process with the team the answer was pretty flat. Not significantly down, not significantly up, we have some trades within home services that we would expect to be negatively impacted and we have some trades in-home service that we expect to be positively impacted. There are a lot of different themes to that because home services is quite a diverse set of trades. But a simple example I might give you is that we are likely to see fewer new home buyers, which would mean that projects to work on and remodel dress up existing homes many times will go up there. The general answer is, in a recession or rising rate environment which could push us to a recession just rising rates alone have very little impact generally which still rates that aren't going to have a big impact we don't believe on any of our businesses. But to the extent rates get quite high and or drive a recession, the business we think would suffer most would be credit cards, where we would expect to see a pretty significant downturn. We've modeled that into our downside scenario plannings and then I guess home services, Greg, was the other one that we had relatively flat to down as much as 20% in that environment. Is that right?

That's correct. To add on to that we did in that contingency planning that said if you look at recessions historically that we've been -- we've been in-home services for a long time. We have not seen an impact from historical recessions on the growth of our home services business.

Yeah and let me say this then don't take that -20% as a sure thing. That's what we're trying to be conservative and come up with a -- we were doing modeling to make sure massively protecting our cash position and making sure we're leaving lots and lots of cushion, which we did and which we have. But we have not seen historically in the last recession, a meaningful, negative impact on home services. I think it's for a couple of reasons. One is, we're not so penetrated that the macro effects are what rule in-home services and I don't expect we will leave for a very long time. The second is, as I mentioned, home service is a very diverse set of trades and what we will do is we will focus on the trades least affected and/or even that get tailwinds from recession, and we will deemphasize those that are affected negatively. We have levers that we can pull given the nature of that marketplace just like we do anyway. But again, if you wanted to, what we think was a worst-case downside for again, very conservative contingency planning for assessing cash positions and making sure we had lots and lots of room for cash no matter what happened. I think we had it worst case down 20%.

Okay. Great. Well, thanks, Doug.

Thank you, Chris. I might also add by the way, while we're talking about the recession that generally speaking historically, and we've been in insurance a long time. Auto insurance does very well in a recession because consumers shop aggressively to reduce their costs across the board, including the requirement to spend on auto insurance and driving activities reduced. So auto insurance carriers tend to do well in recessionary type periods generally speaking.

[Operator Instructions] This concludes today's call. You may now disconnect.