Matthew Hunt Douglas Valenti - Chairman and Chief Executive Officer Kenneth R. Hahn - Chief Financial Officer and Chief Operating Officer

Carter Malloy - Stephens Inc., Research Division Douglas Anmuth - JP Morgan Chase & Co, Research Division Jordan E. Rohan - Stifel, Nicolaus & Co., Inc., Research Division

Good day, ladies and gentlemen, and welcome to the QuinStreet Fourth Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host for today, Mr. Matthew Hunt of The Blueshirt Group. Sir, you may begin.

Thank you, and good afternoon, ladies and gentlemen. Thank you for joining us today as we report QuinStreet's fiscal fourth quarter and full year 2013 financial results. Joining me on the call today are Doug Valenti, CEO; and Ken Hahn, COO and CFO 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. These are statements that relate to future events or financial performance and 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-Q filing with the SEC, completed on May 9, 2013. 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'll turn the call over to Doug, CEO of QuinStreet. Please go ahead.

Thank you, Matt. Hello, everyone. Thank you for joining us today as we report our fiscal fourth quarter and full year 2013 financial results. Revenue in the quarter was in the higher end of the outlook range we provided last quarter at $76 million. Adjusted EBITDA was 16% of revenue. This is our third consecutive quarter of an improving top line trend or smaller year-over-year revenue declines. We continue to make good progress on initiatives that we believe will return us to growth. Our business model has remained stable and attractive, with good adjusted EBITDA and cash flow margins and a strengthening balance sheet. We expect the trends of good cash flow generation and moderate capital requirements to continue. The challenges of the past year resulted in uncertainties and year-over-year revenue declines unprecedented in our 14-year history. However, it was also a year of excellent progress along the widest array of new product, client and market initiatives in company history. Our business model and organization have remained resilient despite the recent challenges and despite spending on such a wide range of new initiatives. Of particular note, in the year, we generated $38 million of normalized free cash flow, and went from net debt of $2 million to net cash of over $35 million. QuinStreet is a leader in online performance marketing, and we believe that this is an important, early and very large market opportunity. We continue to be well positioned, given our strength, strong capabilities, assets and resources. Now turning to our outlook. For the September quarter, we expect the improving top line trend to continue and estimate revenue in the range of $74 million to $79 million. Adjusted EBITDA margin is expected to be approximately 12% as we choose to more aggressively spend on media as an investment in growing our expanded auto insurance model. We believe that the progress we have made in the product, client and monetization metrics of the expanded auto insurance model now justify being more aggressive in media. Effectively accessing more media has been the primary objective of the expanded auto insurance model and is, of course, key to return to growth at scale in that important market. The early stages of developing and optimizing new media sources will, as they always do, require margin investment on our part as we work our way up the learning, coverage and optimization curves. We expect auto insurance revenue to be up about 10% sequentially and year-over-year in the September quarter, partly as a result of these investments. We expect the company overall to return to year-over-year revenue growth for the remainder of the fiscal year. Growth should be driven by continued progress and investment in the expanded auto insurance model, combined with a continuation of recent trends and initiatives in other businesses, particularly Mortgage and Education. We expect adjusted EBITDA margins to return to the mid-teens as we work our way through this media investment cycle, which we expect to take from a couple of months to a couple of quarters. Our long-term adjusted EBITDA target and the one supported structurally by our business, including the expanded auto insurance model at scale, remains 20%, consistent with historic levels. With that, I'll turn the call over to Ken for a more detailed discussion of our financials. Kenneth R. Hahn: Thanks, Doug. Hello, and thanks again for joining us. Today, I'll provide a brief recap of the quarter, an overview of the past fiscal year and then, some more detail on our fourth fiscal quarter. So the high level for Q4, we posted $75.7 million of revenue, a 12% decline compared to the same quarter last year. Adjusted net income was $6.2 million or $0.14 per share on a fully diluted basis, and adjusted EBITDA was $12.3 million or 16% margin. We're pleased to deliver results to the top of the guidance range we provided. Q4 was our third consecutive quarter of an improving top line trend, that is, smaller year-over-year revenue declines or, stated differently, improvement of the second derivative for our last 3 quarters. Looking back at fiscal 2013 as a whole, we've been transparent about our plans and progress over this past challenging year, and we're pleased to have ended the year much