QUINSTREET INC

Previous wording

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 June 30, 2023, filed with the SEC. Furthermore, such forward-looking statements speak only as of the date 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.

Current wording

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 June 30, 2023, and in other documents we file from time to time with the SEC. Furthermore, such forward-looking statements speak only as of the date 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.

Previous wording

Our financial services client vertical represented 58% of net revenue for both the three and six months ended December 31, 2023 and 67% of net revenue for both the three and six months ended December 31, 2022. Our home services client vertical represented 40% of net revenue for both the three and six months ended December 31, 2023 and 32% of net revenue for both the three and six months ended December 31, 2022. Other revenue, which primarily includes performance marketing agency and technology services, represented 2% of net revenue for both the three and six months ended December 31, 2023 and 1% of net revenue for both the three and six months ended December 31, 2022. We generated the majority of our revenue from sales to clients in the United States.

Current wording

Our financial services client vertical represented 67% and 62% of net revenue for the three and nine months ended March 31, 2024 and 70% and 68% of net revenue for the three and nine months ended March 31, 2023. Our home services client vertical represented 32% and 37% of net revenue for the three and nine months ended March 31, 2024 and 29% and 31% of net revenue for the three and nine months ended March 31, 2023. Other revenue, which primarily includes performance marketing agency and technology services, represented 1% of net revenue for both three and nine months ended March 31, 2024 and 2023. We generated the majority of our revenue from sales to clients in the United States.

Previous wording

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, Mayo Labs and FCE completed in fiscal year 2021, and the acquisitions of AmOne Corp. (“AmOne”), CloudControlMedia, LLC (“CCM”) and MyBankTracker.com, LLC (“MBT”) completed in fiscal year 2019.

Current wording

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 BestCompany and AquaVida completed in fiscal year 2024, the acquisitions of Modernize, Mayo Labs and FCE completed in fiscal year 2021, and the acquisitions of AmOne Corp. (“AmOne”), CloudControlMedia, LLC (“CCM”) and MyBankTracker.com, LLC (“MBT”) completed in fiscal year 2019.

Previous wording

Interest and other income (expense), 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 December 31, 2023; however interest expense could increase if, among other things, we enter 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 and other non-operating items.

Current wording

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 March 31, 2024; however interest expense could increase if, among other things, we enter 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 expense and income includes impairment of investment, gains and losses on foreign currency exchange, and other non-operating items.

Previous wording

Cost of revenue and operating expenses include stock-based compensation expense as follows:

Current wording

(1)Cost of revenue and operating expenses include stock-based compensation expense as follows:

Previous wording

Net revenue decreased by $31 million, or 11%, for the six months ended December 31, 2023 compared to the six months ended December 31, 2022. Revenue from our financial services client vertical decreased by $40.8 million, or 22%, primarily due to a decrease in revenue in our insurance business associated with decreased spending by certain insurance carriers to address profitability concerns caused by inflation and higher costs to repair and replace vehicles. This was offset by an increase in revenue in our personal loans businesses due to increased media and client budgets. Revenue from our home services client vertical increased by $9 million, or 10%, primarily as a result of increased client budgets and successful implementation of growth initiatives. Other revenue, which primarily includes performance marketing agency and technology services, contributed $4.4 million of revenue for the six months ended December 31, 2023, as compared to $3.6 million of revenue for the six months ended December 31, 2022.

Current wording

Net revenue decreased by $4.1 million, or 2%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Revenue from our financial services client vertical decreased by $8.0 million, or 7%, primarily due to a decrease in revenue in our insurance business associated with decreased spending by certain insurance carriers to address profitability concerns caused by inflation and higher costs to repair and replace vehicles. Revenue from our home services client vertical increased by $3.6 million, or 7%, primarily as a result of increased client budgets and successful execution of growth initiatives. Other revenue, which primarily includes performance marketing agency and technology services, contributed $2.4 million of revenue for the three months ended March 31, 2024, as compared to $2.2 million of revenue for the three months ended March 31, 2023.

