QuinStreet Misses & Stock Sinks Over 17%

QuinStreet, Inc. (Nasdaq:QNST) a member of our domain name parking index announced its financial results for its fiscal Third Quarter today and missed.

Shares sank over 17% to 9.20 a share.

The Company reported total revenue of $101.2 million, a decrease of 2% over the same quarter last year.

The Company reported GAAP net income of $5.5 million, or $0.11 per diluted share, for the quarter.

Adjusted net income for the quarter was $11.6 million, or $0.24 per diluted share. Adjusted net income excludes stock-based compensation expense and amortization of intangible assets, net of estimated tax.

The Company generated $14.9 million of normalized free cash flow.

Revenue for the Education client vertical was $44.3 million, an increase of 4% compared to the year-ago quarter. Revenue for the Financial Services client vertical was $41.9 million, a decrease of 16% compared to the same quarter last year. Revenue for Other client verticals was $15.0 million, an increase of 34% compared to the year-ago quarter.

Reconciliations of adjusted net income to net income, adjusted EBITDA to net income, and normalized free cash flow to net cash provided by operating activities are included in the accompanying tables.

“We delivered revenue and EBITDA consistent with the outlook provided in our June and August calls,” commented Doug Valenti, QuinStreet CEO. “We made good progress expanding our footprint and capabilities for long-term growth despite adjustments to new regulations in Education, changes in the auto insurance click market and continuing challenges in the employment market, and economy. We remain confident and enthusiastic about our long-term growth prospects. Consistent with that optimism and as part of a balanced program for disciplined capital allocation, the Board of Directors has approved a stock buyback of up to $50 million over the next year. We believe that investing in our stock represents the potential for strong returns for our shareholders.”

The Company also announced a new five-year debt facility that increases its borrowing capacity to $300 million on attractive and improved terms. The Company currently has $104 million of debt outstanding and a total of $145 million of cash and marketable securities.

QUINSTREET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
	September 30,	June 30,
	2011	2011
Assets
Current assets
Cash and cash equivalents	$ 106,469	$ 132,290
Marketable securities	38,831	34,927
Accounts receivable, net	56,982	48,225
Deferred tax assets	10,253	10,253
Prepaid expenses and other assets	2,771	5,773
Total current assets	215,306	231,468
Property and equipment, net	9,650	8,875
Goodwill	227,977	211,856
Other intangible assets, net	72,954	65,847
Deferred tax assets, noncurrent	5,864	5,866
Other assets, noncurrent	983	1,012
Total assets	$ 532,734	$ 524,924
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$ 28,055	$ 23,300
Accrued liabilities	27,830	33,238
Deferred revenue	2,247	2,531
Debt	14,377	10,038
Total current liabilities	72,509	69,107
Debt, noncurrent	89,424	96,010
Other liabilities, noncurrent	4,882	4,418
Total liabilities	166,815	169,535
Stockholders’ equity
Common stock	50	50
Additional paid-in capital	260,696	255,689
Treasury stock	(7,779)	(7,779)
Accumulated other comprehensive income	80	51
Retained earnings	112,872	107,378
Total stockholders’ equity	365,919	355,389
Total liabilities and stockholders’ equity	$ 532,734	$ 524,924

QUINSTREET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
	Three Months Ended
	September 30,
	2011	2010
Net revenue	$ 101,224	$ 103,616
Cost of revenue (1)	75,748	73,629
Gross profit	25,476	29,987
Operating expenses: (1)
Product development	6,074	5,551
Sales and marketing	4,034	4,745
General and administrative	5,217	4,722
Operating income	10,151	14,969
Interest income	38	67
Interest expense	(1,083)	(989)
Other income (expense), net	(31)	164
Income before income taxes	9,075	14,211
Provision for taxes	(3,581)	(6,710)
Net income	$ 5,494	$ 7,501
Net income per share
Basic	$ 0.12	$ 0.17
Diluted	$ 0.11	$ 0.16
Weighted average shares used in computing net income per share
Basic	47,505	45,098
Diluted	48,975	47,112
(1) Cost of revenue and operating expenses include stock-based compensation expense as follows:
Cost of revenue	$ 1,179	$ 1,144
Product development	660	724
Sales and marketing	779	1,206
General and administrative	756	656