farther down the path to recovery than when we started the year. While we've been making progress on returning to top line growth, we've also maintained a fundamentally strong business model, delivering 16% adjusted EBITDA margin for the year and throwing off $52 million of operating cash flow, $48 million of free cash flow and $38 million of normalized free cash flow. Overall, our net cash position increased from negative $2 million at the beginning of the year to positive $35 million at year end. Now to details on the quarter. Please see the supplemental data sheets available for download on the Investor Relations page of our corporate website. They provide, in tabular form, the figures that I will now walk through with you. For revenue by client vertical, our Education client vertical represented 44% of Q4 revenue or $33 million. The year-over-year decline in revenue moderated for the third consecutive quarter as we continue to execute on various growth initiatives and adapt with our clients to regulatory change. As a quick reminder of the context for this client vertical: one, this is a solid profitable client vertical for QuinStreet; two, we believe we're the leader in the space in terms of revenue, market expertise and competitive assets. This is a great market for us if challenged in the near term. Three, clients have been adapting to various regulatory changes for some time now, and we seek to be a high-quality provider and partner with our clients as they adjust. And four, initiatives in place to support our efforts to return to growth include a continued focus on improving the qualification and quality of inquiries, our relatively new click product and client expansion. The Financial Services client vertical represented 41% of Q4 revenue or $31.3 million. The year-over-year decline in revenue moderated for the second consecutive quarter. We saw some nice execution in both our traditional click business in auto insurance, as well as progress on our expanded model and strength in Mortgage. As a quick reminder of the context for this client vertical: one, auto insurance is the largest market in our overall Financial Services client vertical; two, client marketing budgets in auto insurance are substantial, and this is an early market for performance marketing online; three, our primary growth initiative is the adoption of our expanded model, in which we still offer clicks, our historic model, with the addition of leads, calls and bound policies. On this last point, we saw a continued improvement in monetization this past quarter, which gives us increasing confidence that the expanded model will drive meaningful market success and revenue growth over time. Now is about making the timeline to ramp as short as possible. As Doug mentioned, we believe that progress in the monetization of the expanded model gives us the opportunity to now more aggressively ramp media for that business, and we'll be investing more there. Revenue from our Other client verticals, which include B2B technology, Home Services and Medical, represented 15% of our total fiscal Q4 revenue or $11.5 million. Over time, we like the market opportunities that these verticals represent. Moving onto EBITDA. For adjusted EBITDA, we delivered $12.3 million or 16% margin, consistent with the mid-teens guidance we provided last quarter. On the tax front, our rate, as we were close to breakeven on a tax basis, is not meaningful. For your modeling purposes, we expect our ongoing rate to be approximately 40% as it has been for the past year. Moving to the balance sheet. Our cash and marketable securities balance at quarter end totaled $128 million, an increase of $14 million compared to the balance for the previous quarter. Total debt decreased to $93 million from $97 million in the previous quarter due to repayments, and we had no new borrowings. Our net cash position is positive $35 million. Normalized free cash flow was $7.5 million or 10% of revenue and operating cash flow was more than $20 million for the quarter. To summarize, 3 primary points. One, we ended our fiscal year with results demonstrating real progress on the plans we've been sharing with you throughout the year, initiatives intended to return us to growth. Q4 was our third consecutive quarter of an improving top line trend, and our guidance for Q1 indicates that we believe the trajectory will continue. What's more, as Doug discussed, we believe we will show year-over-year revenue growth for the remainder of the fiscal year. Two, our financial model has continued to deliver respectable EBITDA margins and excellent cash generation. And three, we're a leader in online performance marketing and believe that this is an important, early and very large market opportunity. With that, I'll turn the call to the operator for Q&A.

[Operator Instructions] Our first question comes from the line of Carter Malloy of Stephens Inc. Carter Malloy - Stephens Inc., Research Division: So first, I just want to get some clarity on the spending for auto insurance and media. When you're saying that that's going to be an OpEx expense, so you guys are building out your owned -- or your owned and operated inventory and then sites? Or is that more of a longer-term structural, "Hey, you know what? We're going to go ahead and do larger payouts to the affiliates," so it would be more on the growth side of the business?