Previous wording

Net revenue decreased by $11.4 million, or 8%, for the three months ended December 31, 2023 compared to the three months ended December 31, 2022. Revenue from our financial services client vertical decreased by $18 million, or 20%, primarily due to a decrease in revenue in our insurance business associated with decreased spending by certain insurance carriers to address profitability concerns caused by inflation and higher costs to repair and replace vehicles. This was partially offset by an increase in revenue in our personal loans due to increased media and client budgets. Revenue from our home services client vertical increased by $6.4 million, or 15%, primarily as a result of increased client budgets and successful execution of growth initiatives. Other revenue, which primarily includes performance marketing agency and technology services, contributed $2.0 million of revenue for the three months ended December 31, 2023, as compared to $1.8 million of revenue for the three months ended December 31, 2022.

Current wording

Net revenue decreased by $35.1 million, or 8%, for the nine months ended March 31, 2024 compared to the nine months ended March 31, 2023. Revenue from our financial services client vertical decreased by $48.8 million, or 16%, primarily due to a decrease in revenue in our insurance business associated with decreased spending by certain insurance carriers to address profitability concerns caused by inflation and higher costs to repair and replace vehicles. This was partially offset by an increase in other financial services businesses due to increased media and client budgets. Revenue from our home services client vertical increased by $12.6 million, or 9%, primarily due to increased client budgets and successful execution of growth initiatives. Other revenue, which primarily includes performance marketing agency and technology services, contributed $6.8 million of revenue for the nine months ended March 31, 2024, as compared to $5.8 million of revenue for the nine months ended March 31, 2023.

Previous wording

Cost of revenue decreased by $9.7 million, or 8%, for the three months ended December 31, 2023 compared to the three months ended December 31, 2022, primarily driven by decreased media and marketing costs of $13.2 million, partially offset by increased personnel costs of $2.2 million. The decrease in media and marketing costs was primarily associated with lower revenue volumes. The increase in personnel costs was mainly attributable to higher headcount and higher incentive compensation. Gross profit margin, which is the difference between net revenue and cost of revenue as a percentage of net revenue, was 6% for both the three months ended December 31, 2023 and 2022. The gross profit margin remained flat quarter over quarter as a result of decreased media and marketing costs as a percentage of revenue offset by increase in other operating expenses as a percentage of revenue.

Current wording

Cost of revenue decreased by $1.4 million, or 1%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by decreased media and marketing costs of $3.8 million, offset by increased personnel costs of $1.0 million, and increased depreciation expense of $1.1 million. The decrease in media and marketing costs was primarily associated with lower revenue volumes. The increase in personnel costs were mainly attributable to higher headcount and increased stock-based compensation expense. The increase in depreciation expense was primarily due to an increase in capital expenditures. Gross profit margin, which is the difference between net revenue and cost of revenue as a percentage of net revenue, was 8% and 10% for the three months ended March 31, 2024 and 2023. The decrease in gross profit margin was attributable to increased compensation cost and depreciation as a percentage of revenue, partially offset by a decrease in media and marketing costs as a percentage of revenue.

Previous wording

Cost of revenue decreased $24.7 million, or 10% for the six months ended December 31, 2023 compared to the six months ended December 31, 2022, primarily driven by decreased media and marketing costs of $33.5 million, partially offset by increased personnel costs of $6.0 million. The decrease in media and marketing costs was primarily associated with lower revenue volumes. The increase in personnel costs was mainly attributable to higher headcount and higher incentive compensation. Gross profit margin was 6% and 8% for the six months ended December 31, 2023 and 2022. The decrease in gross profit margin was attributable to increased compensation cost and depreciation as a percentage of revenue offset by a decrease in media and marketing costs as a percentage of revenue.

