QUINSTREET, INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended
This Quarterly Report on Form 10-Q contains "forward-looking statements" that
involve risks and uncertainties, as well as assumptions that, if they do not
materialize or if they prove incorrect, could cause our results to differ
materially from those expressed or implied by such forward-looking statements.
The statements contained in this Quarterly Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are often
identified by the use of words such as, but not limited to, "anticipate,"
"believe," "expect," "can," "continue," "could," "estimate," "expect," "intend,"
"outlook," "may," "will," "plan," "project," "seek," "should," "target," "will,"
"would," and similar expressions or variations intended to identify
forward-looking statements. These statements reflect the beliefs and assumptions
of our management based on information currently available to management. Such
forward-looking statements are subject to risks, uncertainties and other
important factors that could cause actual results and the timing of certain
events to differ materially from future results expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified in "Part II -Item
1A. Risk Factors" below, and those discussed in the sections titled "Special
Note Regarding Forward-Looking Statements" and "Risk Factors" included in our
Annual Report on Form 10-K for the fiscal year ended
the
of this report. Except as required by law, we undertake no obligation to update
any forward-looking statements to reflect events or circumstances after the date
of such statements.
Management Overview
We are a leader in performance marketplaces and technologies for the financial
services and home services industries. We specialize in customer acquisition for
clients in high value, information-intensive markets or "verticals," including
financial services and home services. Our clients include some of the world's
largest companies and brands in those markets. The majority of our operations
and revenue are in
We deliver measurable and cost-effective marketing results to our clients,
typically in the form of qualified inquiries such as clicks, leads, calls,
applications, or customers. Clicks, leads, calls, and applications can then
convert into a customer or sale for clients at a rate that results in an
acceptable marketing cost to them. We are typically paid by clients when we
deliver qualified inquiries in the form of clicks, leads, calls, applications,
or customers, as defined by our agreements with them. References to the delivery
of customers means a sale or completed customer transaction (e.g., funded loans,
bound insurance policies or customer appointments with clients). Because we bear
the costs of media, our programs must result in attractive marketing costs to
our clients at media costs and margins that provide sound financial outcomes for
us. To deliver clicks, leads, calls, applications, and customers to our clients,
generally we:
• own or access targeted media through business arrangements (e.g., revenue
sharing arrangements with online publisher partners, large and small) or by
purchasing media (e.g., clicks from major search engines);
• run advertisements or other forms of marketing messages and programs in
that media that result in consumer or visitor responses, typically in the
form of clicks (by a consumer to further qualification or matching steps,
or to online client applications or offerings), leads (e.g., consumer
contact information), calls (from a consumer or to a consumer by our owned
and operated or contracted call centers or by that of our clients or their
agents), applications (e.g., for enrollment or a financial product), or
customers (e.g., funded personal loans); and
• continuously seek to display clients and client offerings to visitors or
consumers that result in the maximum number of consumers finding solutions
that can meet their needs and to which they will take action to respond,
resulting in media buying efficiency (e.g., by segmenting media or traffic
so that the most appropriate clients or client offerings can be displayed
or "matched" to each segment based on fit, response rates or conversion
rates);
• through technology and analytics, seek to optimize combination of
objectives to satisfy the maximum number of shopping or researching
visitors or consumers, deliver on client marketing objectives, effectively
compete for online media, and generate a sound financial outcome for us.
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Our primary financial objective has been and remains creating revenue growth
from sustainable sources, at target levels of profitability. Our primary
financial objective is not to maximize short-term profits, but rather to achieve
target levels of profitability while investing in various growth initiatives, as
we continue to believe we are in the early stages of a large, long-term market
opportunity.
Our business derives its net revenue primarily from fees earned through the
delivery of qualified inquiries such as clicks, leads, calls, applications, or
customers. Through a vertical focus, targeted media presence and our technology
platform, we are able to deliver targeted, measurable marketing results to our
clients.
Our financial services client vertical represented 66% and 74% of net revenue
for the three months ended
vertical represented 33% and 25% of net revenue for the three months ended
marketing agency and technology services, represented 1% of net revenue for the
three months ended
revenue from sales to clients in
One client in our financial services client vertical accounted for 25% and 15%
of our net revenue for the three months ended
other client accounted for 10% or more of our net revenue for the three months
ended
Trends Affecting our Business
Client Verticals
Our financial services client vertical has been challenged by a number of
factors in the past, including the limited availability of high quality media at
acceptable margins caused by the acquisition of media sources by competitors,
increased competition for high quality media and changes in search engine
algorithms. These factors may impact our business in the future again. To offset
this impact, we have enhanced our product set to provide greater segmentation,
matching, transparency and right pricing of media that have enabled better
monetization to provide greater access to high quality media sources. Moreover,
we have entered into strategic partnerships and acquisitions to increase and
diversify our access to quality media and client budgets.
