e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal
Year Ended June 30, 2011
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number:
001-34628
QuinStreet, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0512121
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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950 Tower Lane,
6th
Floor
Foster City, California 94404
(Address of principal
executive offices, including zip code)
(650) 587-7700
(Registrants telephone
number, including area code)
Securities registered pursuant to
Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.001 per share
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The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of December 31, 2010, the aggregate market value of the
voting stock held by non-affiliates of the registrant, based on
the closing sale price of the Companys common stock as
reported by the NASDAQ Global Select Market on such date, was
$404,319,901. For purposes of this disclosure, shares held by
persons who hold more than 5% of the outstanding shares of
common stock and shares held by executive officers and directors
of the registrant have been excluded because such persons may be
deemed to be affiliates. This determination of executive officer
or affiliate status is not a conclusive determination for other
purposes.
Number of shares of common stock outstanding as of
August 25, 2011: 47,558,647
Documents Incorporated by Reference:
Portions of the registrants definitive proxy statement
relating to its 2011 annual stockholders meeting are
incorporated by reference into Part III of this Annual
Report on
Form 10-K
where indicated.
QUINSTREET,
INC.
FOR THE
FISCAL YEAR ENDED JUNE 30, 2011
TABLE OF
CONTENTS
1
PART I
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. All
statements other than statements of historical facts, including
statements regarding our future financial condition, business
strategy and plans and objectives of management for future
operations, are forward-looking statements. Terminology such as
believe, may, might,
objective, estimate,
continue, anticipate,
intend, should, plan,
expect, predict, potential,
or the negative of these terms or other similar expressions is
intended to identify forward-looking statements. We have based
these forward-looking statements largely on our current
expectations and projections about future events and financial
trends that we believe may affect our financial condition,
results of operations, business strategy and financial needs.
These forward-looking statements are subject to a number of
known and unknown risks and uncertainties that could cause our
actual results to differ materially from those expressed or
implied in our forward-looking statements. Such risks and
uncertainties include, among others, those listed in
Part 1, Item 1A. Risk Factors of this
Annual Report on
Form 10-K
and elsewhere in this report, such as but not limited to:
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our immature industry and relatively new business model;
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our dependence on Internet search companies to attract Internet
visitors;
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our dependence on a small number of large clients and our
dependence on a small number of client verticals for a majority
of our revenue;
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changes in regulatory and legislative environment affecting our
business or our clients businesses;
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our ability to successfully manage any recent or future
acquisitions;
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our ability to attract and retain qualified employees and key
personnel;
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our ability to enhance and maintain our client and vendor
relationships;
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our ability to manage our growth effectively;
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our ability to accurately forecast our operating results and
appropriately plan our expenses;
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our ability to develop new services and enhancements and
features to meet new demands from our clients;
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our ability to raise additional capital in the future, if needed;
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general economic conditions in our domestic and potential future
international markets;
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our ability to compete in our industry; and
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our ability to protect our intellectual property rights.
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Except as required by law, we undertake no obligation to update
publicly any forward-looking statements for any reason to
conform these statements to actual results or to changes in our
expectations. Given these risks and uncertainties, readers are
cautioned not to place undue reliance on such forward-looking
statements and we qualify all of our forward-looking statements
by these cautionary statements.
Our
Company
QuinStreet is a leader in vertical marketing and media online.
We have built a strong set of capabilities to engage Internet
visitors with targeted media and to connect our marketing
clients with their potential customers online. We focus on
serving clients in large, information-intensive industry
verticals where relevant, targeted media and offerings help
visitors make informed choices, find the products that match
their needs, and thus become qualified customer prospects for
our clients. Our current primary client verticals are the
education and financial services industries. We also have a
presence in the home services,
business-to-business,
or B2B, and healthcare industries.
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We generate revenue by delivering measurable online marketing
results to our clients. These results are typically in the form
of qualified leads or clicks, the outcomes of customer prospects
submitting requests for information on, or to be contacted
regarding, client products, or their clicking on or through to
specific client offers. These qualified leads or clicks are
generated from our marketing activities on our websites or via
third-party publishers with whom we have relationships. Clients
primarily pay us for leads that they can convert into customers,
typically in a call center or through other offline customer
acquisition processes, or for clicks from our websites that they
can convert into applications or customers on their websites. We
are predominantly paid on a negotiated or market-driven
per lead or per click basis. Media costs
to generate qualified leads or clicks are borne by us as a cost
of providing our services.
Founded in 1999, we have been a pioneer in the development and
application of measurable marketing on the Internet. Clients pay
us for the actual opt-in actions by prospects or customers that
result from our marketing activities on their behalf, versus
traditional impression-based advertising and marketing models in
which an advertiser pays for more general exposure to an
advertisement. We have been particularly focused on developing
and delivering measurable marketing results in the search engine
ecosystem, the entry point of the Internet for most
of the visitors we convert into qualified leads or clicks for
our clients. We own or partner with vertical content websites
that attract Internet visitors from organic search engine
rankings due to the quality and relevancy of their content to
search engine users. We also acquire targeted visitors for our
websites through the purchase of
pay-per-click,
or PPC advertisements on search engines. We complement search
engine companies by building websites with content and offerings
that are relevant and responsive to their searchers, and by
increasing the value of the PPC search advertising they sell by
matching visitors with offerings and converting them into
customer prospects for our clients.
Market
Opportunity
Our clients are shifting more of their marketing budgets from
traditional media channels such as direct mail, television,
radio, and newspapers to the Internet because of increasing
usage of the Internet by their potential customers. We believe
that direct marketing is the most applicable and relevant
marketing segment to us because it is targeted and measurable.
According to the December 2010 research report,
Understanding The Changing Needs Of The US Online
Consumer, 2010 by Forrester Research, Americans spend 36%
of their time with media on the Internet, but online direct
marketing is forecasted to represent only 19% of the
$163 billion in total annual U.S. direct marketing
spending in 2011, as reported by the Direct Marketing
Association. The Internet is an effective direct marketing
medium due to its targeting and measurability characteristics.
If direct marketing budgets shift to the Internet in proportion
to Americans share of time spent with media on the
Internet from 19% to 36% of the $163 billion in
total spending that could represent an increased
market opportunity of $28 billion. In addition, as
traditional media categories such as television and radio shift
from analog to digital formats, they can become channels for the
targeted and measurable marketing techniques and capabilities we
have developed for the Internet, thus expanding our addressable
market opportunity. Further future market potential will also
come from international markets.
Change
in marketing strategy and approach
We believe that marketing approaches are changing as budgets
shift from offline, analog advertising media to digital
advertising media such as Internet marketing. These changing
approaches are fundamental, and require a shift to fundamentally
new competencies, including:
From
qualitative, impression-driven marketing to analytic,
data-driven marketing
We believe that the growth in Internet marketing is enabling a
more data-driven approach to advertising. The measurability of
online marketing allows marketers to collect a significant
amount of detailed data on the performance of their marketing
campaigns, including the effectiveness of ad format and
placement and user responses. This data can then be analyzed and
used to improve marketing campaign performance and
cost-effectiveness on substantially shorter cycle times than
with traditional offline media.
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From
account management-based client relationships to results-based
client relationships
We believe that marketers are becoming increasingly focused on
strategies that deliver specific, measurable results. For
example, marketers are attempting to better understand how their
marketing spending produces measurable objectives such as
meeting their target marketing cost per new customer. As
marketers adopt more results-based approaches, the basis of
client relationships with their marketing services providers is
shifting from being more account management-based to being more
results-oriented.
From
marketing messages pushed on audiences to marketing messages
pulled by self-directed audiences
Traditional marketing messages such as television and radio
advertisements are broadcast to a broad audience. The Internet
is enabling more self-directed and targeted marketing. For
example, when Internet visitors click on PPC search
advertisements, they are expressing an interest in and
proactively engaging with information about a product or service
related to that advertisement. The growth of self-directed
marketing, primarily through online channels, allows marketers
to present more targeted and potentially more relevant marketing
messages to potential customers who have taken the first step in
the buying process, which can in turn increase the effectiveness
of marketers spending.
From
marketing spending focused on large media buys to marketing
spending optimized for fragmented media
We believe that media is becoming increasingly fragmented and
that marketing strategies are changing to adapt to this trend.
There are millions of Internet websites, tens of thousands of
which have significant numbers of visitors. While this
fragmentation can create challenges for marketers, it also
allows for improved audience segmentation and the delivery of
highly targeted marketing messages, but new technologies and
approaches are necessary to effectively manage marketing given
the increasing complexity resulting from more media
fragmentation.
Increasing
complexity of online marketing
Online marketing is a dynamic and increasingly complex
advertising medium. There are numerous online channels for
marketers to reach potential customers, including search
engines, Internet portals, vertical content websites, affiliate
networks, display and contextual ad networks, email, video
advertising, and social media. We refer to these and other
marketing channels as media. Each of these channels may involve
multiple ad formats and different pricing models, amplifying the
complexity of online marketing. We believe that this complexity
increases the demand for our vertical marketing and media
services due to our capabilities and to our experience managing
and optimizing online marketing programs across multiple
channels. Also marketers and agencies often lack our ability to
aggregate offerings from multiple clients in the same industry
vertical, an approach that allows us to cover a wide selection
of visitor segments and provide more potential matches to
Internet visitor needs. This approach can allow us to convert
more Internet visitors into qualified leads or clicks from
targeted media sources, giving us an advantage when buying or
monetizing that media.
Our
Business Model
We deliver cost-effective marketing results to our clients,
predictably and scalably, most typically in the form of a
qualified lead or click. These leads or clicks can then convert
into a customer or sale for the client at a rate that results in
an acceptable marketing cost to them. We get paid by clients
primarily when we deliver qualified leads or clicks as defined
in our agreements. Because we bear the costs of media, our
programs must deliver a value to our clients and a media yield,
or our ability to generate an acceptable margin on our media
costs, that provides a sound financial outcome for us. Our
general process is:
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We own or access targeted media.
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We run advertisements or other forms of marketing messages and
programs in that media to create visitor responses or clicks
through to client offerings.
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We match these responses or clicks to client offerings or brands
that meet visitor interests or needs, converting visitors into
qualified leads or clicks.
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We optimize client matches and media yield such that we achieve
desired results for clients and a sound financial outcome for us.
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Media cost, or the cost to attract targeted Internet visitors,
is the largest cost input to producing the measurable marketing
results we deliver to clients. Balancing our clients cost
and conversion objectives, or the rate at which the leads or
clicks that we deliver to them convert into customers, with our
media costs and yield objectives, represents the primary
challenge in our business model. We have been able to
effectively balance these competing demands by focusing on our
media sources and capabilities, conversion optimization, and our
mix of offerings and client coverage. We also seek to mitigate
media cost risk by working with third-party website publishers
predominantly on a revenue-share basis; media purchased on a
non-revenue-share basis has represented a minority of our media
costs and of the Internet visitors we convert into qualified
leads or clicks for clients.
Media
and Internet visitor mix
We are a client-driven organization. We seek to be one of the
largest providers of measurable marketing results on the
Internet in the client industry verticals we serve by meeting
the needs of clients for results, reliability and volume.
Meeting those client needs requires that we maintain a
diversified and flexible mix of Internet visitor sources due to
the dynamic nature of online media. Our media mix changes with
changes in Internet visitor usage patterns. We adapt to those
changes on an ongoing basis, and also proactively adjust our mix
of vertical media sources to respond to client or
vertical-specific circumstances and to achieve our financial
objectives. Our financial objectives are to achieve consistent,
sustainable financial performance, but can differ by client or
industry vertical, depending on factors such as our need to
invest in the development of media sources, marketing programs,
or client relationships. Generally, our Internet visitor sources
include:
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websites owned and operated by us, with content and offerings
that are relevant to our clients target customers;
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visitors acquired from PPC advertisements purchased on major
search engines and sent to our websites;
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revenue sharing agreements with third-party publishers with whom
we have a relationship and whose content is relevant to our
clients target customers;
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email lists owned by third parties and warranted to us by their
owners to comply with the CAN-SPAM Act;
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email lists owned by us, and generated on an opt-in basis from
Internet visitors to our websites; and
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display ads run through online advertising networks or directly
with major websites or portals.
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Conversion
optimization
Once we acquire targeted Internet visitors from any of our
numerous online media sources, we seek to convert that media
into qualified leads or clicks at a rate that balances client
results with our media costs or yield objectives. We start by
defining the segments and interests of Internet visitors in our
client verticals, and by providing them with the information and
product offerings on our websites and in our marketing programs
that best meet their needs. Achieving acceptable client results
and media yield then requires ongoing testing, measuring,
analysis, feedback, and adaptation of the key components of our
Internet marketing programs. These components include the
marketing or advertising messaging, content mix, visitor
navigation path, mix and coverage of client offerings presented,
and
point-of-sale
conversion messaging the content that is presented
to an Internet visitor immediately prior to converting that
individual into a lead or click for our clients. This data
complexity is managed by us with technology, data reporting,
marketing processes, and personnel. We believe that our scale
and more than ten-year track record give us an advantage, as
managing this complexity often implies a steep experience-based
learning curve.
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Offerings
and client coverage
The Internet is a self-directed medium. Internet visitors choose
the websites they visit and their online navigation paths, and
always have the option of clicking away to a different website
or web page. Having offerings or clients that match the
interests or needs of website visitors is key to providing
results and adequate media yield. Our vertical focus allows us
to continuously revise and improve this matching process, to
better understand the various segments of visitors and client
offerings available to be matched, and to ensure that we enable
Internet visitors to find what they seek.
Our
Competitive Advantages
Vertical
focus and expertise
We focus our efforts on large, attractive client market
verticals, and on building our depth of media and coverage of
clients and client offerings within them. We have been a pioneer
in developing vertical marketing and media on the Internet, and
in providing measureable marketing results to clients. We focus
on clients who are moving their marketing spending to measurable
online formats and on information-intensive client verticals
with large underlying market opportunities and high product or
customer lifetime values. This focus allows us to utilize
targeted media, in-depth industry and client knowledge, and
customer segmentation and breadth of client offerings, or
coverage, to deliver results for our clients and greater media
yield.
Measurable
marketing experience and expertise
We have substantial experience at designing and deploying
marketing programs that allow Internet visitors to find the
information or product offerings they seek, and that can deliver
economically attractive, measurable results to our clients,
cost-effectively for us. Such results require frequent testing
and balancing of numerous variables, including Internet visitor
sources, mix of content and of client and product offerings,
visitor navigation paths, prospect qualification, and
advertising creative design, among others. The complexity of
executing these marketing campaigns is challenging. Due to our
scale and more than ten-year track record, we have successfully
executed thousands of Internet marketing programs, and we have
gained significant experience managing and optimizing this
complexity to meet our clients volume, quality and cost
objectives.
Targeted
media
Targeted media attracts Internet visitors who are relatively
narrowly focused demographically or in their interests. Targeted
media can deliver better measurable marketing results for our
clients, at lower media costs for us, due to higher rates of
conversion of Internet visitors into leads or clicks for
targeted offerings and, often, due to less competition from
display advertisers. We have significant experience at creating,
identifying, monetizing, and managing targeted media on the
Internet. Many of the targeted media sources for our marketing
programs are proprietary or more defensible because of our
direct ownership of websites in our client verticals, our
acquisition of targeted Internet visitors directly from search
engines to our websites, and our exclusive or long-term
relationships with media properties or sources owned by others.