Carter, this is Doug. It's really neither of those in particular. It's not capital expenditures or OpEx on our owned and operated sites, so those are ongoing. The increase is really coming from spending more aggressively in bought or purchased sources of media on the operating line, in the operating expenses. And spending where we now know that good margins are in reach, but for time to scale and iterate and optimize. And we kind of -- and this is something we do on an ongoing basis throughout the business, but we're doing it -- it's having a bigger effect because we're doing it in a more aggressive, bigger way given the opportunity we see in the investments we've made in the expanded auto insurance model. So for example, more aggressively going after pay-per-click spending on Google, where we have not had previously. The monetization power that we now have and working up that iteration and optimization curve is a big chunk of that, and an important one, because it represents access to a lot of media that we now have the ability to afford as we make those efforts. And very good quality media, which has a beneficial effect with clients and in pricing, which we're already beginning to see. So it's really just speeding that virtuous cycle that we now believe we have the product and the clients and the coverage to work on. So that's really where -- that and then, some partner publisher media sources, again, have similar characteristics. Those are the places we'll be spending. Again, it's an investment cycle, this is not a structural change to what we think we'll make in auto insurance overall. As I indicated, I think it's -- we think it's a couple of months to a couple of quarters. And we think we see a pretty clear path given the monetization, given our typical optimization curves and given what we see as the pipeline of more coverage, more budget, more clients coming down the pipe. We think it's something that's -- it's time to do, as we've talked before. In auto insurance, the shift to the expanded model from a couple of -- which began a couple of years ago, was -- we had to have the concept, then, we had to buy the assets, then we had to integrate the assets, we had to build the products and we had to sign the clients. And the last phase, and the phase we're now into, which is terrific, because that means the other pieces have gone well and have gotten us to this point, as the monetization comes, is to now go and do what we -- do what we have to do to grow, which is access more media, which is the whole idea in the first place. So we're coming full circle and we're right back to -- right at the point where we want to be. Carter Malloy - Stephens Inc., Research Division: So what you're saying is that, I'll think of that on a per lead basis or even per visitor basis, the monetization is improving because both internal initiatives, as well as end market improvements. But at the end of the day, I'm still trying to understand how is it not structural if you're spending on keywords to drive incremental traffic? Is it just because you think that the monetization will continue to improve, while those keywords [indiscernible] sort of stay flat?

Yes, absolutely. Well, it's a combination of a couple of things again. One is, whenever we go into newer media sources, it takes a while for us to work our way, kind of, up the optimization curve to get the margins where we want them to eventually be. We've been doing that for 14 years, so we're pretty good at it and we see a tremendous opportunity. And we think we now have the current monetization to begin that process and make very good progress from here. And to your other point, we also see a lot more monetization improvements coming down the pipe from increased client expansion, improvements in productivity in the agent call center, and improvements in coverage on the product side. So that combination, for us -- it's like, we've got to jump on the curve at some point. We're not ready to jump on the curve and we really can't get there until we do. So we're getting on the curve, we're going to start working our way up. Carter Malloy - Stephens Inc., Research Division: And is that -- as we saw in Bankrate last night, some of the monetization for insurance had improved pretty dramatically just in July. Have you guys -- is that what has given you confidence in that insurance guide for 1Q, as you're seeing that same sort of increasing the overall lift to CPC and CPL?

We're seeing very good improvements, very strong improvements in modernization in auto insurance. I think for very different reasons than Bankrate is seeing, but we are seeing them. We're seeing them for all the reasons we've been talking about for the past few quarters, and that is the addition of the broader product set, as well as the addition of a lot of new clients. And those trends both continued this past quarter where we made, I think, we'd given some indications of our hopes for the next couple of quarters about 6 months ago in terms of client adds. And I think we beat that in terms of our targets. And then, the monetization rates continued to improve, as well, consistent with what we had indicated. So those things have happened and we see them continuing to happen and those give us good ability to go and access more media and make the channel bigger which is, again, what's going to drive growth and what has been the objective of this project all along. Carter Malloy - Stephens Inc., Research Division: And is it same to assume that, that insurance, again, just given your confidence in the 1Q outlook in insurance, is that the business that gives you confidence in saying you're going to have positive overall growth next year? Or do you think that all of your segments are going to return to growth next year?