In addition, within our financial services client vertical, we derive a
significant amount of revenue from auto insurance carriers and the financial
results depend on the performance of the auto insurance industry. For example,
weather-related and supply chain events have led to increases in insurance
industry loss ratios, which decreased our clients' advertising spending and
thereby had a material adverse effect on our business.
On
improvement performance marketing company, to broaden our customer and media
relationships in the home services client vertical. Our home services client
vertical has been expanding over the past several years, primarily driven by
successful execution of growth initiatives and synergies with the Modernize
acquisition.
Our business also benefits from more spending by clients in digital media and
performance marketing as digital marketing continues to evolve.
Acquisitions
Acquisitions have historically been, and continue to be, an important element of
our overall corporate strategy and use of capital. We have completed several
strategic acquisitions in the past, including the acquisitions of Modernize,
Corp.
("MBT") completed in fiscal year 2019.
Development, Acquisition and Retention of High Quality Targeted Media
One of the primary challenges of our business is finding or creating media that
is high quality and targeted enough to attract prospects for our clients at
costs that provide a sound financial outcome for us. In order to grow our
business, we must be able to find, develop, or acquire and retain quality
targeted media on a cost-effective basis. Consolidation of media sources,
changes in search engine algorithms and increased competition for available
media has, during some periods, limited and may continue to limit our ability to
generate revenue at acceptable margins. To offset this impact, we have developed
new sources of media, including entering into strategic partnerships with other
marketing and media companies and acquisitions. Such partnerships include
takeovers of performance marketing functions for large web media properties;
backend monetization of unmatched traffic for clients with large
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media buys; and white label products for other performance marketing companies.
We have also focused on growing our revenue from call center, email, mobile and
social media traffic sources.
Seasonality
Our results are subject to significant fluctuation as a result of seasonality.
In particular, our quarters ending
typically characterized by seasonal weakness. In our second fiscal quarters,
there is generally lower availability of media during the holiday period on a
cost effective basis and some of our clients have lower budgets. In our quarters
ending
better media availability and often new budgets at the beginning of the year for
our clients with fiscal years ending
Our results are also subject to fluctuation as a result of seasonality in our
clients' business. For example, revenue in our home services client vertical is
subject to cyclical and seasonal trends, as the consumer demand for home
services typically rises during the spring and summer seasons and declines
during the fall and winter seasons. Other factors affecting our clients'
businesses include macro factors such as credit availability in the market,
interest rates, the strength of the economy and employment.
Regulations
Our revenue has fluctuated in part as a result of federal, state and
industry-based regulations and developing standards with respect to the
enforcement of those regulations. Our business is affected directly because we
operate websites and conduct telemarketing and email marketing, and indirectly
affected as our clients adjust their operations as a result of regulatory
changes and enforcement activity that affect their industries.
Clients in our financial services vertical have been affected by laws and
regulations and the increased enforcement of new and pre-existing laws and
regulations. The effect of these regulations, or any future regulations, may
continue to result in fluctuations in the volume and mix of our business with
these clients.
An example of a regulation that may affect our business is the Telephone
Consumer Protection Act (the "TCPA") that affects telemarketing calls. Our
clients may make business decisions based on their own experiences with the TCPA
regardless of our products and compliance practices. Those decisions may
negatively affect our revenue and profitability.
COVID-19
We continue to monitor the impacts from the COVID-19 pandemic that may
unfavorably affect our business, such as reductions in client spending on
marketing and advertising, drops in media availability or performance,
deteriorating consumer spending, fluctuations in interest rates, and credit
quality of our receivables. The COVID-19 pandemic has affected and may continue
to affect our business operations, including our employees, clients, publishers,
business partners, and communities, and there is substantial uncertainty in the
nature and degree of its continued effects over time. Even after the initial
COVID-19 outbreak has subsided, we may continue to experience materially adverse
impacts to our business as a result of its global economic impact, including any
economic downturn or recession that has occurred or may occur in the future.