Examples of websites that we own and operate include
WorldWideLearn.com, ArmyStudyGuide.com and Schools.com in our
education client vertical; CardRatings.com, MoneyRates.com,
CarInsurance.com, Insurance.com and Insure.com in our financial
services client vertical; AllAboutLawns.com and OldHouseWeb.com
in our home services client vertical; Internet.com in our
business-to-business
client vertical; and ElderCarelink.com in our healthcare client
vertical.
Proprietary
technology
We have developed a core technology platform and a common set of
applications for managing and optimizing measurable marketing
programs across multiple client verticals at scale. The primary
objectives and effects of our technologies are to achieve higher
media yield, deliver better results for our clients, and more
efficiently and effectively manage our scale and complexity. We
continuously strive to develop technologies that allow us to
better match Internet visitors in our client verticals to the
information, clients or product offerings they seek at scale. In
so doing, our technologies can allow us to simultaneously
improve visitor satisfaction, increase our media yield, and
achieve higher rates of conversions of leads or clicks for our
clients a virtuous cycle of increased value for
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Internet visitors and our clients and competitive advantage for
us. Some of the key applications in our technology platform are:
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an ad server for tracking the placement and performance of
content, creative messaging, and offerings on our websites and
on those of publishers with whom we work;
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database-driven applications for dynamically matching content,
offers or brands to Internet visitors expressed needs or
interests;
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a platform for measuring and managing the performance of tens of
thousands of PPC search engine advertising campaigns;
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dashboards or reporting tools for displaying operating and
financial metrics for thousands of ongoing marketing campaigns;
and,
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a compliance tool capable of cataloging and filtering content
from the thousands of websites on which our marketing programs
appear to ensure adherence to client branding guidelines and to
regulatory requirements.
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Approximately one-third of our employees are engineers, focused
on building, maintaining and operating our technology platform.
Client
relationships
We believe we are a reliable source of measurably effective
marketing results for our clients. We endeavor to work
collaboratively and in a data-driven way with clients to improve
our results for them. We believe our high client retention and
per client growth rates are due to:
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our close, often direct, relationships with most of our large
clients;
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our ability to deliver measurable and attractive return on
investment, or ROI, on clients marketing spending;
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our ownership of, or exclusive access to large amounts of,
targeted media inventory and associated Internet visitors in the
client verticals on which we focus; and,
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our ability to consistently and reliably deliver large
quantities of qualified leads or clicks.
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We believe that our high client retention rates, combined with
our depth and breadth of online media in our primary client
verticals, indicate that we are becoming an important marketing
channel partner for our clients to reach their prospective
customers.
Client-driven
online marketing approach
We focus on providing measurable Internet marketing and media
services to our clients in a way that protects and enhances
their brands and their relationships with prospective customers.
The Internet marketing programs we execute are designed to
adhere to strict client branding and regulatory guidelines, and
are designed to match our clients brands and offers with
expressed customer interest. We have contractual arrangements
with third-party website publishers to ensure that they follow
our clients brand guidelines, and we utilize our
proprietary technologies and trained personnel to help ensure
compliance. In addition, we believe that providing relevant,
helpful content and client offers that match an Internet
visitors self-selected interest in a product or service,
such as requesting information about an education program or
financial product, makes that visitor more likely to convert
into a customer for our clients.
We do not engage in online marketing practices such as spyware
or deceptive promotions that do not provide value to Internet
visitors and that can undermine our clients brands. A
small minority of our Internet visitors reach our websites or
client offerings through advertisements in emails. We employ
practices to ensure that we comply with the CAN-SPAM Act
governing unsolicited commercial email.
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Acquisition
strategy and success
We have successfully acquired vertical online marketing and
media companies, including vertical website businesses,
marketing services companies, and technologies. We believe we
can integrate and generate value from acquisitions due to our
scale, breadth of capabilities, and common technology platform.
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Our ability to monetize Internet media, coupled with client
demand for our services, provides us with a particular advantage
in acquiring targeted online media properties in the client
verticals on which we focus.
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Our capabilities in online media can allow us to generate a
greater volume of leads or clicks, and therefore create more
value, than other owners of marketing services companies that
have aggregated client budgets or relationships.
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We can often apply technologies across our business volume to
create more value than previous owners of the technology.
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Scale
We are one of the largest Internet vertical marketing and media
companies in the world. Our scale allows us to better meet the
needs of large clients for reliability, volume and quality of
service. It allows us to invest more in technologies that
improve media yield, client results and our operating
efficiency. We are also able to invest more in other forms of
research and development, including determining and developing
new types of vertical media, new approaches to engaging website
visitors, and new segments of Internet visitors and client
budgets, all of which can lead to advantages in media costs,
effectiveness in delivering client results, and then to more
growth and greater scale.
Our
Strategy
Our goal is to be one of the largest and most successful
marketing and media companies on the Internet, and eventually in
other digitized media forms. We believe that we are in the early
stages of a very large and long-term business opportunity. Our
strategy for pursuing this opportunity includes the following
key components:
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Focus on generating sustainable revenues by providing
measurable value to our clients.
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Build QuinStreet and our industry sustainably by behaving
ethically in all we do and by providing quality content and
website experiences to Internet visitors.
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Remain vertically focused, choosing to grow through depth,
expertise and coverage in our current client verticals; enter
new client verticals selectively over time, organically and
through acquisitions.
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Build a world class organization, with
best-in-class
capabilities for delivering measurable marketing results to
clients and high yields or returns on media costs.
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Develop and evolve the best technologies and platform for
managing vertical marketing and media on the Internet; focus on
technologies that enhance media yield, improve client results
and achieve scale efficiencies.
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Build, buy and partner with vertical content websites that
provide the most relevant and highest quality visitor
experiences in the client and media verticals we serve.
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Be a client-driven organization; develop a broad set of media
sources and capabilities to reliably meet client needs.
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8
Our
Culture
Our values are the foundation of our successful business
culture. They represent the standards we strive to achieve and
the organization we continuously seek to become. These have been
our guiding principles since our founding in 1999. Our values
are:
1. Performance. We lead and take
ownership of results and growth. We know that results drive our
success. We are bold in their pursuit. We take responsibility
and a whatever it takes approach to getting things
done, and done right. We seek input to make the best decisions
possible, but we also act decisively. We ask for help rather
than missing commitments or making excuses. We are committed to
our personal and professional development and to that of our
colleagues. Our growth grows the Company.
2. Open Communications. We respect our
colleagues and deal with one another openly, honestly and
non-hierarchically in an atmosphere of mutual trust and in
pursuit of common stretch goals. We assume noble intentions. We
have an obligation to dissent and may problem-solve with anyone,
anywhere in the organization at any time in the pursuit of the
best solutions. We are mindful of roles and of the need to keep
each other informed to avoid discourtesy, chaos and unintended
consequences. We avoid surprises. But, ideas and performance
rule, not rank and reporting lines. We support decisions once
made, and move forward.
3. High Standards. We hold each other and
ourselves to the highest standards of performance,
professionalism and personal behavior. We act with the highest
of ethical standards. We deliver a strong full-time commitment
to our work. We are as flexible as possible in work timing and
place to maximize retention of the best people. We tolerate and
forgive mistakes, and view them as opportunities to learn and
grow. We do not tolerate patterns of bad behavior or poor
performance.
4. Customer Empathy. We strive every day
to better understand and anticipate the needs of all of our
customers, including clients, visitors, publishers, and other
business partners. We leverage these insights into better
results, higher customer satisfaction and competitive advantage.
5. Prioritization. We work on what is
most important to achieving Company objectives next. If not
clear, we discuss and evaluate competing demands. We are
decisive about what we will not do. We stop working on things
that no longer adequately advance the business.
6. Urgency. We worry constantly about
making enough progress, fast enough, and that the systems,
products and programs that we touch are working correctly so
that we do not lose time. We know our goals and measure our
progress toward them daily.
7. Progress. We are pioneers. We generate
hypotheses and make decisions based on facts and analysis, as
well as intuition. We know that there will be failures in the
pursuit of rapid progress. We learn from failures on short cycle
times and iterate our way to success.
8. Agility. We prize creativity and
flexibility. We innovate constantly. We embrace new ideas and
approaches as opportunities to improve our performance or work
environment. We adapt often and quickly to changing client,
market and competitive dynamics. We resist pride of authorship;
it limits progress. We actively benchmark and work to understand
and employ internal and external best practices and successes.
9. Recognition. We are a meritocracy.
Advancement and recognition are earned through contribution and
performance, including helping others to achieve and nurturing
the best Company culture. We celebrate each others
victories and efforts. We abhor office politics and never take
an action just to advance self-interest or self-promotion.
10. Fun. We believe that work, done well,
can and should be fun. We strive to create an upbeat, supportive
environment and try not to take ourselves too seriously. We do
not have time for negativism, pessimism or nay saying.
Clients
In fiscal years 2011, 2010 and 2009, our top 20 clients
accounted for 62%, 65% and 68% of net revenue, respectively. One
of our largest current clients, DeVry Inc., accounted for 19% of
net revenue in fiscal year 2009. In
9
fiscal years 2011 and 2010, no client comprised more than 10% of
annual net revenue. Since our service was first offered in 2001,
we have developed a broad client base with many multi-year
relationships. We enter into Internet marketing contracts with
our clients, most of which are cancelable with little or no
prior notice. In addition, these contracts do not contain
penalty provisions for cancellation before the end of the
contract term.
Sales and
Marketing
We have an internal sales team that consists of employees
focused on signing new clients and account managers who maintain
and seek to increase our business with existing clients. Our
sales people and account managers are each focused on a
particular client vertical so that they develop an expertise in
the marketing needs of our clients in that particular vertical.
Our marketing programs include attendance at trade shows and
conferences and limited advertising.
Technology
and Infrastructure
We have developed a suite of technologies to manage, improve and
measure the results of the marketing programs we offer our
clients. We use a combination of proprietary and third-party
software as well as hardware from established technology
vendors. We use specialized software for client management,
building and managing websites, acquiring and managing media,
managing our third-party publishers, and the matching of
Internet visitors to our marketing clients. We have invested
significantly in these technologies and plan to continue to do
so to meet the demands of our clients and Internet visitors, to
increase the scalability of our operations, and enhance
management information systems and analytics in our operations.
Our development teams work closely with our marketing and
operating teams to develop applications and systems that can be
used across our business. In fiscal years 2011, 2010 and 2009,
we spent $24.2 million, $19.7 million and
$14.9 million, respectively, on product development.
Our primary data center is at a third-party co-location center
in San Francisco, California. All of the critical
components of the system are redundant and we have a backup data
center in Las Vegas, Nevada. We have implemented these backup
systems and redundancies to minimize the risk associated with
earthquakes, fire, power loss, telecommunications failure, and
other events beyond our control.
Intellectual
Property
We rely on a combination of trade secret, trademark, copyright
and patent laws in the United States and other jurisdictions
together with confidentiality agreements and technical measures
to protect the confidentiality of our proprietary rights. We
currently have two patent applications pending in the United
States and no issued patents. We rely much more heavily on trade
secret protection than patent protection. To protect our trade
secrets, we control access to our proprietary systems and
technology and enter into confidentiality and invention
assignment agreements with our employees and consultants and
confidentiality agreements with other third parties. QuinStreet
is a registered trademark in the United States and other
jurisdictions. We also have registered and unregistered
trademarks for the names of many of our websites and we own the
domain registrations for our many website domains.
Our
Competitors
Our primary competition falls into two categories: advertising
and direct marketing services agencies, and online marketing and
media companies. We compete for business on the basis of a
number of factors including return on marketing expenditures,
price, access to targeted media, ability to deliver large
volumes or precise types of customer prospects, and reliability.
Advertising
and direct marketing services agencies
Online and offline advertising and direct marketing services
agencies control the majority of the large client marketing
spending for which we primarily compete. So, while they are
sometimes our competitors, agencies are also often our clients.
We compete with agencies to attract marketing budget or spending
from offline forms to the
10
Internet or, once designated to be spent online, to be spent
with us versus the agency or by the agency with others. When
spending online, agencies spend with QuinStreet and with
portals, other websites and ad networks.
Online
marketing and media companies
We compete with other Internet marketing and media companies, in
many forms, for online marketing budgets. Most of these
competitors compete with us in one vertical. Examples include
BankRate in the financial services client vertical and Halyard
Education Partners in the education client vertical. Some of our
competition also comes from agencies or clients spending
directly with larger websites or portals, including Google,
Yahoo!, MSN, and AOL.
Government
Regulation
Advertising and promotional information presented to visitors on
our websites and our other marketing activities are subject to
federal and state consumer protection laws that regulate unfair
and deceptive practices. There are a variety of state and
federal restrictions on the marketing activities conducted by
telephone, the mail or by email, or over the internet, including
the Telemarketing Sales Rule, state telemarketing laws, federal
and state privacy laws, the CAN-SPAM Act, and the Federal Trade
Commission Act and its accompanying regulations and guidelines.
In addition, some of our clients operate in regulated
industries, particularly in our financial services, education
and medical verticals. In our education client vertical, our
clients are subject to the U.S. Higher Education Act,
which, among other things, prohibits incentive compensation in
recruiting students. The Department of Education issued final
regulations on incentive compensation and other matters which
become effective July 1, 2011. The Departments
regulations repeal all safe harbors regarding incentive
compensation which existed under the prior regulations,
including the safe harbor for Internet-based recruiting and
admissions activities. The regulations state that payment for
contact information or consumer clicks do not
constitute incentive compensation for purposes of the Higher
Education Act provided that there is no commission, bonus or
other incentive payment based directly or indirectly upon
success in securing enrollments. Notwithstanding the foregoing,
these regulations could impact how we are paid for leads by
clients in our education client vertical and could also impact
our education clients and their marketing practices. In
addition, the same regulations impose strict liability on
educational institutions for misrepresentations made by
entities, like us, who contract with the institutions to provide
marketing services. As a result, our clients have demanded and
we have agreed to be subject to increased limitations of
liability in our contracts as well as indemnification for
actions by our third-party publishers. Other regulations, such
as the regulations on gainful employment that become
effective on July 1, 2012 will restrict Federal financial
aid to students in programs where certain
debt-to-income
ratios and loan default rates are not satisfied, could limit our
clients businesses and, therefore, ours. In our financial
services vertical, the U.S. Real Estate Settlement
Procedures Act, or RESPA, regulates the payments that may be
made to mortgage brokers. While we do not engage in the
activities of a traditional mortgage broker, we are licensed as
a mortgage broker in 24 states for our online marketing
activities. Our insurance business is also highly regulated and
we are a licensed insurance agent in all fifty states. In our
medical client vertical, our medical device and supplies clients
are subject to state and federal anti-kickback statutes that
prohibit payment for referrals. While we believe our matching of
prospective customers with our clients and the manner in which
we are paid for these activities complies with these and other
applicable regulations, these rules and regulations in many
cases were not developed with online marketing in mind and their
applicability is not always clear. The rules and regulations are
complex and may be subject to different interpretations by
courts or other governmental authorities. We might
unintentionally violate such laws, such laws may be modified and
new laws may be enacted in the future. Any such developments (or
developments stemming from enactment or modification of other
laws) or the failure to anticipate accurately the application or
interpretation of these laws could create liability to us and
result in adverse publicity.
Employees
As of June 30, 2011, we had 675 employees, which
consisted of 207 employees in product development and
engineering, 64 in sales and marketing, 57 in general and
administration and 347 in operations. None of our employees is
represented by a labor union.
