QuinStreet(QNST) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for QuinStreet, Inc. as of December 31, 2021, and for the three and six months ended December 31, 2021 and 2020, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with accompanying notes detailing accounting policies, revenue disaggregation, acquisitions, and other financial information Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | | Total Current Assets | $185,010 | $206,176 | | Total Assets | $427,591 | $449,515 | | Total Current Liabilities | $96,656 | $115,611 | | Total Liabilities | $128,946 | $154,367 | | Total Stockholders' Equity | $298,645 | $295,148 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | | :--- | :--- | :--- | | Net Revenue | $125,331 | $134,968 | | Gross Profit | $9,777 | $14,531 | | Operating (Loss) Income | $(7,553) | $(231) | | Net (Loss) Income | $(5,628) | $466 | | Diluted (Loss) Income Per Share | $(0.10) | $0.01 | Condensed Consolidated Statements of Cash Flows Highlights (Six Months Ended Dec 31, in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $19,687 | $23,137 | | Net cash used in investing activities | $(3,979) | $(23,284) | | Net cash used in financing activities | $(10,977) | $(4,642) | Notes to Condensed Consolidated Financial Statements The notes provide detailed explanations of the company's accounting policies and financial data, covering revenue disaggregation, fair value measurements, acquisitions, goodwill, intangible assets, income taxes, lease obligations, and stock-based compensation plans Disaggregation of Revenue by Vertical (in thousands) | Vertical | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | | :--- | :--- | :--- | | Financial Services | $90,158 | $104,154 | | Home Services | $33,820 | $29,190 | | Other Revenue | $1,353 | $1,624 | | Total net revenue | $125,331 | $134,968 | - On August 31, 2020, the company divested its education client vertical for $20.0 million, recognizing a gain of $16.6 million in the first quarter of fiscal year 2021[47] - The company completed the acquisition of Modernize, Inc. on July 1, 2020, for total consideration of $70.4 million to expand its home services vertical. It also acquired FC Ecosystem, LLC in March 2021 for total consideration of $13.7 million to broaden its financial services customer relationships[48][53][54] - As of December 31, 2021, the company had goodwill of $119.6 million and net intangible assets of $54.3 million. No goodwill impairments were recorded during the six months ended December 31, 2021[61][62][63] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) This section provides management's perspective on the company's financial condition and results of operations, covering key business trends, income statement analysis, liquidity, capital resources, and cash flow activities - The company's primary financial objective is to create sustainable revenue growth at target profitability levels, rather than maximizing short-term profits, by investing in long-term market opportunities[87][88] - The COVID-19 pandemic continues to create uncertainty, particularly affecting credit-driven businesses like personal loans and credit cards, although some recovery has been observed[91] - One client in the financial services vertical accounted for 13% of net revenue for the three months ended December 31, 2021, down from 24% in the prior-year period[90] Results of Operations For the quarter ended December 31, 2021, net revenue decreased 7% year-over-year to $125.3 million, primarily due to a 13% decline in the Financial Services vertical, partially offset by a 16% increase in the Home Services vertical, with gross profit margin decreasing from 11% to 8% due to higher media and marketing costs, and operating expenses increasing by 17% due to a $2.7 million adjustment to contingent consideration Revenue Change by Vertical (Three Months Ended Dec 31, 2021 vs 2020) | Vertical | Change ($M) | Change (%) | Key Driver | | :--- | :--- | :--- | :--- | | Financial Services | $(14.0) | (13%) | Decreased spending by insurance carriers. | | Home Services | $4.6 | 16% | Increased client budgets and Modernize acquisition integration. | - Gross profit margin for the quarter decreased to 8% from 11% in the prior year, primarily due to increased media and marketing costs, personnel costs, and depreciation and amortization as a percentage of revenue[121] - General and administrative expenses increased by $2.7 million (40%) for the quarter, primarily due to a $2.7 million adjustment to the fair value of contingent consideration related to an acquisition[126] Liquidity and Capital Resources As of December 31, 2021, the company's principal sources of liquidity were $115.0 million in cash and cash equivalents and expected cash from operations, which management believes are sufficient to meet anticipated cash requirements for at least the next 12 months, with net cash from operations at $19.7 million, cash used in investing at $4.0 million, and cash used in financing at $11.0 million for the six months ended December 31, 2021 - The company's principal sources of liquidity as of December 31, 2021, consisted of $115.0 million in cash and cash equivalents[130] Cash Flow Summary (Six Months Ended Dec 31, in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $19,687 | $23,137 | | Net cash used in investing activities | $(3,979) | $(23,284) | | Net cash used in financing activities | $(10,977) | $(4,642) | - Cash used in financing activities for the six months ended Dec 31, 2021, included $6.5 million for post-closing and contingent payments for acquisitions and $5.5 million for withholding taxes on restricted stock releases[141] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is from interest rate fluctuations on its cash and cash equivalents, which are invested in money market funds, and management believes this exposure is not material due to the short-term nature of its investments - The company's main market risk is interest rate risk related to its cash and cash equivalents held in money market funds[146][147] - Due to the short-term nature of its investments, the company believes it does not have material exposure to changes in fair value from interest rate fluctuations. A hypothetical 1% decline in interest rates would not have a material effect[147] Controls and Procedures Management, with the participation of the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of December 31, 2021, with no material changes to internal control over financial reporting identified during the quarter - Based on an evaluation as of December 31, 2021, the principal executive and financial officers concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level[148] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, such controls[149] PART II. OTHER INFORMATION Legal Proceedings The company is subject to various legal proceedings and claims arising in the ordinary course of business, but management does not believe the final outcome of any pending matters will have a material adverse effect on its future financial results - The company is subject to various legal proceedings and claims in the ordinary course of business but does not believe they will have a material adverse effect on its financial results[150] Risk Factors This section details significant risks associated with investing in the company's common stock, including the evolving nature of its industry, dependence on client spending and a limited number of major clients, reliance on third-party media sources and search engines, online security threats and data privacy regulations, the ongoing impact of the COVID-19 pandemic, and intense competition - A substantial portion of revenue comes from a limited number of clients; one client accounted for 14% of net revenue for the six months ended December 31, 2021. The loss of a major client could significantly harm the business[160] - The company is exposed to online data privacy and security risks, including unauthorized access to personally identifiable information. Failure to maintain adequate safeguards could result in significant expenses and reputational damage[164][165] - Dependence on Internet search companies for visitor traffic is a key risk. Changes in search engine algorithms have harmed and could in the future harm website placements and reduce revenue[168][169] - The business is subject to numerous complex and changing regulations, such as the TCPA (Telephone Consumer Protection Act) and CCPA (California Consumer Privacy Act), which could be costly to comply with and expose the company to liability[173][175] - The COVID-19 pandemic and its aftermath pose significant risks, potentially disrupting operations, reducing client marketing spend, and adversely impacting financial results and cash flows[237][238][239] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of its equity securities and no repurchases of its equity securities during the period covered by the report - There were no unregistered sales of equity securities during the period[254] - The company did not purchase any of its own equity securities during the period[255] Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the period - None[256] Mine Safety Disclosures This item is not applicable to the company's business - Not Applicable[257] Other Information The company reported no other information for this period - None[258] Exhibits This section lists the exhibits filed with the Form 10-Q, including the 2021 Employee Stock Purchase Plan, CEO and CFO certifications pursuant to the Sarbanes-Oxley Act, and Inline XBRL data files - Exhibits filed include the 2021 Employee Stock Purchase Plan, CEO/CFO certifications (Sections 302 and 906), and various Inline XBRL documents[260]