I think there's -- we think growth will be driven by 3 of the businesses primarily. One will be auto insurance, continued expansion there and continued progress there, consistent with what we've seen over the past few months in terms of monetization and now feeding that monetization with media and working that up. That will be, probably, the biggest driver. Next biggest driver is likely to be Mortgage, where we have a lot of momentum in that business. On the heels of product expansions, that business was up about 35% year-over-year last year. And we're going into this year with a moderate wind at our backs because of our product and media expansions there. And then, the third piece of it, we believe, will be Education. Not as big a contributor, necessarily, to overall growth, but we do expect growth there. But the lack of downdraft or the greater stabilization driven some by more stability in the market, but more by the -- seeing the results of a lot of initiatives on the product and client media side there that are allowing us to overcome some of the instability and the broader for-profit, post-secondary market. And those are the 3 things that we see really driving growth. And the other verticals will continue to feed contribution, and we are not focusing on growing those as much as we're focusing on keeping them stable and keeping good contribution there to help subsidize and help support the investment we're making in those 3 more critical, larger verticals, where we also see better growth opportunities in the near term.

Our next question comes the line of Douglas Anmuth of JPMorgan. Douglas Anmuth - JP Morgan Chase & Co, Research Division: I just wanted to follow-up and ask about the Education business. I mean, you can clearly see the smaller declines here on a year-over-year basis. But what do you think really gets you over the hump on Education? And I guess, in particular, can you provide just some more color on how you're continuing to improve the quality of inventory and then also, on the new click product that you talked about?

Sure, Doug. The -- Education stability and growth, we think, are going to come from a combination of effects. One is, the industry itself is at a -- is in more of a stable position as they've adapted more to regulation -- the industry I'm talking about there is for-profit post-secondary. We are not counting on much by way of return to growth for that sector for us to stabilize, and we think, grow the Education business. We're really counting more on initiatives that we've been talking about for a while that are beginning to have good impact, including, as you asked, the click product, which is -- which has the benefit of accessing incremental budget from clients we already have that are typically spent elsewhere, so it gives us more budget access from existing clients. It gives us budget access from clients we haven't served that would prefer to buy that way. And very importantly, it gives us the ability to convert more visitors because many of our visitors won't convert on a contact form on a third-party website, but they will click over to a school. So it adds leverage on the margin side, which allows us to go afford more media to feed budgets that we can't necessarily fill in places where we're media-constrained. So that click product just continues to be an important strategic initiative that continues to develop well. There are also other product initiatives in Education that have been successful for us. Our call center revenue in Education was up pretty dramatically this past year as we expanded the ability for our traffic to be monetized or visitors to interact with us via the phone, either to the clients or through our call center to the clients or through our call center as a warm transfer. So that product was up greater than 50% this past year. We expect that that's going to continue to be a source of growth. And then, we've added -- we continue to add more clients, in particular, we have continued to see very good growth from a broader range of clients in for-profit -- the for-profit business through an initiative we've had to expand that business and because we're picking up share from other folks who have not been able to sustain themselves or sustain their volumes or quality in this market. Also from nonprofits, where we continue to see a rapidly growing, though smaller market opportunity in the beginnings, but it's growing nicely and getting to the point where it's becoming pretty meaningful. So we're excited about that, given the broadening of the business and the lack of issues that they have, of course, relative to the for-profits. And then, of course, contributing some last year and contributing more this year will be growth in our India and Brazil businesses, both of which are primarily Education, where we expect about $1 million to $1.5 million of new revenue contribution, maybe $1 million to $2 million in new revenue contribution from those businesses. Still early in their development, but they had a very good year last year and we expect them to have -- to continue their progress this year. So those are really the components of the Education initiatives in the business this year. And by the way, Doug, I forgot to answer your question on quality, and I apologize for that. The quality improvements are coming from 2 primary initiatives. One is, working very hard on our matching technologies to continue to iterate the taxonomies and the qualification criteria, and to make sure that the visitors are getting matched with the best school that they're looking for. And there's been big progress there this past year as there has been in past years and we expect big progress continuing this year. The second piece is continued focus on better quality media sources, including our own call center, which is -- which we talked about, a big example. But also products like, pay-per-click, where we're working -- we're able to access better words and better quality because we've gained share and because clients are more willing to pay for good quality, so -- and this is on the media front, as well as on the technology and qualification front.