11
Available
Information
We file reports with the Securities and Exchange Commission
(SEC), including annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any other filings required by the SEC. We make available
free of charge on our website via the investor relations page on
www.quinstreet.com our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the SEC. We also webcast our earnings calls and
certain events we host with members of the investment community
on our investor relations page. The content of our website is
not intended to be incorporated by reference into this report or
in any other report or document we file and any reference to
this website is intended to be inactive textual references only.
The public may read and copy any materials we file with the SEC
at the SECs Public Reference Room at
100 F Street, NE, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room
by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site
(http://www.sec.gov)
that contains reports, proxy and information statements, and
other information regarding issuers that file electronically
with the SEC.
Executive
Officers of the Registrant
The name of and certain information regarding each of our
current executive officers as of June 30, 2011 are set
forth below.
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Name
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Age
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Position
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Douglas Valenti
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Chief Executive Officer and Chairman
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Bronwyn Syiek
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President and Chief Operating Officer
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Kenneth Hahn
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Chief Financial Officer
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Tom Cheli
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Executive Vice President
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Scott Mackley
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Executive Vice President
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Nina Bhanap
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Chief Technology Officer
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Daniel Caul
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General Counsel
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Timothy Stevens
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Senior Vice President
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Douglas Valenti has served as our Chief Executive Officer
and member of our board of directors since July 1999 and as our
Chairman and Chief Executive Officer since March 2004. Prior to
QuinStreet, Mr. Valenti served as a partner at Rosewood
Capital, a venture capital firm, for five years; at
McKinsey & Company as a strategy consultant and
engagement manager for three years; at Procter &
Gamble in various management roles for three years; and for the
U.S. Navy as a nuclear submarine officer for five years. He
holds a Bachelors degree in Industrial Engineering from the
Georgia Institute of Technology, where he graduated with highest
honors and was named the Georgia Tech Outstanding Senior in
1982, and an M.B.A. from the Stanford Graduate School of
Business, where he was an Arjay Miller Scholar.
Bronwyn Syiek has served as our President and Chief
Operating Officer since February 2007 and member of our board of
directors since January 2011, as our Chief Operating Officer
from April 2004 to February 2007, as Senior Vice President from
September 2000 to April 2004, as Vice President from her start
date in March 2000 to September 2000 and as a consultant to us
from July 1999 to March 2000. Prior to joining us,
Ms. Syiek served as Director of Business Development and
member of the Executive Committee at De La Rue Plc, a
banknote printing and security product company, for three years.
She previously served as a strategy consultant and engagement
manager at McKinsey & Company for four years and held
various investment management and banking positions with Lloyds
Bank and Charterhouse Bank. She holds an M.A. in Natural
Sciences from Cambridge University in the United Kingdom.
Kenneth Hahn has served as our Chief Financial Officer
since September 2006. Prior to joining us, Mr. Hahn served
as Chief Financial Officer of Borland Software Corporation, a
public software company, from September 2002 to July 2006.
Previously, Mr. Hahn served in various roles, including
Chief Financial Officer, of Extensity,
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Inc., a public software company, for five years; as a strategy
consultant at the Boston Consulting Group for three years; and
as an audit manager at Price Waterhouse, a public accounting
firm, for five years. He holds a B.A. in Business from
California State University Fullerton, summa cum laude, and an
M.B.A. from the Stanford Graduate School of Business, where he
was an Arjay Miller Scholar. Mr. Hahn is also a Certified
Public Accountant (inactive), licensed in the state of
California.
Tom Cheli has served as our Executive Vice President
since February 2007, as Senior Vice President from December 2004
to February 2007, as Vice President of Sales from January 2001
to December 2004 and as Director of Sales from February 2000 to
January 2001. Prior to joining us, Mr. Cheli served as
Director of Inside Sales and Sales Operations at Collagen
Aesthetics Corporation, an aesthetic biomedical device company,
and as Regional Sales Manager at Akorn Ophthalmics, Inc., a
specialty pharmaceutical company. He holds a B.A. in Sports
Medicine from the University of the Pacific.
Scott Mackley has served as our Executive Vice President
since February 2007, as Senior Vice President from December 2004
to February 2007, as Vice President from June 2003 to December
2004, as Senior Director from February 2002 to June 2003, as
Director from October 2000 to February 2002 and as Senior
Manager, Network Management from May 2000 to October 2000. Prior
to joining us, Mr. Mackley served at Salomon Brothers and
Salomon Smith Barney, in various roles in their Equity Trading
unit and Investment Banking and Equity Capital Markets divisions
over four years. He holds a B.A. in Economics from Washington
and Lee University.
Nina Bhanap has served as our Chief Technology Officer
since July 2009, as our Senior Vice President of Engineering
from November 2006 to July 2009, as Vice President of Product
Development from January 2004 to November 2006, as Senior
Director from January 2003 to January 2004 and as Director of
Product Management from October 2001 to January 2003. Prior to
joining us, Ms. Bhanap served as Head of Fixed Income Sales
Technology for Europe at Morgan Stanley for five years and as a
senior associate at Booz Allen Hamilton for one year. She holds
a B.S. in Computer Science with Honors from Imperial College,
University of London, and an M.B.A. from the London Business
School.
Daniel Caul has served as our General Counsel since
January 2008. Prior to joining us, Mr. Caul served as
General Counsel for the Search and Media division of
IAC/InterActiveCorp, an Internet search and advertising company,
from September 2006 to January 2008, and prior to the
acquisition by IAC/InterActiveCorp, he was Assistant General
Counsel of Ask Jeeves, Inc. from February 2003 to September
2006. Previously, Mr. Caul was an attorney with Howard,
Rice, Nemerovsky, Canady, Falk and Rabkin, a corporate law firm,
for four years and served as a U.S. District Court clerk.
He holds a B.A. in Political Science from Vanderbilt University,
summa cum laude, and a J.D. from the Harvard Law School, magna
cum laude. Mr. Caul was also a Fulbright Scholar.
Timothy Stevens has served as our Senior Vice President
since October 2008. Prior to joining us, Mr. Stevens served
as President and CEO of Doppelganger, Inc., an online social
entertainment studio, from January 2007 to October 2008. Prior
to Doppelganger, Mr. Stevens served as General Counsel for
Borland Software Corporation, a software company, from October
2003 to June 2006. Previously, he served in various executive
management roles, including most recently as Senior Vice
President of Corporate Development, at Inktomi Corporation, an
Internet infrastructure company, during his six year tenure.
Previously, Mr. Stevens was an attorney with Wilson Sonsini
Goodrich & Rosati, a corporate law firm, for six
years. He holds a B.S. in both Finance and Management from the
University of Oregon, summa cum laude, and a J.D. from the
University of California at Davis, Order of the Coif.
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks described below and the
other information in this report on
Form 10-K.
If any of such risks actually occur, our business, operating
results or financial condition could be adversely affected. In
those cases, the trading price of our common stock could decline
and you may lose all or part of your investment.
13
Risks
Related to Our Business and Industry
We
operate in an immature industry and have a relatively new
business model, which makes it difficult to evaluate our
business and prospects.
We derive nearly all of our revenue from the sale of online
marketing and media services, which is an immature industry that
has undergone rapid and dramatic changes in its short history.
The industry in which we operate is characterized by
rapidly-changing Internet media, evolving industry standards,
and changing user and client demands. Our business model is also
evolving and is distinct from many other companies in our
industry, and it may not be successful. As a result of these
factors, the future revenue and income potential of our business
is uncertain. Although we have experienced significant revenue
growth in recent periods, we may not be able to sustain current
revenue levels or growth rates. Any evaluation of our business
and our prospects must be considered in light of these factors
and the risks and uncertainties often encountered by companies
in an immature industry with an evolving business model such as
ours. Some of these risks and uncertainties relate to our
ability to:
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maintain and expand client relationships;
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sustain and increase the number of visitors to our websites;
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sustain and grow relationships with third-party website
publishers and other sources of web visitors;
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manage our expanding operations and implement and improve our
operational, financial and management controls;
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overcome challenges presented by adverse global economic
conditions as they impact spending in our client verticals;
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raise capital at attractive costs, or at all;
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acquire and integrate websites and other businesses;
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successfully expand our footprint in our existing client
verticals and enter new client verticals;
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respond effectively to competition and potential negative
effects of competition on profit margins;
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attract and retain qualified management, employees and
independent service providers;
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successfully introduce new processes and technologies and
upgrade our existing technologies and services;
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protect our proprietary technology and intellectual property
rights; and
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respond to government regulations relating to the Internet,
marketing in our client verticals, personal data protection,
email, software technologies and other aspects of our business.
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If we are unable to address these risks, our business, results
of operations and prospects could suffer.
We
depend upon Internet search companies to attract a significant
portion of the visitors to our websites, and any change in the
search companies search algorithms or perception of us or
our industry could result in our websites being listed less
prominently in either paid or algorithmic search result
listings, in which case the number of visitors to our websites
and our revenue could decline.
We depend in significant part on various Internet search
companies, such as Google, Microsoft and Yahoo!, and other
search websites to direct a significant number of visitors to
our websites to provide our online marketing services to our
clients. Search websites typically provide two types of search
results, algorithmic and paid listings. Algorithmic, or organic,
listings are determined and displayed solely by a set of
formulas designed by search companies. Paid listings can be
purchased and then are displayed if particular words are
included in a users Internet search. Placement in paid
listings is generally not determined solely on the bid price,
but also takes into account the search engines assessment
of the quality of the website featured in the paid listing and
other factors. We rely on both algorithmic and paid search
results, as well as advertising on other websites, to direct a
substantial share of the visitors to our websites.
14
Our ability to maintain the number of visitors to our websites
from search websites and other websites is not entirely within
our control. For example, Internet search websites frequently
revise their algorithms in an attempt to optimize their search
result listings or to maintain their internal standards and
strategies. Changes in the algorithms could cause our websites
to receive less favorable placements, which could reduce the
number of users who visit our websites. We have experienced
fluctuations in the search result rankings for a number of our
websites. Some of our sites and paid listing campaigns have been
negatively impacted by Google algorithmic changes. In addition,
our business model may be deemed similar to those of our
competitors and others in our industry that Internet search
websites may consider to be unsuitable or unattractive. Internet
search websites could deem our content to be unsuitable or below
standards or less attractive or worthy than those of other or
competing websites. In either such case, our websites may
receive less favorable placement in algorithmic or paid
listings, or both.
In addition, we may make decisions that are suboptimal regarding
the purchase of paid listings or our proprietary bid management
technologies may contain defects or otherwise fail to achieve
their intended results, either of which could also reduce the
number of visitors to our websites or cause us to incur
additional costs. We may also make decisions that are suboptimal
regarding the placement of advertisements on other websites and
pricing, which could increase our costs to attract such visitors
or cause us to incur unnecessary costs. A reduction in the
number of visitors to our websites could negatively affect our
ability to earn revenue. If visits to our websites decrease, we
may need to resort to more costly sources to replace lost
visitors, and such increased expense could adversely affect our
business and profitability.
A
substantial portion of our revenue is generated from a limited
number of clients and, if we lose a major client, our revenue
will decrease and our business and prospects would be adversely
impacted.
A substantial portion of our revenue is generated from a limited
number of clients. Our top three clients accounted for 20% of
our net revenue for the fiscal year ended June 30, 2011.
Our clients can generally terminate their contracts with us at
any time, with limited prior notice or penalty. Our clients may
reduce their level of business with us, leading to lower
revenue. In addition, reductions in business by one or more
significant clients of our programs may lead to price reductions
to our other clients for those products whose prices are
determined in whole or in part by client bidding or competition,
resulting in lower revenue. We expect that a limited number of
clients will continue to account for a significant percentage of
our revenue, and the loss of, or material reduction in, their
marketing spending with us could decrease our revenue and harm
our business.
There
is significant activity and uncertainty in the regulatory and
legislative environment for the for-profit education sector.
These regulatory or legislative changes could negatively affect
our clients businesses, marketing practices and budgets
and could impact demand, pricing or form of our services, any or
all of which could have a material adverse impact on our
financial results.
We generate nearly half of our revenue from our education client
vertical and nearly all of that revenue is generated from
for-profit educational institutions. There is intense
governmental interest in and scrutiny of the for-profit
education industry and a high degree of focus on marketing
practices in the industry. The Department of Education has
promulgated proposed and final regulations that could adversely
impact us and our education clients. The intense focus on the
for-profit education industry could result in further regulatory
or legislative action. We cannot predict whether this will
happen or what the impact could be on our financial results.
The Higher Education Act, administered by the
U.S. Department of Education, provides that to be eligible
to participate in Federal student financial aid programs, an
educational institution must enter into a program participation
agreement with the Secretary of the Department of Education. The
agreement includes a number of conditions with which an
institution must comply to be granted initial and continuing
eligibility to participate. Among those conditions is a
prohibition on institutions providing to any individual or
entity engaged in recruiting or admission activities any
commission, bonus, or other incentive payment based directly or
indirectly on success in securing enrollments. The Department of
Education issued final regulations on incentive compensation and
other matters which became effective July 1, 2011. The
Departments regulations repeal all safe harbors regarding
incentive compensation which existed under the prior
regulations, including the safe harbor for Internet-based
recruiting and admissions activities. The elimination of the
safe harbors could create uncertainty for us and our
15
education clients and impact the way in which we are paid by our
clients and, accordingly, could reduce the amount of revenue we
generate from the education client vertical.
In addition, the same regulations impose strict liability on
educational institutions for misrepresentations made by
entities, like us, who contract with the institutions to provide
marketing services. As a result, our clients have demanded and
we have agreed to be subject to increased limitations of
liability in our contracts as well as indemnification for
actions by our third-party publishers. We could be subject to
costly litigation and damage to our reputation, if we are
unsuccessful in defending ourselves, damages for our violation
of any applicable regulation and the unauthorized or unlawful
acts of third-party website publishers.
Other existing and proposed regulations could negatively impact
our for-profit education clients. For example, the regulations
on gainful employment that would restrict or
eliminate federal financial aid to students in programs where
certain
debt-to-income
ratios and loan default rates are not satisfied could result in
the elimination or reduction in some of our clients
programs. Over the past year, enrollments have dropped
significantly at some of our clients, caused in part by changes
being made in anticipation of the implementation of this
regulation. In addition, some of our large for-profit education
clients have indicated that in coming years they may violate the
90/10
rule, whereby for-profit institutions must receive at
least 10 percent of their revenue from sources other than
federal student financial aid. If a for-profit institution fails
to comply with the rule for two consecutive fiscal years, it may
lose its eligibility to receive student-aid funds for at least
two years. These and other regulations or a failure of our
clients to comply with such regulations, could adversely affect
our clients businesses and, as a result, affect or
materially reduce the amount of revenue we generate from those
clients.
Moreover, some of our education clients have had and may in the
future have issues regarding their academic accreditation, which
could adversely affect their ability to offer certain degree
programs. If any of our significant education clients lose their
accreditation, they may reduce or eliminate their marketing
spending, which could adversely affect our financial results.
Any of the aforementioned regulatory or legislative risks could
cause some or all of our education clients to significantly
shrink or even to cease doing business, which could have a
material adverse effect on our financial results.
We are
dependent on two market verticals for a majority of our revenue.
Negative changes in the economic condition, market dynamics or
regulatory environment in one or both of these verticals could
cause our revenue to decline and our business and growth could
suffer.
To date, we have generated a majority of our revenue from
clients in our education and financial services client
verticals. We expect that a majority of our revenue in the near
term will continue to be generated from clients in our education
and financial services client verticals. Changes in the market
conditions or the regulatory environment in these two
highly-regulated client verticals may negatively impact our
clients businesses, marketing practices and budgets and,
therefore, adversely affect our financial results.