Furthermore, we may experience disruptions to our business operations resulting
from supply chain disruptions affecting auto insurance carrier budgets which
could have a material adverse impact on our business, financial condition,
operating results and cash flows. Refer to Risk Factors (Part II, Item 1A of
this Form 10-Q) for a discussion of these factors and other risks.
Basis of Presentation
Net Revenue
Our business generates revenue primarily from fees earned through the delivery
of qualified inquiries such as clicks, leads, calls, applications, or customers.
We deliver targeted and measurable results through a vertical focus, which
includes our financial services client vertical and our home services client
vertical. All remaining businesses that are not significant enough for separate
reporting are included in other revenue.
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Cost of Revenue
Cost of revenue consists primarily of media and marketing costs, personnel
costs, amortization of intangible assets, depreciation expense and facilities
expense. Media and marketing costs consist primarily of fees paid to third-party
publishers, media owners or managers, or to strategic partners that are directly
related to a revenue-generating event and of pay-per-click, or PPC, ad purchases
from Internet search companies. We pay these third-party publishers, media
owners or managers, strategic partners and Internet search companies on a
revenue-share, a cost-per-lead, or CPL, or cost-per-click, or CPC, basis.
Personnel costs include salaries, stock-based compensation expense, bonuses,
commissions and related taxes and employee benefit costs. Personnel costs are
primarily related to individuals associated with maintaining our servers and
websites, our call center operations, our editorial staff, client management,
creative team, content, compliance group and media purchasing analysts. Costs
associated with software incurred in the development phase or obtained for
internal use are capitalized and amortized to cost of revenue over the
software's estimated useful life.
Operating Expenses
We classify our operating expenses into three categories: product development,
sales and marketing, and general and administrative. Our operating expenses
consist primarily of personnel costs and, to a lesser extent, professional
services fees, facilities fees and other costs. Personnel costs for each
category of operating expenses generally include salaries, stock-based
compensation expense, bonuses, commissions and related taxes, and employee
benefit costs.
Product Development. Product development expenses consist primarily of personnel
costs, facilities fees and professional services fees related to the development
and maintenance of our products and media management platform. We are
constraining expenses generally to the extent practicable.
Sales and Marketing. Sales and marketing expenses consist primarily of personnel
costs, facilities fees and professional services fees. We are constraining
expenses generally to the extent practicable.
General and Administrative. General and administrative expenses consist
primarily of personnel costs of our finance, legal, employee benefits and
compliance, technical support and other administrative personnel, accounting and
legal professional services fees, facilities fees and bad debt expense. We are
constraining expenses generally to the extent practicable.
Interest and Other (Expense) Income, Net
Interest and other (expense) income, net, consists primarily of interest
expense, interest income, and other income and expense. Interest expense is
related to imputed interest on post-closing payments related to our
acquisitions. We have no borrowing agreements outstanding as of
2022
into a new borrowing agreement to manage liquidity or make additional
acquisitions through debt financing. Interest income represents interest earned
on our cash and cash equivalents, which may increase or decrease depending on
market interest rates and the amounts invested. Other income and expense
includes gains and losses on foreign currency exchange, gains and losses on
divestitures of subsidiaries, client verticals and assets that were not
considered to be strategically important to our business, and other
non-operating items.
Benefit from (Provision for) Income Taxes
We are subject to tax in
countries in which we conduct business. Earnings from our limited non-
activities are subject to local country income tax and may be subject to
income tax.
Critical Accounting Policies, Estimates and Judgments
In presenting our consolidated financial statements in conformity with
generally accepted accounting principles, or GAAP, we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities as of the date of
the financial statements, and reported amounts of revenue and expenses during
the reporting period.
Some of the estimates and assumptions we are required to make relate to matters
that are inherently uncertain as they pertain to future events. We base these
estimates and assumptions on historical experience or on various other factors
that we believe to be reasonable and appropriate under the circumstances. On an
ongoing basis, we reconsider and evaluate our estimates and assumptions. Actual
results may differ significantly from these estimates.
We believe that the critical accounting policies listed below involve our more
significant judgments, assumptions and estimates and, therefore, could have the
greatest potential impact on our consolidated financial statements.
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• Revenue recognition; • Valuation of goodwill and intangible assets; • Stock-based compensation; • Business combination; • Income taxes; and • Valuation of long-lived assets.