Current wording

Cost of revenue decreased by $26.0 million, or 6%, for the nine months ended March 31, 2024 compared to the nine months ended March 31, 2023. This was primarily driven by decreased media and marketing costs of $37.3 million, offset by increased personnel costs of $7.0 million, and increased depreciation expense of $3.0 million. The decrease in media and marketing costs was primarily associated with lower revenue volumes. The increase in personnel costs were due to higher headcount and increased stock-based compensation expense. The increase in depreciation expense was primarily due to higher internal software development costs and capital expenditures. Gross profit margin was 7% and 8% for the nine months ended March 31, 2024 and 2023. The decrease in gross profit margin was primarily attributable to increased compensation cost and depreciation as a percentage of revenue, partially offset by a decrease in media and marketing costs as a percentage of revenue.

Previous wording

Product development expenses remained flat for the three months ended December 31, 2023 compared to the three months ended December 31, 2022.

Current wording

Product development expenses remained substantially flat for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Previous wording

Product development expenses increased by $0.9 million, or 6%, for the six months ended December 31, 2023 compared to the six months ended December 31, 2022, primarily due to increased personnel costs of $1.4 million as a result of higher headcount, the impact of annual salary increases and increased incentive compensation, partially offset by decreased costs in professional services and facilities of $0.6 million.

Current wording

Product development expenses increased by $0.6 million, or 3%, for the nine months ended March 31, 2024 compared to the nine months ended March 31, 2023, primarily due to increased personnel costs of $1.3 million as a result of higher headcount and increased stock-based compensation expense, partially offset by a decrease in professional services and facilities fees of $0.7 million.

Previous wording

General and administrative expenses increased by $0.3 million, or 4%, for the three months ended December 31, 2023 compared to the three months ended December 31, 2022, primarily due increased personnel costs including stock based compensation expenses.

Current wording

Sales and marketing expenses increased by $0.4 million, or 4%, for the nine months ended March 31, 2024 compared to the nine months ended March 31, 2023, primarily due to increased personnel costs as a result of higher headcount and increased stock-based compensation expense.

Previous wording

The Company recorded a provision for income taxes of $0.3 million and $1.0 million for the three and six months ended December 31, 2023 and a benefit of $1.4 million and $2.0 million for the three and six months ended December 31, 2022. Given the recording of the valuation allowance against deferred tax assets in the fourth quarter of 2023, the Company no longer records a benefit for the losses generated in the United States, causing the Company to flip from a tax benefit in the second quarter of 2022 to a tax expense in the second quarter of 2023. The tax provision for the second quarter of 2023 was primarily related to the foreign operations and the tax amortization of goodwill. The tax benefit in the second quarter of 2022 was related to losses of the Company and the foreign operations.

Current wording

The Company recorded a benefit from income taxes of $0.6 million and a provision for income taxes of $0.4 million for the three and nine months ended March 31, 2024 and a benefit of $1.1 million and $3.1 million for the three and nine months ended March 31, 2023. Given the recording of the valuation allowance against deferred tax assets in the fourth quarter of 2023, the Company no longer records a benefit for the losses generated in the United States. The tax benefit for the third quarter of 2024 was primarily related to the foreign operations and the tax amortization of goodwill. The tax benefit in the third quarter of 2023 was related to losses of the Company and the foreign operations.

Previous wording

As of December 31, 2023, our principal sources of liquidity consisted of cash and cash equivalents of $45.5 million and cash we expect to generate from future 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.

Current wording

As of March 31, 2024, our principal sources of liquidity consisted of cash and cash equivalents of $39.6 million and cash we expect to generate from future 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.

Previous wording

In April 2022, our Board of Directors canceled our prior stock repurchase program that commenced in July 2017 and authorized a new stock repurchase program allowing the repurchase of up to $40.0 million worth of common stock. In the second quarter of fiscal year 2024, we repurchased and retired 70,107 shares of our common stock at an average price of $8.84 per share, at a total cost of $0.6 million (including a broker commission of $0.03 per share). 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 December 31, 2023, approximately $16.8 million remained available for stock repurchases pursuant to the board authorization.