Our
operating results have fluctuated in the past and may do so in
the future, which makes our results of operations difficult to
predict and could cause our operating results to fall short of
analysts and investors expectations.
While we have experienced revenue growth, our prior quarterly
and annual operating results have fluctuated due to changes in
our business, our industry and the general economic climate.
Similarly, our future operating results may vary significantly
from quarter to quarter due to a variety of factors, many of
which are beyond our control. Our fluctuating results could
cause our performance to be below the expectations of securities
analysts and investors, causing the price of our common stock to
fall. Because our business is changing and evolving, our
historical operating results may not be useful to you in
predicting our future operating results. Factors that may
increase the volatility of our operating results include the
following:
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changes in demand and pricing for our services;
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changes in our pricing policies, the pricing policies of our
competitors, or the pricing of Internet advertising or media;
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the addition of new clients or the loss of existing clients;
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changes in our clients advertising agencies or the
marketing strategies our clients or their advertising agencies
employ;
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changes in the regulatory environment for us or our clients;
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changes in the economic prospects of our clients or the economy
generally, which could alter current or prospective
clients spending priorities, or could increase the time or
costs required to complete sales with clients;
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changes in the availability of Internet advertising or the cost
to reach Internet visitors;
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changes in the placement of our websites on search engines;
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the introduction of new product or service offerings by our
competitors; and
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costs related to acquisitions of businesses or technologies.
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Our
future growth depends on part on our ability to identify and
complete acquisitions. Any acquisitions that we pursue or
complete will involve a number of risks. If we are unable to
address and resolve these risks successfully, such acquisition
activity could harm our business, results of operations and
financial condition.
Our growth over the past several years is in significant part
due to the large number of acquisitions we have completed of
third-party website publishing businesses and other businesses
that are complementary to our own. We intend to evaluate and
pursue additional acquisitions of complementary businesses and
technologies to expand our capabilities, client base and media.
We have also evaluated, and expect to continue to evaluate, a
wide array of potential strategic transactions. However, we may
not be successful in identifying suitable acquisition candidates
or be able to complete acquisitions of such candidates. In
addition, we may not be able to obtain financing on favorable
terms, or at all, to fund acquisitions that we may wish to
pursue. The anticipated benefit of acquisitions that we complete
may not materialize and the process of integrating acquired
businesses or technologies may create unforeseen operating
difficulties and expenditures. Some of the areas where we may
face acquisition-related risks include:
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diversion of management time and potential business disruptions;
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difficulties integrating and supporting acquired products or
technologies;
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disruptions or reductions in client revenues associated with
changes to the business models of acquired businesses;
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expenses, distractions and potential claims resulting from
acquisitions, whether or not they are completed;
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retaining and integrating employees from any businesses we may
acquire;
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issuance of dilutive equity securities, incurrence of debt or
reduction in cash balances;
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integrating various accounting, management, information, human
resource and other systems to permit effective management;
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incurring possible impairment charges, contingent liabilities,
amortization expense or write-offs of goodwill;
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unexpected capital expenditure requirements;
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insufficient revenue to offset increased expenses associated
with acquisitions;
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underperformance problems associated with acquisitions; and
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becoming involved in acquisition-related litigation.
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Foreign acquisitions involve risks in addition to those
mentioned above, including those related to integration of
operations across different cultures and languages, currency
risks and the particular economic, political, administrative and
management, and regulatory risks associated with specific
countries. We may not be able to address these risks
successfully, or at all, without incurring significant costs,
delay or other operating problems. Our inability to resolve such
risks could harm our business and results of operations.
If we
are unable to retain the members of our management team or
attract and retain qualified management team members in the
future, our business and growth could suffer.
Our success and future growth depend, to a significant degree,
on the continued contributions of the members of our management
team. Each member of our management team is an at-will employee
and may voluntarily terminate his or her employment with us at
any time with minimal notice. We also may need to hire
additional management team members to adequately manage our
growing business. We may not be able to retain or identify and
attract additional qualified management team members.
Competition for experienced management-level personnel in our
industry is intense. Qualified individuals are in high demand,
particularly in the Internet marketing industry, and we may
incur significant costs to attract and retain them. Members of
our management team have also become, or will soon become,
substantially vested in their stock option grants. Management
team members may be more likely to leave as a result of the
recent establishment of a public market for our common stock. If
we lose the services of any member of our management team or if
we are unable to attract and retain additional qualified senior
managers, our business and growth could suffer.
We
need to hire and retain additional qualified personnel to grow
and manage our business. If we are unable to attract and retain
qualified personnel, our business and growth could be seriously
harmed.
Our performance depends on the talents and efforts of our
employees. Our future success will depend on our ability to
attract, retain and motivate highly skilled personnel in all
areas of our organization and, in particular, in our
engineering/technology, sales and marketing, media, finance and
legal/regulatory teams. We plan to continue to grow our business
and will need to hire additional personnel to support this
growth. We have found it difficult from time to time to locate
and hire suitable personnel. If we experience similar
difficulties in the future, our growth may be hindered.
Qualified individuals are in high demand, particularly in the
Internet marketing industry, and we may incur significant costs
to attract and retain them. Many of our employees have also
become, or will soon become, substantially vested in their stock
option grants. Employees may be more likely to leave us as a
result of the establishment of a public market for our common
stock. If we are unable to attract and retain the personnel we
need to succeed, our business and growth could be harmed.
We
depend on third-party website publishers for a significant
portion of our visitors, and any decline in the supply of media
available through these websites or increase in the price of
this media could cause our revenue to decline or our cost to
reach visitors to increase.
A significant portion of our revenue is attributable to visitors
originating from arrangements that we have with third-party
websites. In many instances, website publishers can change the
media inventory they make available to us at any time and,
therefore, impact our revenue. In addition, website publishers
may place significant restrictions on our offerings. These
restrictions may prohibit advertisements from specific clients
or specific industries, or restrict the use of certain creative
content or formats. If a website publisher decides not to make
media inventory available to us, or decides to demand a higher
revenue share or places significant restrictions on the use of
such inventory, we may not be able to find advertising inventory
from other websites that satisfy our requirements in a timely
and cost-effective manner. In addition, the number of competing
online marketing service providers and advertisers that acquire
inventory from websites continues to increase. Consolidation of
Internet advertising networks and website publishers could
eventually lead to a concentration of desirable inventory on a
small number of websites or networks, which could limit the
supply of inventory available to us or increase the price of
inventory to us. We cannot assure you that we will be able to
acquire advertising inventory that meets our clients
performance, price and quality requirements. If any of these
things occur, our revenue could decline or our operating costs
may increase.
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If we
do not effectively manage our growth, our operating performance
will suffer and we may lose clients.
We have experienced rapid growth in our operations and operating
locations, and we expect to experience further growth in our
business, both through acquisitions and internally. This growth
has placed, and will continue to place, significant demands on
our management and our operational and financial infrastructure.
In particular, continued rapid growth and acquisitions may make
it more difficult for us to accomplish the following:
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successfully scale our technology to accommodate a larger
business and integrate acquisitions;
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maintain our standing with key vendors, including Internet
search companies and third-party website publishers;
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maintain our client service standards; and
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develop and improve our operational, financial and management
controls and maintain adequate reporting systems and procedures.
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In addition, our personnel, systems, procedures and controls may
be inadequate to support our future operations. The improvements
required to manage our growth will require us to make
significant expenditures, expand, train and manage our employee
base and allocate valuable management resources. If we fail to
effectively manage our growth, our operating performance will
suffer and we may lose clients, key vendors and key personnel.
We may
need additional capital in the future to meet our financial
obligations and to pursue our business objectives. Additional
capital may not be available or may not be available on
favorable terms and our business and financial condition could
therefore be adversely affected.
While we anticipate that our existing cash and cash equivalents,
together with availability under our existing credit facility
and cash from operations, will be sufficient to fund our
operations for at least the next 12 months, we may need to
raise additional capital to fund operations in the future or to
finance acquisitions. If we seek to raise additional capital in
order to meet various objectives, including developing future
technologies and services, increasing working capital, acquiring
businesses and responding to competitive pressures, capital may
not be available on favorable terms or may not be available at
all. In addition, pursuant to the terms of our credit facility,
we are required to use a portion of the net proceeds of certain
equity financings to repay the outstanding balance of our term
loan. Lack of sufficient capital resources could significantly
limit our ability to take advantage of business and strategic
opportunities. Any additional capital raised through the sale of
equity or debt securities with an equity component would dilute
our stock ownership. If adequate additional funds are not
available, we may be required to delay, reduce the scope of, or
eliminate material parts of our business strategy, including
potential additional acquisitions or development of new
technologies.
We
have incurred a significant amount of debt, which may limit our
ability to fund general corporate requirements and obtain
additional financing, limit our flexibility in responding to
business opportunities and competitive developments and increase
our vulnerability to adverse economic and industry
conditions.
As of June 30, 2011, we had an outstanding term loan with a
principal balance of $30.2 million and a revolving credit
line pursuant to which we can borrow up to an additional
$190.0 million. As of June 30, 2011, we had drawn
$66.6 million from our revolving credit line. As of such
date, we also had outstanding notes to sellers arising from
numerous acquisitions in the total principal amount of
$11.0 million. As a result of our debt:
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we may not have sufficient liquidity to respond to business
opportunities, competitive developments and adverse economic
conditions;
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we may not have sufficient liquidity to fund all of these costs
if our revenue declines or costs increase; and
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we may not have sufficient funds to repay the principal balance
of our debt when due.
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Our debt obligations may also impair our ability to obtain
additional financing, if needed. Our indebtedness is secured by
substantially all of our assets, leaving us with limited
collateral for additional financing. Moreover, the
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terms of our indebtedness restrict our ability to take certain
actions, including the incurrence of additional indebtedness,
mergers and acquisitions, investments and asset sales. In
addition, even if we are able to raise needed equity financing,
we are required to use a portion of the net proceeds of certain
types of equity financings to repay the outstanding balance of
our term loan. A failure to pay interest or indebtedness when
due could result in a variety of adverse consequences, including
the acceleration of our indebtedness. In such a situation, it is
unlikely that we would be able to fulfill our obligations under
our credit facility or repay the accelerated indebtedness or
otherwise cover our costs.
The
severe economic downturn in the United States still poses
additional risks to our business, financial condition and
results of operations.
The United States has experienced a severe economic downturn and
significant uncertainty about the economic outlook remains. The
slow pace of recovery in the United States, deterioration of
global economies, potential insolvency of one or more countries
globally, high unemployment and reduced equity valuations all
create risks that could harm our business. If macroeconomic
conditions were to worsen, we are not able to predict the impact
such worsening conditions will have on the online marketing
industry in general, and our results of operations specifically.
Clients in particular client verticals such as financial
services, particularly mortgage, credit cards and deposits,
small- and medium-sized business customers and home services are
facing very difficult conditions and their marketing spend has
been negatively affected. These conditions could also damage our
business opportunities in existing markets, and reduce our
revenue and profitability. While the effect of these and related
conditions poses widespread risk across our business, we believe
that it may particularly affect our efforts in the mortgage,
credit cards and deposits, small- and medium-sized business and
home services client verticals, due to reduced availability of
credit for households and business and reduced household
disposable income. Economic conditions may not improve or may
worsen.
Poor
perception of our business or industry as a result of the
actions of third parties could harm our reputation and adversely
affect our business, financial condition and results of
operations.
Our business is dependent on attracting a large number of
visitors to our websites and providing leads and clicks to our
clients, which depends in part on our reputation within the
industry and with our clients. There are companies within our
industry that regularly engage in activities that our
clients customers may view as unlawful or inappropriate.
These activities, such as spyware or deceptive promotions, by
third parties may be seen by clients as characteristic of
participants in our industry and, therefore, may have an adverse
effect on the reputation of all participants in our industry,
including us. Any damage to our reputation, including from
publicity from legal proceedings against us or companies that
work within our industry, governmental proceedings, consumer
class action litigation, or the disclosure of information
security breaches or private information misuse, could adversely
affect our business, financial condition and results of
operations.
Our
quarterly revenue and operating results may fluctuate
significantly from quarter to quarter due to seasonal
fluctuations in advertising spending.
Our results are subject to significant fluctuation as a result
of seasonality. In particular, our quarters ending December 31
(our second fiscal quarter) generally demonstrate seasonal
weakness. In our second fiscal quarters, there is generally
lower availability of lead supply from some forms of media
during the holiday period on a cost effective basis and some of
our clients request fewer leads due to holiday staffing. Our
fluctuating results could cause our performance to be below the
expectations of securities analysts and investors, causing the
price of our common stock to fall. To the extent our rate of
growth slows, we expect that the seasonality in our business may
become more apparent and may in the future cause our operating
results to fluctuate to a greater extent.
If we
fail to compete effectively against other online marketing and
media companies and other competitors, we could lose clients and
our revenue may decline.
The market for online marketing is intensely competitive. We
expect this competition to continue to increase in the future.
We perceive only limited barriers to entry to the online
marketing industry. We compete both for clients
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and for limited high quality advertising inventory. We compete
for clients on the basis of a number of factors, including
return on marketing expenditures, price, and client service.
We compete with Internet and traditional media companies for a
share of clients overall marketing budgets, including:
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online marketing or media services providers such as Halyard
Education Partners in the education client vertical and BankRate
in the financial services client vertical;
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offline and online advertising agencies;
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major Internet portals and search engine companies with
advertising networks such as Google, Yahoo!, MSN, and AOL;
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other online marketing service providers, including online
affiliate advertising networks and industry-specific portals or
lead generation companies;
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website publishers with their own sales forces that sell their
online marketing services directly to clients;
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in-house marketing groups at current or potential clients;
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offline direct marketing agencies; and
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television, radio and print companies.
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Competition for web traffic among websites and search engines,
as well as competition with traditional media companies, could
result in significant price pressure, declining margins,
reductions in revenue and loss of market share. In addition, as
we continue to expand the scope of our services, we may compete
with a greater number of websites, clients and traditional media
companies across an increasing range of different services,
including in vertical markets where competitors may have
advantages in expertise, brand recognition and other areas.
Large Internet companies with brand recognition, such as Google,
Yahoo!, MSN, and AOL, have significant numbers of direct sales
personnel and substantial proprietary advertising inventory and
web traffic that provide a significant competitive advantage and
have significant impact on pricing for Internet advertising and
web traffic. These companies may also develop more vertically
targeted products that match consumers with products and
services, such as Googles mortgage rate and credit card
comparison products, and thus compete with us more directly. The
trend toward consolidation in the Internet advertising arena may
also affect pricing and availability of advertising inventory
and web traffic. Many of our current and potential competitors
also enjoy other competitive advantages over us, such as longer
operating histories, greater brand recognition, larger client
bases, greater access to advertising inventory on high-traffic
websites, and significantly greater financial, technical and
marketing resources. As a result, we may not be able to compete
successfully. Competition from other marketing service
providers on- and offline offerings could affect both
volume and price, and thus revenue. If we fail to deliver
results that are superior to those that other online marketing
service providers achieve, we could lose clients and our revenue
may decline.
If the
market for online marketing services fails to continue to
develop, our future growth may be limited and our revenue may
decrease.