[Operator Instructions] Our next question comes from the line of Jordan Rohan from Stifel, Nicolaus. Jordan E. Rohan - Stifel, Nicolaus & Co., Inc., Research Division: So the question I have for you is one, whether at a high level, the fix in Financial Services is really more tactics rather than strategy. I understand offering more products, which I think is an obvious and nice diversification from just insurance products. But when you just spend more money, aren't you just inviting competitors to spend more money alongside you and eliminate that advantage? Or wouldn't it be a short duration advantage? And then, separately, on the Education side, can you remind me how much of your traffic in Education is from direct NAS or SEO or through your unpaid traffic? And are there any initiatives to really improve that traffic as opposed to just spend more to drive more, say, media?

Yes. I mean, we -- and you know we don't do this historically. We're not starting to do it now. We don't just spend more to get more media and just take the margin hit. You can always do that in these businesses, and you always have to ask yourself if you're doing it such that you are finding a way to work the margin back up over time because you see a path to doing that or if you're just structurally lowering your margins. If your question is, are we just structurally lowering our margins for short-term gain? The answer is an absolute no. We haven't done that historically, we're not going to start doing that today. What we do see, and it is strategic, not tactical, is that with a broader range of products that we can now -- with a broader range of products and clients, which have -- equal higher monetization capabilities, we now have to start feeding those products with media in order to grow the business and to begin to optimize to the margin levels we think we can reach once we get the products in place, which you kind of have to start at the curve somewhere and feed it with media so they have the opportunity to optimize and to get up. So we see this as a very fundamental, very sustainable, very expandable move to better margins because of the strategic investments we've made in the broader product set, which we've talked about now for 2.5 years. So yes, we get the question and I think you know us well enough to know that's not what we do. And I think we've been super clear about what the levers are, of how we're doing that. So we have no discomfort in our -- and seeing the path on this at this point into the EBITDA range, as I talked about in my prepared remarks. In terms of organic traffic in Education, it's down because Penguin and Panda, though quite stable lately and quite stable relative to most people. But for Education, in particular, I think the number is somewhere in the 30% to 40% range. I'm looking at Greg and Ken. The company, overall, is a little less than 10% now. So it had gotten as high as 50% before a lot of the organic changes that happened with Google. And again, that number is, you're actually correct, it might not be precisely accurate but we can give it to you in the after-call, and happy to, but it's -- and there are a lot of initiatives to continue to improve performance, and we've had a lot of success there. Certainly, on an absolute basis, with certain sites and on -- and certainly, relative to most of the folks at our industry who have been pretty devastated by this. Some of our new sites that have done particularly well include: schools.com, on onlinecolleges.com and a few others. And the initiatives include a number of things, primarily focused on better segmentation of the traffic, better understanding of the content, what the visitors want, upgrading of our editorial staff and team and a lot of initiatives to execute on those things. And again, on an absolute basis, we've had some real successes. On an overall relative basis, we've had great success. And I think the algorithm itself has turned into kind of a mixed bag. And what we've done is focused on a number of sites that we think are the keepers and that can represent good, kind of beacon sites for the right segments of visitors over time. But I'd say, we're a lot better at editorial and SEO than we ever have been because we've been forced to be, and that's again, the reason that in a world where there are still, it's still not unusual to see declines of 35% to 40% amongst some of our major competitors in the organic sites, we're seeing stability and net positive over the past couple of quarters. And in some cases, real wins on those sites. So yes, a lot of focus there, still a lot of people focused there. And we think it's still a good driver in the long run now that we -- and as we reach a point of new stability from the algorithmic changes. Jordan E. Rohan - Stifel, Nicolaus & Co., Inc., Research Division: Any plans to buy back some shares? Or if -- you said that, given that you now have the $35 million cash balance flow, how much did you buy back this last quarter and will it continue?

We didn't buy any back this past quarter. We completed our $50 million buyback a couple of quarters ago. And we are -- we don't have any near-term plans. We'll, of course, be mindful of the fact that we're building cash, we expect to continue to build cash and we'll make decisions as a board as to what to do with that, what we think are in the best interest of the shareholders going forward. But no current plans in place.

And ladies and gentlemen, this does conclude today's conference. A replay will be available of this call beginning this evening at 7:30 p.m. Eastern Time, and running through August 5 at midnight. You can reach this replay at 1 (800) 585-8367 or (855) 859-2056. You may also dial local number (404) 537-3406 and use conference ID 13330363. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of the day.