QUINSTREET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
	Three Months Ended
	September 30,
	2011	2010
Cash Flows from Operating Activities
Net income	$ 5,494	$ 7,501
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,108	5,897
Provision for sales returns and doubtful accounts receivable	36	(470)
Stock-based compensation	3,374	3,730
Excess tax benefits from stock-based compensation	(35)	(287)
Other non-cash adjustments, net	243	15
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable	(6,087)	(10,008)
Prepaid expenses and other assets	3,155	(1,852)
Other assets, noncurrent	29	20
Accounts payable	4,487	6,960
Accrued liabilities	(7,307)	(2,727)
Deferred revenue	(339)	70
Other liabilities, noncurrent	519	(5)
Net cash provided by operating activities	10,677	8,844
Cash Flows from Investing Activities
Capital expenditures	(753)	(902)
Business acquisitions, net of notes payable and cash acquired	(30,204)	(34,121)
Internal software development costs	(559)	(384)
Purchases of marketable securities	(9,610)	—
Proceeds from sales and maturities of marketable securities	5,433	—
Other investing activities	28	(6)
Net cash used in investing activities	(35,665)	(35,413)
Cash Flows from Financing Activities
Payments for issuance of common stock	—	(5)
Proceeds from exercise of common stock options	1,817	2,095
Principal payments on bank debt	(1,313)	(900)
Principal payments on acquisition-related notes payable	(1,213)	(3,365)
Excess tax benefits from stock-based compensation	35	287
Withholding taxes related to restricted stock net share settlement	(184)	—
Net cash used in financing activities	(858)	(1,888)
Effect of exchange rate changes on cash and cash equivalents	25	(19)
Net decrease in cash and cash equivalents	(25,821)	(28,476)
Cash and cash equivalents at beginning of period	132,290	155,770
Cash and cash equivalents at end of period	$ 106,469	$ 127,294

QUINSTREET, INC.
RECONCILIATION OF NET INCOME TO
ADJUSTED NET INCOME
(In thousands, except per share data)
(Unaudited)
	Three Months Ended
	September 30,
	2011	2010
Net income	$ 5,494	$ 7,501
Amortization of intangible assets	5,786	4,922
Stock-based compensation	3,374	3,730
Tax impact of the above items	(3,024)	(2,673)
Adjusted net income	$ 11,630	$ 13,480
Adjusted diluted net income per share	$ 0.24	$ 0.29
Weighted average shares used in computing adjusted diluted net income per share	48,975	47,112
QUINSTREET, INC.
RECONCILIATION OF NET INCOME TO
ADJUSTED EBITDA
(In thousands)
(Unaudited)
	Three Months Ended
	September 30,
	2011	2010
Net income	$ 5,494	$ 7,501
Interest and other income (expense), net	1,076	758
Provision for taxes	3,581	6,710
Depreciation and amortization	7,108	5,897
Stock-based compensation	3,374	3,730
Adjusted EBITDA	$ 20,633	$ 24,596
QUINSTREET, INC.
RECONCILIATION OF NET CASH PROVIDED BY
OPERATING ACTIVITIES TO FREE CASH FLOW
AND NORMALIZED FREE CASH FLOW
(In thousands)
(Unaudited)
	Three Months Ended
	September 30,
	2011	2010
Net cash provided by operating activities	$ 10,677	$ 8,844
Capital expenditures	(753)	(902)
Internal software development costs	(559)	(384)
Free cash flow	$ 9,365	$ 7,558
Changes in operating assets and liabilities, less excess tax benefits from stock-based compensation	5,578	7,829
Normalized free cash flow	$ 14,943	$ 15,387