The online marketing services market is relatively new and
rapidly evolving, and it uses different measurements than
traditional media to gauge its effectiveness. Some of our
current or potential clients have little or no experience using
the Internet for advertising and marketing purposes and have
allocated only limited portions of their advertising and
marketing budgets to the Internet. The adoption of Internet
advertising, particularly by those entities that have
historically relied upon traditional media for advertising,
requires the acceptance of a new way of conducting business,
exchanging information and evaluating new advertising and
marketing technologies and services. In particular, we are
dependent on our clients adoption of new metrics to
measure the success of online marketing campaigns. We may also
experience resistance from traditional advertising agencies who
may be advising our clients. We cannot assure you that the
market for online marketing services will continue to grow. If
the market for online marketing services fails to continue to
develop or develops more slowly than we anticipate, our ability
to grow our business may be limited and our revenue may decrease.
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Third-party
website publishers can engage in unauthorized or unlawful acts
that could subject us to significant liability or cause us to
lose clients.
We generate a significant portion of our web visitors from media
advertising that we purchase from third-party website
publishers. Some of these publishers are authorized to display
our clients brands, subject to contractual restrictions.
In the past, some of our third-party website publishers have
engaged in activities that certain of our clients have viewed as
harmful to their brands, such as displaying outdated
descriptions of a clients offerings or outdated logos. Any
activity by publishers that clients view as potentially damaging
to their brands can harm our relationship with the client and
cause the client to terminate its relationship with us,
resulting in a loss of revenue. In addition, the law is
unsettled on the extent of liability that an advertiser in our
position has for the activities of third-party website
publishers. Recent Department of Education regulations impose
strict liability on our education clients for misrepresentations
made by their marketing service providers and many of our
contracts in the education client vertical impose liability on
us for the acts of our third-party publishers. We could be
subject to costly litigation and, if we are unsuccessful in
defending ourselves, damages for the unauthorized or unlawful
acts of third-party website publishers.
Because
many of our client contracts can be cancelled by the client with
little prior notice or penalty, the cancellation of one or more
contracts could result in an immediate decline in our
revenue.
We derive our revenue from contracts with our Internet marketing
clients, most of which are cancelable with little or no prior
notice. In addition, these contracts do not contain penalty
provisions for cancellation before the end of the contract term.
The non-renewal, renegotiation, cancellation, or deferral of
large contracts, or a number of contracts that in the aggregate
account for a significant amount of our revenue, is difficult to
anticipate and could result in an immediate decline in our
revenue.
Unauthorized
access to or accidental disclosure of consumer
personally-identifiable information that we collect may cause us
to incur significant expenses and may negatively affect our
credibility and business.
There is growing concern over the security of personal
information transmitted over the Internet, consumer identity
theft and user privacy. Despite our implementation of security
measures, our computer systems may be susceptible to electronic
or physical computer break-ins, viruses and other disruptions
and security breaches. Any perceived or actual unauthorized
disclosure of personally-identifiable information regarding
website visitors, whether through breach of our network by an
unauthorized party, employee theft, misuse or error or
otherwise, could harm our reputation, impair our ability to
attract website visitors and attract and retain our clients, or
subject us to claims or litigation arising from damages suffered
by consumers, and thereby harm our business and operating
results. In addition, we could incur significant costs in
complying with the multitude of state, federal and foreign laws
regarding the unauthorized disclosure of personal information.
If we
do not adequately protect our intellectual property rights, our
competitive position and business may suffer.
Our ability to compete effectively depends upon our proprietary
systems and technology. We rely on trade secret, trademark and
copyright law, confidentiality agreements, technical measures
and patents to protect our proprietary rights. We currently have
two patent applications pending in the United States and no
issued patents. Effective trade secret, copyright, trademark and
patent protection may not be available in all countries where we
currently operate or in which we may operate in the future. Some
of our systems and technologies are not covered by any
copyright, patent or patent application. We cannot guarantee
that: (i) our intellectual property rights will provide
competitive advantages to us; (ii) our ability to assert
our intellectual property rights against potential competitors
or to settle current or future disputes will not be limited by
our agreements with third parties; (iii) our intellectual
property rights will be enforced in jurisdictions where
competition may be intense or where legal protection may be
weak; (iv) any of the patents, trademarks, copyrights,
trade secrets or other intellectual property rights that we
presently employ in our business will not lapse or be
invalidated, circumvented, challenged, or abandoned;
(v) competitors will not design around our protected
systems and technology; or (vi) that we will not lose the
ability to assert our intellectual property rights against
others.
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We are a party to a number of third-party intellectual property
license agreements and in the future, may need to obtain
additional licenses or renew existing license agreements. We are
unable to predict with certainty whether these license
agreements can be obtained or renewed on commercially reasonable
terms, or at all.
We have from time to time become aware of third parties who we
believe may have infringed on our intellectual property rights.
The use of our intellectual property rights by others could
reduce any competitive advantage we have developed and cause us
to lose clients, third-party website publishers or otherwise
harm our business. Policing unauthorized use of our proprietary
rights can be difficult and costly. In addition, litigation,
while it may be necessary to enforce or protect our intellectual
property rights or to defend litigation brought against us,
could result in substantial costs and diversion of resources and
management attention and could adversely affect our business,
even if we are successful on the merits.
Confidentiality
agreements with employees, consultants and others may not
adequately prevent disclosure of trade secrets and other
proprietary information.
We have devoted substantial resources to the development of our
proprietary systems and technology. In order to protect our
proprietary systems and technology, we enter into
confidentiality agreements with our employees, consultants,
independent contractors and other advisors. These agreements may
not effectively prevent unauthorized disclosure of confidential
information or unauthorized parties from copying aspects of our
services or obtaining and using information that we regard as
proprietary. Moreover, these agreements may not provide an
adequate remedy in the event of such unauthorized disclosures of
confidential information and we cannot assure you that our
rights under such agreements will be enforceable. In addition,
others may independently discover trade secrets and proprietary
information, and in such cases we could not assert any trade
secret rights against such parties. Costly and time-consuming
litigation could be necessary to enforce and determine the scope
of our proprietary rights, and failure to obtain or maintain
trade secret protection could reduce any competitive advantage
we have and cause us to lose clients, publishers or otherwise
harm our business.
Third
parties may sue us for intellectual property infringement which,
if successful, could require us to pay significant damages or
curtail our offerings.
We cannot be certain that our internally-developed or acquired
systems and technologies do not and will not infringe the
intellectual property rights of others. In addition, we license
content, software and other intellectual property rights from
third parties and may be subject to claims of infringement if
such parties do not possess the necessary intellectual property
rights to the products they license to us. We have in the past
and may in the future be subject to legal proceedings and claims
that we have infringed the patent or other intellectual property
rights of a third-party. These claims sometimes involve patent
holding companies or other adverse patent owners who have no
relevant product revenue and against whom our own patents, if
any, may therefore provide little or no deterrence. In addition,
third parties have asserted and may in the future assert
intellectual property infringement claims against our clients,
which we have agreed in certain circumstances to indemnify and
defend against such claims. Any intellectual property related
infringement claims, whether or not meritorious, could result in
costly litigation and could divert management resources and
attention. Moreover, should we be found liable for infringement,
we may be required to enter into licensing agreements, if
available on acceptable terms or at all, pay substantial
damages, or limit or curtail our systems and technologies.
Moreover, we may need to redesign some of our systems and
technologies to avoid future infringement liability. Any of the
foregoing could prevent us from competing effectively and
increase our costs.
Additionally, the laws relating to use of trademarks on the
Internet are currently unsettled, particularly as they apply to
search engine functionality. For example, other Internet
marketing and search companies have been sued in the past for
trademark infringement and other intellectual property-related
claims for the display of ads or search results in response to
user queries that include trademarked terms. The outcomes of
these lawsuits have differed from jurisdiction to jurisdiction.
For this reason, it is conceivable that certain of our
activities could expose us to trademark infringement, unfair
competition, misappropriation or other intellectual property
related claims which could be costly to defend and result in
substantial damages or otherwise limit or curtail our
activities, and adversely affect our business or prospects.
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Our
proprietary technologies may include design or performance
defects and may not achieve their intended results, either of
which could impair our future revenue growth.
Our proprietary technologies are relatively new, and they may
contain design or performance defects that are not yet apparent.
The use of our proprietary technologies may not achieve the
intended results as effectively as other technologies that exist
now or may be introduced by our competitors, in which case our
business could be harmed.
If we
fail to keep pace with rapidly-changing technologies and
industry standards, we could lose clients or advertising
inventory and our results of operations may
suffer.
The business lines in which we currently compete are
characterized by rapidly-changing Internet media and marketing
standards, changing technologies, frequent new product and
service introductions, and changing user and client demands. The
introduction of new technologies and services embodying new
technologies and the emergence of new industry standards and
practices could render our existing technologies and services
obsolete and unmarketable or require unanticipated investments
in technology. Our future success will depend in part on our
ability to adapt to these rapidly-changing Internet media
formats and other technologies. We will need to enhance our
existing technologies and services and develop and introduce new
technologies and services to address our clients changing
demands. If we fail to adapt successfully to such developments
or timely introduce new technologies and services, we could lose
clients, our expenses could increase and we could lose
advertising inventory.
Changes
in government regulation and industry standards applicable to
the Internet and our business could decrease demand for our
technologies and services or increase our costs.
Laws and regulations that apply to Internet communications,
commerce and advertising are becoming more prevalent. These
regulations could increase the costs of conducting business on
the Internet and could decrease demand for our technologies and
services.
In the United States, federal and state laws have been enacted
regarding copyrights, sending of unsolicited commercial email,
user privacy, search engines, Internet tracking technologies,
direct marketing, data security, childrens privacy,
pricing, sweepstakes, promotions, intellectual property
ownership and infringement, trade secrets, export of encryption
technology, taxation and acceptable content and quality of
goods. Other laws and regulations may be adopted in the future.
Laws and regulations, including those related to privacy and use
of personal information, are changing rapidly outside the United
States as well which may make compliance with such laws and
regulations difficult and which may negatively affect our
ability to expand internationally. This legislation could:
(i) hinder growth in the use of the Internet generally;
(ii) decrease the acceptance of the Internet as a
communications, commercial and advertising medium;
(iii) reduce our revenue; (iv) increase our operating
expenses; or (v) expose us to significant liabilities.
The laws governing the Internet remain largely unsettled, even
in areas where there has been some legislative action. While we
actively monitor this changing legal and regulatory landscape to
stay abreast of changes in the laws and regulations applicable
to our business, we are not certain how our business might be
affected by the application of existing laws governing issues
such as property ownership, copyrights, encryption and other
intellectual property issues, libel, obscenity and export or
import matters to the Internet advertising industry. The vast
majority of such laws were adopted prior to the advent of the
Internet. As a result, they do not contemplate or address the
unique issues of the Internet and related technologies. Changes
in laws intended to address such issues could create uncertainty
in the Internet market. It may take years to determine how
existing laws apply to the Internet and Internet marketing. Such
uncertainty makes it difficult to predict costs and could reduce
demand for our services or increase the cost of doing business
as a result of litigation costs or increased service delivery
costs.
In particular, a number of U.S. federal laws impact our
business. The Digital Millennium Copyright Act, or DMCA, is
intended, in part, to limit the liability of eligible online
service providers for listing or linking to third-party websites
that include materials that infringe copyrights or other rights.
Portions of the Communications Decency Act, or CDA, are intended
to provide statutory protections to online service providers who
distribute third-party content. We rely on the protections
provided by both the DMCA and CDA in conducting our business.
The Higher Education Act, administered by the
U.S. Department of Education, provides that to be eligible
to participate
24
in Federal student financial aid programs, an educational
institution must enter into a program participation agreement
with the Secretary of the Department of Education. The agreement
includes a number of conditions with which an institution must
comply to be granted initial and continuing eligibility to
participate. Among those conditions is a prohibition on
institutions providing to any individual or entity engaged in
recruiting or admission activities any commission, bonus, or
other incentive payment based directly or indirectly on success
in securing enrollments. The Department of Education issued
final regulations on incentive compensation and other matters
which became effective July 1, 2011. The Departments
regulations repeal all safe harbors regarding incentive
compensation which existed under the prior regulations,
including the safe harbor for Internet-based recruiting and
admissions activities. The elimination of the safe harbors
create uncertainty for us and our education clients and impact
the way in which we are paid by our clients and, accordingly,
could reduce the amount of revenue we generate from the
education client vertical.
In addition, the Department has issued final regulations that
will also restrict Title IV funding for programs not
meeting prescribed
income-to-debt
ratios (i.e., programs not leading to gainful
employment as defined under the proposed regulation).
These regulations will take effect on July 1, 2012. These
provisions, could negatively affect our business with education
clients. Any changes in these laws or judicial interpretations
narrowing their protections will subject us to greater risk of
liability and may increase our costs of compliance with these
regulations or limit our ability to operate certain lines of
business.
The financial services, education and medical industries are
highly regulated and our marketing activities on behalf of our
clients in those industries are also regulated. As described
above, and for example, the proposed regulations from the
Department of Education on incentive compensation, gainful
employment and other matters could limit our clients
businesses and limit the revenue we receive from our education
clients. As an additional example, our mortgage and insurance
websites and marketing services we offer are subject to various
federal, state and local laws, including state licensing laws,
federal and state laws prohibiting unfair acts and practices,
and federal and state advertising laws. Any failure to comply
with these laws and regulations could subject us to revocation
of required licenses, civil, criminal or administrative
liability, damage to our reputation or changes to or limitations
on the conduct of our business. Any of the foregoing could cause
our business, operations and financial condition to suffer.
Increased
taxation of companies engaged in Internet commerce may adversely
affect the commercial use of our marketing services and our
financial results.
The tax treatment of Internet commerce remains unsettled, and we
cannot predict the effect of current attempts to impose sales,
income or other taxes on commerce conducted over the Internet.
Tax authorities at the international, federal, state and local
levels are currently reviewing the taxation of Internet
commerce, particularly as many governmental agencies seek to
address fiscal concerns and budgetary shortfalls by introducing
new taxes or expanding the applicability of existing tax laws.
We have experienced certain states taking expansive positions
with regard to their taxation of our services. The imposition of
new laws requiring the collection of sales or other
transactional taxes on the sale of our services via the Internet
could create increased administrative burdens or costs,
discourage clients from purchasing services from us, decrease
our ability to compete or otherwise substantially harm our
business and results of operations.
Limitations
on our ability to collect and use data derived from user
activities could significantly diminish the value of our
services and cause us to lose clients and revenue.
When a user visits our websites, we use technologies, including
cookies, to collect information such as the
users Internet Protocol, or IP, address, offerings
delivered by us that have been previously viewed by the user and
responses by the user to those offerings. In order to determine
the effectiveness of a marketing campaign and to determine how
to modify the campaign, we need to access and analyze this
information. The use of cookies has been the subject of
regulatory scrutiny and litigation and users are able to block
or delete cookies from their browser. Periodically, certain of
our clients and publishers seek to prohibit or limit our
collection or use of this data. Interruptions, failures or
defects in our data collection systems, as well as privacy
concerns regarding the collection of user data, could also limit
our ability to analyze data from our clients marketing
campaigns. This risk is heightened when we deliver marketing
services to clients in the financial and medical services client
verticals. If our
25
access to data is limited in the future, we may be unable to
provide effective technologies and services to clients and we
may lose clients and revenue.
As a
creator and a distributor of Internet content, we face potential
liability and expenses for legal claims based on the nature and
content of the materials that we create or distribute. If we are
required to pay damages or expenses in connection with these
legal claims, our operating results and business may be
harmed.