Current wording

In April 2022, our Board of Directors canceled our prior stock repurchase program that commenced in July 2017 and authorized a new stock repurchase program allowing the repurchase of up to $40.0 million worth of common stock. We repurchased and retired 177,511 shares and 70,107 shares of our common stock at an average price of $8.86 per share and $8.84 per share, at a total cost of $1.6 million and $0.6 million (including a broker commission of $0.03 per share) in the first and second quarter of fiscal year 2024. 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. There were no repurchases made during the three months ended March 31, 2024. As of March 31, 2024, approximately $16.8 million remained available for stock repurchases pursuant to the board authorization.

Previous wording

Cash flows from operating activities are primarily the result of our net loss 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.

Current wording

Cash flows from operating activities are primarily the result of our net loss adjusted for depreciation and amortization, impairment of investment, benefit from or provision for sales returns and doubtful accounts receivable, stock-based compensation expense, non-cash lease expense, deferred income taxes, and changes in working capital components.

Previous wording

Cash used in operating activities was $8.6 million for the six months ended December 31, 2023, compared to cash provided by operating activities of $3.2 million for the six months ended December 31, 2022.

Current wording

Cash used in operating activities was $4.5 million for the nine months ended March 31, 2024, compared to cash provided by operating activities of $6.1 million for the nine months ended March 31, 2023.

Previous wording

Cash used in operating activities for the six months ended December 31, 2023 consisted of a net loss of $22.1 million and a net decrease in cash from changes in working capital of $9.2 million, offset by non-cash adjustments of $22.5 million. The changes in working capital accounts were primarily attributable to an increase in accounts receivable of $7.4 million and a decrease in accounts payable of $4.7 million, offset by a decrease in prepaid expenses and other assets of $2.0 million. The increase in accounts receivable, and decrease of prepaid expenses and other assets was primarily due to timing of receipts and payments. The decrease in accounts payable was primarily due to lower revenue levels in the two months ended December 31, 2023 as compared to the two months ended December 31, 2022, which led to lower media costs in December 31, 2023. The non-cash adjustments primarily consisted of stock-based compensation expense of $11.3 million, and depreciation and amortization expense of $11.1 million.

Current wording

Cash used in operating activities for the nine months ended March 31, 2024 consisted of a net loss of $29.2 million, offset by non-cash adjustments of $37.4 million, and a net decrease in cash from changes in working capital of $12.8 million. The non-cash adjustments primarily consisted of stock-based compensation expense of $18.1 million, depreciation and amortization expense of $17.3 million, and impairment of investment of $2.0 million. The changes in working capital accounts were primarily attributable to an increase in accounts receivable of $32.6 million, offset by an increase in accrued liabilities of $14.9 million, a decrease in prepaid expenses and other assets of $2.5 million, and an increase in accounts payable of $2.3 million. The increases in accounts receivable and accrued liabilities and accounts payable were primarily due to higher revenue levels for the two months ended March 31, 2024 as compared to two months ended June 30, 2023, and timing of receipts and payments. The decrease in prepaid expenses and other assets was primarily due to higher amortization expense.

Previous wording

Cash provided by operating activities for the six months ended December 31, 2022 consisted of a net loss of $12.5 million and a net decrease in cash from changes in working capital of $1.9 million, offset by non-cash adjustments of $17.5 million. The changes in working capital accounts were primarily attributable to a decrease in accrued liabilities of $5.5 million and a decrease in accounts payable of $4.7 million, offset by a decrease in accounts receivable of $9.3 million. The decreases in accounts receivable, accrued liabilities and accounts payable were primarily due to lower revenue levels in the two months ended December 31, 2022 as compared to the two months ended December 31, 2021, and timing of receipts and payments. The non-cash adjustments primarily consisted of stock-based compensation expense of $10.7 million, depreciation and amortization expense of $9.0 million, and an increase in deferred tax assets of $2.3 million primarily due to benefit from income taxes recorded for the first two quarters of fiscal year 2023.