For further information on our critical and other significant accounting
policies and estimates, see Part II, Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of our Annual Report
on Form 10-K for the year ended
Recently Issued Accounting Standards
See Note 2, Summary of Significant Accounting Policies, to our condensed
consolidated financial statements.
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Results of Operations
The following table sets forth our condensed consolidated statements of
operations for the periods indicated:
Three Months Ended September 30,
2022 2021
(In thousands, except percentages)
Net revenue $ 143,593 100.0 % $ 159,608 100.0 %
Cost of revenue (1) 131,245 91.4 141,505 88.7
Gross profit 12,348 8.6 18,103 11.3
Operating expenses: (1)
Product development 6,826 4.7 4,625 2.9
Sales and marketing 3,100 2.2 2,906 1.8
General and administrative 7,319 5.1 6,634 4.1
Operating (loss) income (4,897 ) (3.4 ) 3,938 2.5
Interest income 7 - - -
Interest expense (226 ) (0.2 ) (273 ) (0.2 )
Other (expense) income, net (23 ) - 4 -
(Loss) income before income taxes (5,139 ) (3.6 ) 3,669 2.3
Benefit from (provision for) income taxes 622 0.5 (576 ) (0.4 )
Net (loss) income $ (4,517 ) (3.1 )% $ 3,093 1.9 %
(1) Cost of revenue and operating expenses include stock-based compensation
expense as follows:
Cost of revenue $ 2,119 1.5 % $ 1,821 1.1 %
Product development 765 0.5 606 0.4
Sales and marketing 652 0.5 732 0.5
General and administrative 1,734 1.2 1,747 1.1
Gross Profit
Three Months Ended Three
September 30, Months
2022 2021 % Change
(In thousands)
Net revenue $ 143,593 $ 159,608 (10 %)
Cost of revenue 131,245 141,505 (7 %)
Gross profit $ 12,348 $ 18,103 (32 %)
Net Revenue
Net revenue decreased by
Revenue from our financial services client vertical decreased by
or 19%, primarily due to a decrease in revenue in our insurance business
associated with decreased spending by insurance carriers to address
profitability concerns caused by higher incident rates, inflation, and higher
costs to repair and replace vehicles. This is offset by an increase in revenue
in our credit-driven businesses due to increased client budgets and some
economic recovery from the impact of the COVID-19 pandemic. Revenue from our
home services client vertical increased by
result of increased client budgets and successful implementation of growth
initiatives. Other revenue, which primarily includes performance marketing
agency and technology services, contributed
three months ended
for the three months ended
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Cost of Revenue and Gross Profit Margin
Cost of revenue decreased by
primarily driven by decreased media and marketing costs of
by increased personnel costs of
marketing costs was associated with lower revenue volumes. The increase in
personnel costs was mainly attributable to higher headcount and the impact of
our annual compensation increase. Gross profit margin, which is the difference
between net revenue and cost of revenue as a percentage of net revenue, was 9%
and 11% for the three months ended
gross profit margin was primarily attributable to increased personnel costs as a
percentage of revenue.
Operating Expenses
Three Months Ended Three
September 30, Months
2022 2021 % Change
(In thousands)
Product development $ 6,826 $ 4,625 48 %
Sales and marketing 3,100 2,906 7 %
General and administrative 7,319 6,634 10 %
Operating expenses $ 17,245 $ 14,165 22 %
Product Development Expenses
Product development expenses increased by
months ended
2021
higher headcount, and increased professional services costs of
Sales and Marketing Expenses
Sales and marketing expenses increased by
months ended
2021
General and Administrative Expenses
General and administrative expenses increased by
three months ended
and increased professional services costs of
Benefit from (Provision for) Income Taxes
Three Months Ended
September 30,
2022 2021
(In thousands)
Benefit from (provision for) income taxes
As of
allowance adjustments based on the information and evidence available at the
time. However, if there are unfavorable changes to actual operating results or
to projections of future income, we may determine that it is more likely than
not that such deferred tax assets may not be realizable.
We recorded a benefit from income taxes of
income taxes of
2021. The change from an income tax provision to an income tax benefit was
primarily due to the changes in the amount of pre-tax income or loss and the
Company's estimated annual effective tax rate.
Liquidity and Capital Resources
As of
and cash equivalents of
operations. Our cash and cash equivalents are maintained in highly liquid
investments with remaining maturities of 90 days or less at the time of
purchase. We believe our cash equivalents are liquid and accessible.