We create original content for our websites and marketing
messages and distribute third-party content on our websites and
in our marketing messages. As a creator and distributor of
original content and third-party provided content, we face
potential liability based on a variety of theories, including
defamation, negligence, deceptive advertising (including the
Department of Educations regulations regarding
misrepresentation in education marketing), copyright or
trademark infringement or other legal theories based on the
nature, creation or distribution of this information. It is also
possible that our website visitors could make claims against us
for losses incurred in reliance upon information provided on our
websites. In addition, as the number of users of forums and
social media features on our websites increases, we could be
exposed to liability in connection with material posted to our
websites by users and other third parties. These claims, whether
brought in the United States or abroad, could divert management
time and attention away from our business and result in
significant costs to investigate and defend, regardless of the
merit of these claims. In addition, if we become subject to
these types of claims and are not successful in our defense, we
may be forced to pay substantial damages.
Wireless
devices and mobile phones are increasingly being used to access
the Internet, and our online marketing services may not be as
effective when accessed through these devices, which could cause
harm to our business.
The number of people who access the Internet through devices
other than personal computers has increased substantially in the
last few years. Our online marketing services were designed for
persons accessing the Internet on a desktop or laptop computer.
The smaller screens, lower resolution graphics and less
convenient typing capabilities of these devices may make it more
difficult for visitors to respond to our offerings. In addition,
the cost of mobile advertising is relatively high and may not be
cost-effective for our services. If our services continue to be
less effective or economically attractive for clients seeking to
engage in marketing through these devices and this segment of
web traffic grows at the expense of traditional computer
Internet access, we will experience difficulty attracting
website visitors and attracting and retaining clients and our
operating results and business will be harmed.
We may
not succeed in expanding our businesses outside the United
States, which may limit our future growth.
One potential area of growth for us is in the international
markets and we have recently entered into certain markets.
However, we have limited experience in marketing, selling and
supporting our services outside of the United States and we may
not be successful in introducing or marketing our services
abroad. There are risks inherent in conducting business in
international markets, such as:
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the adaptation of technologies and services to foreign
clients preferences and customs;
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application of foreign laws and regulations to us, including
marketing and privacy regulations;
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changes in foreign political and economic conditions;
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tariffs and other trade barriers, fluctuations in currency
exchange rates and potentially adverse tax consequences;
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language barriers or cultural differences;
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reduced or limited protection for intellectual property rights
in foreign jurisdictions;
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difficulties and costs in staffing, managing or overseeing
foreign operations; and
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education of potential clients who may not be familiar with
online marketing.
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26
If we are unable to successfully expand and market our services
abroad, our business and future growth may be harmed and we may
incur costs that may not lead to future revenue.
We
rely on Internet bandwidth and data center providers and other
third parties for key aspects of the process of providing
services to our clients, and any failure or interruption in the
services and products provided by these third parties could harm
our business.
We rely on third-party vendors, including data center and
Internet bandwidth providers. Any disruption in the network
access or co-location services provided by these third-party
providers or any failure of these third-party providers to
handle current or higher volumes of use could significantly harm
our business. Any financial or other difficulties our providers
face may have negative effects on our business, the nature and
extent of which we cannot predict. We exercise little control
over these third-party vendors, which increases our
vulnerability to problems with the services they provide. We
license technology and related databases from third parties to
facilitate analysis and storage of data and delivery of
offerings. We have experienced interruptions and delays in
service and availability for data centers, bandwidth and other
technologies in the past. Any errors, failures, interruptions or
delays experienced in connection with these third-party
technologies and services could adversely affect our business
and could expose us to liabilities to third parties.
Our systems also heavily depend on the availability of
electricity, which also comes from third-party providers. If we
or third-party data centers which we utilize were to experience
a major power outage, we would have to rely on
back-up
generators. These
back-up
generators may not operate properly through a major power outage
and their fuel supply could also be inadequate during a major
power outage or disruptive event. Furthermore, we do not
currently have backup generators at our Foster City, California
headquarters. Information systems such as ours may be disrupted
by even brief power outages, or by the fluctuations in power
resulting from switches to and from
back-up
generators. This could give rise to obligations to certain of
our clients which could have an adverse effect on our results
for the period of time in which any disruption of utility
services to us occurs.
Interruption
or failure of our information technology and communications
systems could impair our ability to effectively deliver our
services, which could cause us to lose clients and harm our
operating results.
Our delivery of marketing and media services depends on the
continuing operation of our technology infrastructure and
systems. Any damage to or failure of our systems could result in
interruptions in our ability to deliver offerings quickly and
accurately
and/or
process visitors responses emanating from our various web
presences. Interruptions in our service could reduce our revenue
and profits, and our reputation could be damaged if people
believe our systems are unreliable. Our systems and operations
are vulnerable to damage or interruption from earthquakes,
terrorist attacks, floods, fires, power loss, break-ins,
hardware or software failures, telecommunications failures,
computer viruses or other attempts to harm our systems, and
similar events.
We lease or maintain server space in various locations,
including in San Francisco, California. Our California
facilities are located in areas with a high risk of major
earthquakes. Our facilities are also subject to break-ins,
sabotage and intentional acts of vandalism, and to potential
disruptions if the operators of these facilities have financial
difficulties. Some of our systems are not fully redundant, and
our disaster recovery planning cannot account for all
eventualities. The occurrence of a natural disaster, a decision
to close a facility we are using without adequate notice for
financial reasons or other unanticipated problems at our
facilities could result in lengthy interruptions in our service.
Any unscheduled interruption in our service would result in an
immediate loss of revenue. If we experience frequent or
persistent system failures, the attractiveness of our
technologies and services to clients and website publishers
could be permanently harmed. The steps we have taken to increase
the reliability and redundancy of our systems are expensive,
reduce our operating margin, and may not be successful in
reducing the frequency or duration of unscheduled interruptions.
27
Any
constraints on the capacity of our technology infrastructure
could delay the effectiveness of our operations or result in
system failures, which would result in the loss of clients and
harm our business and results of operations.
Our future success depends in part on the efficient performance
of our software and technology infrastructure. As the numbers of
websites and Internet users increase, our technology
infrastructure may not be able to meet the increased demand. A
sudden and unexpected increase in the volume of user responses
could strain the capacity of our technology infrastructure. Any
capacity constraints we experience could lead to slower response
times or system failures and adversely affect the availability
of websites and the level of user responses received, which
could result in the loss of clients or revenue or harm to our
business and results of operations.
We
could lose clients if we fail to detect click-through or other
fraud on advertisements in a manner that is acceptable to our
clients.
We are exposed to the risk of fraudulent clicks or actions on
our websites or our third-party publishers websites. We
may in the future have to refund revenue that our clients have
paid to us and that was later attributed to, or suspected to be
caused by, fraud. Click-through fraud occurs when an individual
clicks on an ad displayed on a website or an automated system is
used to create such clicks with the intent of generating the
revenue share payment to the publisher rather than to view the
underlying content. Action fraud occurs when on-line forms are
completed with false or fictitious information in an effort to
increase the compensable actions in respect of which a web
publisher is to be compensated. From time to time we have
experienced fraudulent clicks or actions and we do not charge
our clients for such fraudulent clicks or actions when they are
detected. It is conceivable that this activity could negatively
affect our profitability, and this type of fraudulent act could
hurt our reputation. If fraudulent clicks or actions are not
detected, the affected clients may experience a reduced return
on their investment in our marketing programs, which could lead
the clients to become dissatisfied with our campaigns, and in
turn, lead to loss of clients and the related revenue.
Additionally, we have from time to time had to terminate
relationships with web publishers who we believed to have
engaged in fraud and we may have to do so in the future.
Termination of such relationships entails a loss of revenue
associated with the legitimate actions or clicks generated by
such web publishers.
If we
fail to maintain proper and effective internal controls, our
ability to produce accurate financial statements on a timely
basis could be impaired, which would adversely affect our
ability to operate our business.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally
accepted accounting principles. We may in the future discover
areas of our internal financial and accounting controls and
procedures that need improvement. Our internal control over
financial reporting will not prevent or detect all error and all
fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance
that the control systems objectives will be met. Because
of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all
control issues and instances of fraud will be detected. If we
are unable to maintain proper and effective internal controls,
we may not be able to produce accurate financial statements on a
timely basis, which could adversely affect our ability to
operate our business and could result in regulatory action.
Risks
Related to the Ownership of Our Common Stock
Our
stock price may be volatile, and you may not be able to resell
shares of our common stock at or above the price you
paid.
The trading price of our common stock has been highly volatile
since our initial public offering and may continue to be subject
to wide fluctuations in response to various factors, some of
which are beyond our control. These factors include those
discussed in this Risk Factors section of this
report on
Form 10-K
and others such as:
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changes in earnings estimates or recommendations by securities
analysts;
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28
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announcements about our revenues, earnings or growth rates that
are not in line with analyst expectations, the risk of which is
heightened because it is our policy not to give quarterly
guidance on revenue, earnings, or growth rates.
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changes in governmental regulations;
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announcements by us or our competitors of new services,
significant contracts, commercial relationships, acquisitions or
capital commitments;
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changes in the search engine rankings of our sites or our
ability to access PPC advertising;
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developments with respect to intellectual property rights;
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our ability to develop and market new and enhanced products on a
timely basis;
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our commencement of, or involvement in, litigation;
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negative publicity about us, our industry, our clients or our
clients industries; and
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a slowdown in our industry or the general economy.
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In recent years, the stock market in general, and the market for
technology and Internet-based companies in particular, has
experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of those companies. Broad market and industry
factors may seriously affect the market price of our common
stock, regardless of our actual operating performance. In
addition, in the past, following periods of volatility in the
overall market and the market price of a particular
companys securities, securities class action litigation
has often been instituted against these companies. Such
litigation, if instituted against us, could result in
substantial costs and a diversion of our managements
attention and resources.
If
securities or industry analysts do not publish research or
reports about our business, or if they issue an adverse opinion
regarding our stock, our stock price and trading volume could
decline.
The trading market for our common stock is influenced by the
research and reports that industry or securities analysts
publish about us or our business. If any of the analysts who
cover us issue an adverse opinion regarding our stock, our stock
price would likely decline. If one or more of these analysts
ceases coverage of our company or fail to publish reports on us
regularly, we could lose visibility in the financial markets,
which in turn could cause our stock price or trading volume to
decline.
Our
directors, executive officers and principal stockholders and
their respective affiliates have substantial control over us and
could delay or prevent a change in corporate
control.
As of June 30, 2011, our directors and executive officers,
together with their affiliates, beneficially owned approximately
38% of our outstanding common stock. As a result, these
stockholders, acting together, have substantial control over the
outcome of matters submitted to our stockholders for approval,
including the election of directors and any merger,
consolidation or sale of all or substantially all of our assets.
In addition, these stockholders, acting together, have
significant influence over the management and affairs of our
company. Accordingly, this concentration of ownership may have
the effect of:
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delaying, deferring or preventing a change in corporate control;
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impeding a merger, consolidation, takeover or other business
combination involving us; or
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discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us.
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Future
sales of shares by existing stockholders could cause our stock
price to decline.
If our existing stockholders sell, or indicate an intent to
sell, substantial amounts of our common stock in the public
market the trading price of our common stock could decline
significantly. We had 47,387,425 shares of common stock
outstanding as of June 30, 2011. In addition, (i) the
9,753,295 shares subject to outstanding stock options and
restricted stock units under our equity incentive plans as of
June 30, 2011 and (ii) the shares reserved for
29
future issuance under our equity incentive plans will become
eligible for sale in the public market in the future, subject to
certain legal and contractual limitations. If these additional
shares are sold, or if it is perceived that they will be sold,
in the public market, the price of our common stock could
decline substantially.
Provisions
in our charter documents under Delaware law and in contractual
obligations, could discourage a takeover that stockholders may
consider favorable and may lead to entrenchment of
management.
Our amended and restated certificate of incorporation and bylaws
contain provisions that could have the effect of delaying or
preventing changes in control or changes in our management
without the consent of our board of directors. These provisions
include:
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a classified board of directors with three-year staggered terms,
which may delay the ability of stockholders to change the
membership of a majority of our board of directors;
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no cumulative voting in the election of directors, which limits
the ability of minority stockholders to elect director
candidates;
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the exclusive right of our board of directors to elect a
director to fill a vacancy created by the expansion of the board
of directors or the resignation, death or removal of a director,
which prevents stockholders from being able to fill vacancies on
our board of directors;
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the ability of our board of directors to determine to issue
shares of preferred stock and to determine the price and other
terms of those shares, including preferences and voting rights,
without stockholder approval, which could be used to
significantly dilute the ownership of a hostile acquirer;
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a prohibition on stockholder action by written consent, which
forces stockholder action to be taken at an annual or special
meeting of our stockholders;
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the requirement that a special meeting of stockholders may be
called only by the chairman of the board of directors, the chief
executive officer or the board of directors, which may delay the
ability of our stockholders to force consideration of a proposal
or to take action, including the removal of directors; and
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advance notice procedures that stockholders must comply with in
order to nominate candidates to our board of directors or to
propose matters to be acted upon at a stockholders
meeting, which may discourage or deter a potential acquiror from
conducting a solicitation of proxies to elect the
acquirors own slate of directors or otherwise attempting
to obtain control of us.
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We are subject to certain anti-takeover provisions under
Delaware law. Under Delaware law, a corporation may not, in
general, engage in a business combination with any holder of 15%
or more of its capital stock unless the holder has held the
stock for three years or, among other things, the board of
directors has approved the transaction.
We do
not currently intend to pay dividends on our common stock and,
consequently, your ability to achieve a return on your
investment will depend on appreciation in the price of our
common stock.
We do not intend to declare and pay dividends on our capital
stock for the foreseeable future. We currently intend to invest
our future earnings, if any, to fund our growth. Additionally,
the terms of our credit facility restrict our ability to pay
dividends. Therefore, you are not likely to receive any
dividends on your common stock for the foreseeable future.
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Item 1B.
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Unresolved
Staff Comments
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None.
Our principal executive offices are located in a leased facility
in Foster City, California, consisting of approximately
63,998 square feet of office space under a lease that
expires in October 2018 with the option to extend the lease term
by another two years. This facility accommodates our principal
engineering, sales, marketing,
30
operations and finance and administrative activities. We also
lease buildings in Arkansas, Florida, Massachusetts, Nevada, New
Jersey, New York, North Carolina, Oklahoma, Oregon, India and
the United Kingdom.
We may add new facilities and expand our existing facilities as
we add employees and expand our markets, and we believe that
suitable additional or substitute space will be available as
needed to accommodate any such expansion of our operations.
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Item 3.
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Legal
Proceedings
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On September 8, 2010, a patent infringement lawsuit was
filed against us by LendingTree, LLC (LendingTree)
in the United States District Court for the Western District of
North Carolina, seeking a judgment that we have infringed a
certain patent held by LendingTree, an injunctive order against
the alleged infringing activities and an award for damages. On
September 24, 2010, LendingTree filed a first amended
complaint adding an additional defendant. If an injunction is
granted, it could force us to stop or alter certain of our
business activities, such as our lead generation in certain of
our client verticals. While we intend to vigorously defend our
position, neither the outcome of the litigation nor the amount
and range of potential damages or exposure associated with the
litigation can be assessed with certainty.
From time to time, we may become involved in other legal
proceedings and claims arising in the ordinary course of our
business.
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Item 4.