Current wording

Cash used in operating activities for the nine months ended March 31, 2023 consisted of a net loss of $13.0 million, offset by non-cash adjustments of $26.8 million, and a net decrease in cash from changes in working capital of $19.9 million. The non-cash adjustments primarily consisted of stock-based compensation expense of $16.1 million, depreciation and amortization expense of $14.0 million, and an increase in deferred tax assets of $3.3 million primarily due to benefit from income taxes recorded for the first three quarters of fiscal year 2023. The changes in working capital accounts were primarily attributable to an increase in accounts receivable of $25.1 million and an increase in prepaid expenses and other assets of $3.8 million, offset by an increase in accrued liabilities of $10.9 million. The increases in accounts receivable and accrued liabilities were primarily due to higher revenue levels for the two months ended March 31, 2023 as compared to the two months ended June 30, 2022, and the timing of receipts and payments. The increase in prepaid expenses and other assets was primarily due to increased prepayments made to third-party publishers.

Previous wording

Cash used in investing activities was $9.4 million for the six months ended December 31, 2023, compared to cash used in investing activities of $7.1 million for the six months ended December 31, 2022.

Current wording

Cash used in investing activities was $19.1 million for the nine months ended March 31, 2024, compared to cash used in investing activities of $10.7 million for the nine months ended March 31, 2023.

Previous wording

Cash used in investing activities in the six months ended December 31, 2022 was due to capital expenditures and internal software development costs of $7.0 million.

Current wording

Cash used in investing activities in the nine months ended March 31, 2023 was primarily due to capital expenditures and internal software development costs of $10.5 million.

Previous wording

Cash used in financing activities was $10.2 million for the six months ended December 31, 2023, compared to cash used in financing activities of $13.3 million for the six months ended December 31, 2022.

Current wording

Cash used in financing activities was $10.5 million for the nine months ended March 31, 2024, compared to cash used in financing activities of $16.7 million for the nine months ended March 31, 2023.

Previous wording

Cash used in financing activities in the six months ended December 31, 2023 was due to payment of post-closing payments and contingent consideration related to acquisitions of $6.2 million, payment of withholding taxes related to the release of restricted stock, net of share settlement of $3.3 million, and repurchases of common stock of $2.3 million, offset by proceeds from the issuance of common stock under the employee stock purchase plan and exercise of stock options of $1.7 million.

Current wording

Cash used in financing activities in the nine months ended March 31, 2024 was due to payment of post-closing payments and contingent consideration related to acquisitions of $6.6 million, payment of withholding taxes related to the release of restricted stock, net of share settlement of $4.9 million, and repurchases of common stock of $2.3 million, offset by proceeds from the exercise of stock options and issuance of common stock under the employee stock purchase plan of $3.3 million.

Previous wording

Cash used in financing activities in the six months ended December 31, 2022 was due to payment of post-closing payments and contingent consideration related to acquisitions of $7.2 million, repurchases of common stock of $4.7 million, and payment of withholding taxes related to the release of restricted stock, net of share settlement of $3.2 million, offset by proceeds from the exercise of stock options and issuance of common stock under the employee stock purchase plan of $1.8 million.

Current wording

Cash used in financing activities in the nine months ended March 31, 2023 was due to payment of post-closing payments and contingent consideration related to acquisitions of $10.4 million, repurchases of common stock of $4.7 million, and payment of withholding taxes related to the release of restricted stock, net of share settlement of $4.7 million, offset by proceeds from the exercise of stock options and issuance of common stock under the employee stock purchase plan of $3.2 million.

Previous wording

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 June 30, 2023.

Current wording

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 June 30, 2023.