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Our short-term and long-term liquidity requirements primarily arise from our
working capital requirements, capital expenditures, internal software
development costs, repurchases of our common stock, and acquisitions from time
to time. Our acquisitions also may have deferred purchase price components and
contingent consideration which requires us to make a series of payments
following the acquisition closing date. Our primary operating cash requirements
include the payment of media costs, personnel costs, costs of information
technology systems and office facilities. Our ability to fund these requirements
will depend on our future cash flows, which are determined, in part, by future
operating performance and are, therefore, subject to prevailing global
macroeconomic conditions including the impact of COVID-19, and financial,
business and other factors, some of which are beyond our control. Even though we
may not need additional funds to fund anticipated liquidity requirements, we may
still elect to obtain debt financing or issue additional equity securities for
other reasons.
In
program that commenced in
program allowing the repurchase of up to
During the three months ended
285,644 shares of our common stock at an average price of
total cost of
Repurchases under this program took place in the open market and were made under
a Rule 10b5-1 plan. The repurchased shares of common stock were recorded as
treasury stock and were accounted for under the cost method. As of
2022
pursuant to the board authorization.
We believe that our principal sources of liquidity will be sufficient to satisfy
our currently anticipated cash requirements through at least the next 12 months
and thereafter for the foreseeable future.
The following table summarizes our cash flows for the periods indicated:
Three Months Ended
September 30,
2022 2021
(In thousands)
Net cash provided by operating activities
Net cash used in investing activities
(3,037 ) (1,374 )
Net cash used in financing activities (10,681 ) (8,764 )
Operating Activities
Cash flows from operating activities are primarily the result of our net (loss)
income adjusted for depreciation and amortization, provision for or benefit from
sales returns and doubtful accounts receivable, stock-based compensation
expense, non-cash lease expense, deferred income taxes and changes in working
capital components.
Cash provided by operating activities was
ended
Cash provided by operating activities for the three months ended
2022
of
non-cash adjustments primarily consisted of stock-based compensation expense of
increase in deferred tax assets of
income taxes recorded for the first quarter of fiscal year 2023. The changes in
working capital accounts were primarily attributable to a decrease in accounts
receivable of
million
accounts receivable, accrued liabilities and accounts payable were primarily due
to lower revenue levels in the two months ended
to the two months ended
payments.
Cash provided by operating activities for the three months ended
2021
million
compensation expense of
due to provision for income taxes for the first quarter of fiscal year 2022. The
changes in working capital accounts were primarily attributable to a decrease in
accrued liabilities of
million
were due to the timing of payments. The increase in accounts receivable was due
to the timing of receipts.
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Investing Activities
Cash flows from investing activities generally include capital expenditures,
capitalized internal software development costs, acquisitions from time to time,
business divestitures, and investment in equity securities.
Cash used in investing activities was
million
Cash used in investing activities in the three months ended
was due to internal software development costs of
expenditures of
Cash used in investing activities in the three months ended
was due to internal software development costs of
expenditures of
Financing Activities
Cash flows from financing activities generally include repurchases of common
stock, payment of withholding taxes related to the release of restricted stock,
net of share settlement, proceeds from the exercise of stock options and
issuance of common stock under employee stock purchase plan, and post-closing
payments related to business acquisitions.
Cash used in financing activities was
million
Cash used in financing activities in the three months ended
was due to payment of post-closing payments related to acquisitions of
million
withholding taxes related to the release of restricted stock, net of share
settlement of
options and issuance of common stock under the employee stock purchase plan of
Cash used in financing activities in the three months ended
was due to payment of post-closing payments related to acquisitions of
million
stock, net of share settlement of
exercise of stock options of
Off-Balance Sheet Arrangements
During the periods presented, we did not have any material relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes.
Contractual Obligations
Our contractual obligations primarily consist of operating leases, post-closing
payments and contingent consideration payments recognized from our acquisitions.
These contractual obligations impact our short-term and long-term liquidity and
capital resource needs. There have been no material changes in our contractual
obligations as presented in Part II, Item 7 Management's Discussion and Analysis
of Financial Condition and Results of Operations included in our Annual Report
on Form 10-K for our fiscal year ended
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MEDIAALPHA, INC. – 10-Q – Management's discussion and analysis of financial condition and results of operations
CNO FINANCIAL GROUP, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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