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(Removed
and Reserved)
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PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Our common stock has been traded on the NASDAQ Global Select
Market under the symbol QNST since our initial
public offering on February 11, 2010. Prior to this time,
there was no public market for our common stock. The following
table shows the high and low sale prices per share of our common
stock as reported on the NASDAQ Global Select Market for the
periods indicated:
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Fiscal Year Ended June 30, 2010
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High
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Low
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Third quarter ended March 31, 2010 (beginning
February 11, 2010)
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$
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17.74
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$
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12.77
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Fourth quarter ended June 30, 2010
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$
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18.25
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$
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11.37
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Fiscal Year Ended June 30, 2011
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High
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Low
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First quarter ended September 30, 2010
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$
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15.51
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$
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9.79
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Second quarter ended December 31, 2010
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$
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21.38
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$
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13.91
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Third quarter ended March 31, 2011
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$
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24.91
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$
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18.92
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Fourth quarter ended June 30, 2011
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$
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22.98
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$
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10.68
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On August 25, 2011, the closing price as reported on the
NASDAQ Global Select Market of our common stock was $10.30 per
share and we had approximately 152 stockholders of record of our
common stock.
We have never declared or paid, and do not anticipate declaring
or paying, any cash dividends on our common stock. Any future
determination as to the declaration and payment of dividends, if
any, will be at the discretion of our board of directors and
will depend on then existing conditions, including our financial
condition, operating results, contractual restrictions, capital
requirements, business prospects and other factors our board of
directors may deem relevant.
For equity compensation plan information refer to Item 12
in Part III of this Annual Report on
Form 10-K.
31
Performance
Graph
This performance graph shall not be deemed soliciting
material or to be filed with the Securities
and Exchange Commission for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or the Exchange
Act, or otherwise subject to the liabilities under that Section,
and shall not be deemed to be incorporated by reference into any
filing of QuinStreet, Inc. under the Securities Act of 1933, as
amended, or the Exchange Act.
The following graph shows a comparison from February 11,
2010 (the date our common stock commenced trading on the NASDAQ
Global Select Market) through June 30, 2011 of cumulative
total return for our common stock, the NASDAQ Composite Index
and the RDG Internet Composite Index. Such returns are based on
historical results and are not intended to suggest future
performance. Data for the NASDAQ Composite Index and the RDG
Internet Composite Index assume reinvestment of dividends.
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$100 invested on
2/11/10 in
stock or
1/31/10 in
index, including reinvestment of dividends. |
Recent
Sales of Unregistered Securities
There were no unregistered sales of our equity securities during
the fiscal year ended June 30, 2011.
Use of
Proceeds
On February 10, 2010, our registration statement on
Form S-1
(File
No. 333-163228)
was declared effective for our initial public offering, pursuant
to which we registered the offering and sale of
10,000,000 shares of common stock at a public offering
price of $15.00 per share and an aggregate offering price of
$150 million. The managing underwriters were Credit Suisse
Securities (USA) LLC, Merrill Lynch, Pierce Fenner &
Smith Incorporated and J.P. Morgan Securities Inc. The
offering was completed on February 17, 2010.
As a result of the offering, we received net proceeds of
$136.7 million, after underwriting discounts and
commissions of $10.5 million and other offering costs of
$2.8 million. None of such payments were a direct or
indirect payment to any of our directors or officers or their
associates, to persons owning ten percent or more of our common
stock or any of our other affiliates.
32
The net offering proceeds have been invested in money market
accounts and short-term marketable securities.
There has been no material change in the planned use of proceeds
from our initial public offering as described in our final
prospectus filed with the SEC pursuant to Rule 424(b).
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Item 6.
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Selected
Consolidated Financial Data
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The following selected consolidated financial data should be
read together with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and with the consolidated financial statements and accompanying
notes appearing elsewhere in this report. The selected
consolidated financial data in this section is not intended to
replace our consolidated financial statements and the
accompanying notes. The results of the acquired businesses have
been included in our consolidated financial statements since
their respective dates of acquisition. Our historical results
are not necessarily indicative of our future results and any
interim results are not necessarily indicative of the results
for a full fiscal year.
We derived the consolidated statements of operations data for
the fiscal years ended June 30, 2011, 2010 and 2009 and the
consolidated balance sheets data as of June 30, 2011 and
2010 from our audited consolidated financial statements
appearing elsewhere in this report. The consolidated statements
of operations data for the fiscal year ended June 30, 2008
and 2007 and the consolidated balance sheets data as of
June 30, 2009, 2008 and 2007 are derived from our audited
consolidated financial statements, which are not included in
this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
403,021
|
|
|
$
|
334,835
|
|
|
$
|
260,527
|
|
|
$
|
192,030
|
|
|
$
|
167,370
|
|
Cost of revenue(1)
|
|
|
291,991
|
|
|
|
240,730
|
|
|
|
181,593
|
|
|
|
130,869
|
|
|
|
108,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
111,030
|
|
|
|
94,105
|
|
|
|
78,934
|
|
|
|
61,161
|
|
|
|
58,425
|
|
Operating expenses: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
24,163
|
|
|
|
19,726
|
|
|
|
14,887
|
|
|
|
14,051
|
|
|
|
14,094
|
|
Sales and marketing
|
|
|
17,382
|
|
|
|
16,698
|
|
|
|
16,154
|
|
|
|
12,409
|
|
|
|
8,487
|
|
General and administrative
|
|
|
20,396
|
|
|
|
18,464
|
|
|
|
13,172
|
|
|
|
13,371
|
|
|
|
11,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
61,941
|
|
|
|
54,888
|
|
|
|
44,213
|
|
|
|
39,831
|
|
|
|
34,021
|
|
Operating income
|
|
|
49,089
|
|
|
|
39,217
|
|
|
|
34,721
|
|
|
|
21,330
|
|
|
|
24,404
|
|
Interest income
|
|
|
169
|
|
|
|
97
|
|
|
|
245
|
|
|
|
1,482
|
|
|
|
1,905
|
|
Interest expense
|
|
|
(4,213
|
)
|
|
|
(3,977
|
)
|
|
|
(3,544
|
)
|
|
|
(1,214
|
)
|
|
|
(732
|
)
|
Other income (expense), net
|
|
|
56
|
|
|
|
1,523
|
|
|
|
(239
|
)
|
|
|
145
|
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
(3,988
|
)
|
|
|
(2,357
|
)
|
|
|
(3,538
|
)
|
|
|
413
|
|
|
|
1,034
|
|
Income before income taxes
|
|
|
45,101
|
|
|
|
36,860
|
|
|
|
31,183
|
|
|
|
21,743
|
|
|
|
25,438
|
|
Provision for taxes
|
|
|
(17,887
|
)
|
|
|
(16,276
|
)
|
|
|
(13,909
|
)
|
|
|
(8,876
|
)
|
|
|
(9,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
27,214
|
|
|
$
|
20,584
|
|
|
$
|
17,274
|
|
|
$
|
12,867
|
|
|
$
|
15,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: 8% non-cumulative dividends on convertible preferred stock
|
|
$
|
|
|
|
$
|
(2,018
|
)
|
|
$
|
(3,276
|
)
|
|
$
|
(3,276
|
)
|
|
$
|
(3,276
|
)
|
Less: Undistributed earnings allocated to convertible preferred
stock
|
|
$
|
|
|
|
$
|
(5,784
|
)
|
|
$
|
(8,599
|
)
|
|
$
|
(5,925
|
)
|
|
$
|
(7,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders Basic
|
|
$
|
27,214
|
|
|
$
|
12,782
|
|
|
$
|
5,399
|
|
|
$
|
3,666
|
|
|
$
|
4,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings re-allocated to common stock
|
|
$
|
|
|
|
$
|
419
|
|
|
$
|
399
|
|
|
$
|
360
|
|
|
$
|
522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
Diluted
|
|
$
|
27,214
|
|
|
$
|
13,201
|
|
|
$
|
5,798
|
|
|
$
|
4,026
|
|
|
$
|
5,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income per share attributable to common stockholders:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.59
|
|
|
$
|
0.50
|
|
|
$
|
0.41
|
|
|
$
|
0.28
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.55
|
|
|
$
|
0.46
|
|
|
$
|
0.39
|
|
|
$
|
0.26
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing net income per share
attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
46,222
|
|
|
|
25,616
|
|
|
|
13,294
|
|
|
|
13,104
|
|
|
|
12,789
|
|
Diluted
|
|
|
49,130
|
|
|
|
28,429
|
|
|
|
14,971
|
|
|
|
15,325
|
|
|
|
15,263
|
|
|
|
|
(1) |
|
Cost of revenue and operating expenses include stock-based
compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
4,506
|
|
|
$
|
3,111
|
|
|
$
|
1,916
|
|
|
$
|
1,112
|
|
|
$
|
416
|
|
Product development
|
|
|
2,705
|
|
|
|
2,176
|
|
|
|
669
|
|
|
|
443
|
|
|
|
75
|
|
Sales and marketing
|
|
|
3,747
|
|
|
|
3,463
|
|
|
|
1,761
|
|
|
|
581
|
|
|
|
226
|
|
General and administrative
|
|
|
2,992
|
|
|
|
4,621
|
|
|
|
1,827
|
|
|
|
1,086
|
|
|
|
1,354
|
|
|
|
|
(2) |
|
See Note 3 to our consolidated financial statements
included in this report for an explanation of the method used to
calculate basic and diluted net income per share of common stock. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
132,290
|
|
|
$
|
155,770
|
|
|
$
|
25,182
|
|
|
$
|
24,953
|
|
|
$
|
26,765
|
|
Working capital
|
|
|
162,361
|
|
|
|
155,164
|
|
|
|
16,426
|
|
|
|
17,022
|
|
|
|
42,769
|
|
Total assets
|
|
|
524,924
|
|
|
|
434,630
|
|
|
|
212,878
|
|
|
|
179,746
|
|
|
|
118,536
|
|
Total liabilities
|
|
|
169,535
|
|
|
|
144,608
|
|
|
|
96,289
|
|
|
|
86,032
|
|
|
|
37,831
|
|
Total debt
|
|
|
106,048
|
|
|
|
93,608
|
|
|
|
57,240
|
|
|
|
51,654
|
|
|
|
10,250
|
|
Total stockholders equity
|
|
|
355,389
|
|
|
|
290,022
|
|
|
|
73,186
|
|
|
|
50,311
|
|
|
|
37,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Consolidated Statements of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
78,171
|
|
|
$
|
38,509
|
|
|
$
|
32,570
|
|
|
$
|
24,751
|
|
|
$
|
25,197
|
|
Depreciation and amortization
|
|
|
27,272
|
|
|
|
18,791
|
|
|
|
15,978
|
|
|
|
11,727
|
|
|
|
9,637
|
|
Capital expenditures
|
|
|
5,363
|
|
|
|
2,710
|
|
|
|
1,347
|
|
|
|
2,177
|
|
|
|
2,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
90,311
|
|
|
$
|
71,379
|
|
|
$
|
56,872
|
|
|
$
|
36,279
|
|
|
$
|
36,112
|
|
|
|
|
(1) |
|
We define Adjusted EBITDA as net income less provision for
taxes, depreciation expense, amortization expense, stock-based
compensation expense, interest and other income (expense), net.
Please see the Adjusted EBITDA section below for
more information. |
34
The following table presents a reconciliation of Adjusted EBITDA
to net income calculated in accordance with U.S. generally
accepted accounting principles (GAAP), the most comparable GAAP
measure, for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
27,214
|
|
|
$
|
20,584
|
|
|
$
|
17,274
|
|
|
$
|
12,867
|
|
|
$
|
15,610
|
|
Interest and other (income) expense, net
|
|
|
3,988
|
|
|
|
2,357
|
|
|
|
3,538
|
|
|
|
(413
|
)
|
|
|
(1,034
|
)
|
Provision for taxes
|
|
|
17,887
|
|
|
|
16,276
|
|
|
|
13,909
|
|
|
|
8,876
|
|
|
|
9,828
|
|
Depreciation and amortization
|
|
|
27,272
|
|
|
|
18,791
|
|
|
|
15,978
|
|
|
|
11,727
|
|
|
|
9,637
|
|
Stock-based compensation expense
|
|
|
13,950
|
|
|
|
13,371
|
|
|
|
6,173
|
|
|
|
3,222
|
|
|
|
2,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
90,311
|
|
|
$
|
71,379
|
|
|
$
|
56,872
|
|
|
$
|
36,279
|
|
|
$
|
36,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
You should read the following discussion of our financial
condition and results of operations in conjunction with the
consolidated financial statements and the notes thereto included
elsewhere in this report. The following discussion contains
forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could
cause or contribute to these differences include those discussed
below and elsewhere in this report, particularly in the sections
titled Special Note Regarding Forward-Looking
Statements and Risk Factors.
Management
Overview
QuinStreet is a leader in vertical marketing and media online.
We have built a strong set of capabilities to engage Internet
visitors with targeted media and to connect our marketing
clients with their potential customers online. We focus on
serving clients in large, information-intensive industry
verticals where relevant, targeted media and offerings help
visitors make informed choices, find the products that match
their needs, and thus become qualified customer prospects for
our clients.
We deliver cost-effective marketing results to our clients most
typically in the form of a qualified lead or inquiry, or in the
form of a click. These leads or clicks 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 leads or clicks as defined by
our agreements with them. Because we bear the costs of media,
our programs must deliver value to our clients and provide for a
media yield, or our ability to generate an acceptable margin on
our media costs, that provides a sound financial outcome for us.
Our general process is:
|
|
|
|
|
We own or access targeted media;
|
|
|
|
We run advertisements or other forms of marketing messages and
programs in that media to create visitor responses or clicks
through to client offerings;
|
|
|
|
We match these responses or clicks to client offerings that meet
visitor interests or needs, converting visitors into qualified
leads or clicks; and
|
|
|
|
We optimize client matches and media yield such that we achieve
desired results for clients and a sound financial outcome for us.
|
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 profits, but rather to achieve target levels of
profitability while investing in various growth initiatives, as
we believe we are in the early stages of a large, long-term
market.
Our Direct Marketing Services, or DMS, business accounted for
substantially all of our net revenue in fiscal years 2011, 2010
and 2009. Our DMS business derives its net revenue from fees
earned through the delivery of qualified leads and clicks and,
to a lesser extent, display advertisement, or impressions.
Through a vertical focus,
35
targeted media presence and our technology platform, we are able
to deliver targeted, measurable marketing results to our clients.
Our two largest client verticals are financial services and
education. Our financial services client vertical represented
45%, 43% and 31% of net revenue in fiscal years 2011, 2010 and
2009, respectively. Our education client vertical represented
44%, 45% and 58% of net revenue in fiscal years 2011, 2010 and
2009, respectively. Other DMS client verticals, consisting
primarily of home services,
business-to-business,
or B2B, and medical, represented 11%, 11%, and 10% of net
revenue in fiscal years 2011, 2010 and 2009, respectively.
In addition, we derived less than 1% of our net revenue in
fiscal year 2011 and 1% in fiscal years 2010 and 2009 from our
Direct Selling Services, or DSS, business.
We generated substantially all of our revenue from sales to
clients in the United States.
Trends
Affecting our Business
Client
Verticals
To date, we have generated the majority of our revenue from
clients in our financial services and education client
verticals. We expect that a majority of our revenue in fiscal
year 2012 will be generated from clients in these two client
verticals.
Our education client vertical is affected by a number of
factors, including most importantly uncertainty from the
adoption of the new regulations of for-profit financial
institutions. The uncertainty and the regulations may affect our
clients businesses and marketing practices and may result
in fluctuations in the volume and mix of our business with these
clients.
Our financial services client vertical has been negatively
affected by pricing pressure. Prices in the click business of
our financial services client vertical are determined by
bidding. Changes in volume of one or more bidders can
dynamically impact pricing for all clients. Recently, revenue in
our financial services client vertical has been negatively
affected by the pricing impact from volume reductions by certain
clients.
Acquisitions
Acquisitions
in Fiscal Year 2011
In November 2010, we acquired 100% of the outstanding shares of
Car Insurance.com, Inc., or CarInsurance.com, a Florida-based
online insurance business, and certain of its affiliated
companies, in exchange for $49.7 million in cash, for its
capacity to generate online visitors in the financial services
market. In July 2010, we acquired the website business
Insurance.com from Insurance.com Group, Inc., an Ohio-based
online insurance business, in exchange for $33.0 million in
cash and the issuance of a $2.6 million
non-interest-bearing, unsecured promissory note, for its
capacity to generate online visitors in the financial services
market. During fiscal year 2011, in addition to the acquisitions
of CarInsurance.com and Insurance.com, we acquired 13 other
online publishing businesses.
Also, in August 2011, we acquired 100% of the outstanding equity
interests of NarrowCast Group, LLC, a Kentucky-based Internet
media company, in exchange for $23,961 in cash, to broaden our
media access in the
business-to-business
market.
Acquisitions
in Fiscal Year 2010
In November 2009, we acquired the website business Internet.com,
a division of WebMediaBrands, Inc., or Internet.com, a New
York-based Internet media company, in exchange for
$15.9 million in cash and the issuance of a
$1.7 million non-interest-bearing, unsecured promissory
note, to broaden our media access and client base in the B2B
market. In October 2009, we acquired the website business
Insure.com from Life Quotes, Inc., or Insure.com, an
Illinois-based online insurance quote service and brokerage
business, in exchange for $15.0 million in cash and the
issuance of a $1.0 million non-interest-bearing, unsecured
promissory note, for its capacity to generate online
36
visitors in the financial services market. During fiscal year
2010, in addition to the acquisitions of Internet.com and
Insure.com, we acquired 31 other online publishing businesses.
Acquisitions
in Fiscal Year 2009
In August 2008, we acquired 100% of the outstanding shares of
U.S. Citizens for Fair Credit Card Terms, Inc., or
CardRatings, an Arkansas-based online marketing company, in
exchange for $10.4 million in cash and the issuance of
$5.0 million in non-interest-bearing, secured promissory
notes, for its capacity to generate online visitors in the
financial services market. During fiscal year 2009, in addition
to the acquisition of CardRatings, we acquired 33 other online
publishing businesses.
Our acquisition strategy may result in significant fluctuations
in our available working capital from period to period and over
the years. We may use cash, stock or promissory notes to acquire
various businesses or technologies, and we cannot accurately
predict the timing of those acquisitions or the impact on our
cash flows and balance sheet. Large acquisitions or multiple
acquisitions within a particular period may significantly affect
our financial results for that period. We may utilize debt
financing to make acquisitions, which could give rise to higher
interest expense and more restrictive operating covenants. We
may also utilize our stock as consideration, which could result
in substantial dilution.
Development
and Acquisition of Targeted Media
One of the primary challenges of our business is finding or
creating media that is targeted enough to attract prospects
economically for our clients and at costs that work for our
business model. In order to continue to grow our business, we
must be able to continue to find or develop quality targeted
media on a cost-effective basis. Our inability to find or
develop high quality targeted media could impair our growth or
adversely affect our financial performance.
Seasonality
Our results are subject to significant fluctuation as a result
of seasonality. In particular, our quarters ending December 31
(our second fiscal quarter) typically demonstrate seasonal
weakness. In our second fiscal quarters, there is lower
availability of lead supply from some forms of media during the
holiday period on a cost effective basis and some of our clients
request fewer leads due to holiday staffing. In our quarters
ending March 31 (our third fiscal quarter), this trend generally
reverses with better lead availability and often new budgets at
the beginning of the year for our clients with fiscal years
ending December 31.
Basis of
Presentation
General
We operate in two segments: DMS and DSS. For further discussion
and financial information about our reporting segments, see
Note 14 to our consolidated financial statements.
Net
Revenue
DMS. Our DMS business generates revenue from
fees earned through the delivery of qualified leads, clicks and,
to a lesser extent, display advertisement, or impressions. We
deliver targeted and measurable results through a vertical focus
that we classify into the following client verticals: financial
services, education and other (which includes home
services, B2B and medical).
DSS. Our DSS business generated approximately
1% of net revenue in fiscal years 2011, 2010 and 2009 from the
provision of a hosted solution and related services for clients
in the direct selling industry. We expect DSS to continue to
represent an immaterial portion of our business.
37
Cost
of Revenue
Cost of revenue consists primarily of media costs, personnel
costs, amortization of acquisition-related intangible assets,
depreciation expense and amortization of internal software
development costs relating to revenue-producing technologies.
Media costs consist primarily of fees paid to website publishers
that are directly related to a revenue-generating event and
pay-per-click,
or PPC, ad purchases from Internet search companies. We pay
these Internet search companies and website publishers on a
revenue-share, a
cost-per-lead,
or CPL,
cost-per-click,
or CPC and
cost-per-thousand-impressions,
or CPM basis. Personnel costs include salaries, stock-based
compensation expense, bonuses and employee benefit costs.
Personnel costs are primarily related to individuals associated
with maintaining our servers and websites, our editorial staff,
client management, creative team, compliance group and media
purchasing analysts.
Costs associated with software incurred in the development phase
or obtained for internal use are capitalized and amortized in
cost of revenue over the softwares estimated useful life.
We anticipate that our cost of revenue will increase in absolute
dollars as we continue to increase our revenue base and product
offerings.
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, rent and allocated costs. Personnel costs for each
category of operating expenses generally include salaries,
stock-based compensation expense, bonuses and commissions and
employee benefit costs.
Product Development. Product development
expenses consist primarily of personnel costs and professional
services fees associated with the development and maintenance of
our technology platforms, development and launching of our
websites, product-based quality assurance and testing. We
believe that continued investment in technology is critical to
attaining our strategic objectives and, as a result, we expect
product development expenses to increase in absolute dollars in
the future.
Sales and Marketing. Sales and marketing
expenses consist primarily of personnel costs and, to a lesser
extent, allocated overhead costs, professional services fees,
travel costs, advertising and marketing materials. We expect
sales and marketing expenses to increase in absolute dollars as
we hire additional personnel in sales and marketing to support
our increasing revenue base and product offerings.
General and Administrative. General and
administrative expenses consist primarily of personnel costs of
our executive, finance, legal, corporate and business
development, employee benefits and compliance, technical support
and other administrative personnel, as well as accounting and
legal professional services fees and other corporate expenses.
We expect general and administrative expenses to increase in
absolute dollars in future periods as we continue to invest in
corporate infrastructure and incur additional expenses
associated with being a public company, including increased
legal and accounting costs, higher insurance premiums, investor
relations costs and compliance costs associated with
Section 404 of the Sarbanes-Oxley Act of 2002.
Interest
and Other Income (Expense), Net
Interest and other income (expense), net, consists primarily of
interest expense, other income and expense and interest income.
Interest expense is related to our credit facility and
promissory notes issued in connection with our acquisitions and
includes imputed interest. Borrowings under our credit facility
and related interest expense could increase as we continue to
implement our acquisition strategy. Interest income represents
interest received on our cash, cash equivalents and marketable
securities, which may increase or decrease depending on market
interest rates and the amounts invested.
Other income (expense), net, includes foreign currency exchange
gains and losses and other non-operating items.
38
Income
Tax Expense
We are subject to tax in the United States as well as other tax
jurisdictions or countries in which we conduct business.
Earnings from our limited
non-U.S. activities
are subject to local country income tax and may be subject to
U.S. income tax.
Results
of Operations
The following table sets forth our consolidated statement of
operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
403,021
|
|
|
|
100.0
|
%
|
|
$
|
334,835
|
|
|
|
100.0
|
%
|
|
$
|
260,527
|
|
|
|
100.0
|
%
|
Cost of revenue(1)
|
|
|
291,991
|
|
|
|
72.5
|
|
|
|
240,730
|
|
|
|
71.9
|
|
|
|
181,593
|
|
|
|
69.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
111,030
|
|
|
|
27.5
|
|
|
|
94,105
|
|
|
|
28.1
|
|
|
|
78,934
|
|
|
|
30.3
|
|
Operating expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
24,163
|
|
|
|
6.0
|
|
|
|
19,726
|
|
|
|
5.9
|
|
|
|
14,887
|
|
|
|
5.7
|
|
Sales and marketing
|
|
|
17,382
|
|
|
|
4.3
|
|
|
|
16,698
|
|
|
|
5.0
|
|
|
|
16,154
|
|
|
|
6.2
|
|
General and administrative
|
|
|
20,396
|
|
|
|
5.0
|
|
|
|
18,464
|
|
|
|
5.5
|
|
|
|
13,172
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
49,089
|
|
|
|
12.2
|
|
|
|
39,217
|
|
|
|
11.7
|
|
|
|
34,721
|
|
|
|
13.3
|
|
Interest income
|
|
|
169
|
|
|
|
0.0
|
|
|
|
97
|
|
|
|
0.0
|
|
|
|
245
|
|
|
|
0.1
|
|
Interest expense
|
|
|
(4,213
|
)
|
|
|
(1.0
|
)
|
|
|
(3,977
|
)
|
|
|
(1.2
|
)
|
|
|
(3,544
|
)
|
|
|
(1.4
|
)
|
Other income (expense), net
|
|
|
56
|
|
|
|
0.0
|
|
|
|
1,523
|
|
|
|
0.5
|
|
|
|
(239
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
45,101
|
|
|
|
11.2
|
|
|
|
36,860
|
|
|
|
11.0
|
|
|
|
31,183
|
|
|
|
12.0
|
|
Provision for taxes
|
|
|
(17,887
|
)
|
|
|
(4.4
|
)
|
|
|
(16,276
|
)
|
|
|
(4.9
|
)
|
|
|
(13,909
|
)
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
27,214
|
|
|
|
6.8
|
%
|
|
$
|
20,584
|
|
|
|
6.1
|
%
|
|
$
|
17,274
|
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cost of revenue and operating expenses include stock-based
compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
4,506
|
|
|
|
1.1
|
%
|
|
$
|
3,111
|
|
|
|
0.9
|
%
|
|
$
|
1,916
|
|
|
|
0.7
|
%
|
Product development
|
|
|
2,705
|
|
|
|
0.7
|
|
|
|
2,176
|
|
|
|
0.6
|
|
|
|
669
|
|
|
|
0.3
|
|
Sales and marketing
|
|
|
3,747
|
|
|
|
0.9
|
|
|
|
3,463
|
|
|
|
1.0
|
|
|
|
1,761
|
|
|
|
0.7
|
|
General and administrative
|
|
|
2,992
|
|
|
|
0.7
|
|
|
|
4,621
|
|
|
|
1.4
|
|
|
|
1,827
|
|
|
|
0.7
|
|
Net
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2011 - 2010
|
|
|
2010 - 2009
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
403,021
|
|
|
$
|
334,835
|
|
|
$
|
260,527
|
|
|
|
20
|
%
|
|
|
29
|
%
|
Cost of revenue
|
|
|
291,991
|
|
|
|
240,730
|
|
|
|
181,593
|
|
|
|
21
|
%
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
111,030
|
|
|
$
|
94,105
|
|
|
$
|
78,934
|
|
|
|
18
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue increased $68.2 million, or 20%, in fiscal year
2011 compared to fiscal year 2010. The majority of this increase
was attributable to an increase in revenue from our financial
services client vertical and, to a lesser extent, our education
client vertical and other client verticals. Financial services
client vertical revenue increased $38.0 million, or 26%, as
increases in click and lead volume were partially offset by
lower prices. Education client vertical revenue increased
$23.2 million, or 15%, driven by higher prices, a shift in
mix towards higher priced inquiries and an increase in inquiry
volume. Our other client verticals revenue increased
$7.0 million, or 18%, primarily due to the acquisition of
Internet.com in November 2009.
39
Net revenue increased $74.3 million, or 29%, in fiscal year
2010 compared to fiscal year 2009, attributable to an increase
in revenue from our financial services client vertical and, to a
lesser extent, our other client verticals. Financial services
client vertical revenue increased $64.2 million, or 81%.
The increase in financial services client vertical revenue was
driven by lead and click volume increases at relatively steady
prices. Our other client verticals revenue increased
$9.3 million, or 31%. The increase in our other client
vertical revenue was primarily affected by growth in our B2B
client vertical revenue resulting from our acquisition of
Internet.com in November 2009 and, to a lesser extent, due to
growth in our medical client vertical resulting from our
acquisition of the website business of ElderCareLink in April
2009. Our education client vertical revenue remained relatively
flat, increasing $0.8 million, or 1%. The slight increase
was driven by growth from a majority of our education clients,
almost entirely offset by revenue decline from a single client.
Cost of
Revenue
Cost of revenue increased $51.3 million, or 21%, in fiscal
year 2011 compared to fiscal year 2010, driven by an increase in
media costs of $28.9 million due to higher lead and click
volumes, increased personnel costs of $10.6 million and
increased amortization of acquisition-related intangible assets
of $6.9 million resulting from acquisitions in fiscal year
2011 and 2010. The increase in personnel costs was attributable
to a 34% increase in average headcount, primarily resulting from
acquisitions. Gross margin, which is the difference between net
revenue and cost of revenue as a percentage of net revenue,
remained flat at 28% in fiscal year 2011, as higher margins from
publisher arrangements and a higher mix of traffic from owned
and operated targeted media were offset by the above-mentioned
increase in headcount and related personnel costs, as well as
higher amortization expense.
Cost of revenue increased $59.1 million, or 33%, in fiscal
year 2010 compared to fiscal year 2009, driven by a
$41.2 million increase in media costs due to lead and click
volume increases, increased personnel costs of
$10.7 million and increased amortization of
acquisition-related intangible assets of $3.2 million
resulting from acquisitions in fiscal year 2009 and 2010. The
increase in personnel costs was attributable to a 17% increase
in average headcount, resulting from the acquisition of
Internet.com in November 2009, as well as the expansion of our
business. Gross margin declined from 30% in fiscal year 2009 to
28% in fiscal year 2010, due to the above-mentioned increase in
headcount and related compensation expense, as well as due to a
higher mix of traffic from third parties.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2011 - 2010
|
|
|
2010 - 2009
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Product development
|
|
$
|
24,163
|
|
|
$
|
19,726
|
|
|
$
|
14,887
|
|
|
|
22
|
%
|
|
|
33
|
%
|
Sales and marketing
|
|
|
17,382
|
|
|
|
16,698
|
|
|
|
16,154
|
|
|
|
4
|
%
|
|
|
3
|
%
|
General and administrative
|
|
|
20,396
|
|
|
|
18,464
|
|
|
|
13,172
|
|
|
|
10
|
%
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
61,941
|
|
|
$
|
54,888
|
|
|
$
|
44,213
|
|
|
|
13
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Development Expenses
Product development expenses increased $4.4 million, or
22%, in fiscal year 2011 compared to fiscal year 2010, primarily
due to increased personnel costs. The increase in personnel
costs was due to increased compensation expense of
$3.1 million, increased stock-based compensation expense of
$0.5 million and various smaller increases in product
development expenses. The increase in compensation expense and
stock-based compensation expense was due to a 24% increase in
average headcount from additional hiring in connection with
development projects and recent acquisitions.
Product development expenses increased $4.8 million, or
33%, in fiscal year 2010 compared to fiscal year 2009, primarily
due to increased personnel costs of $4.2 million and, to a
lesser extent, increased professional services fees of
$0.4 million. The increase in personnel costs was
attributable to increased compensation expense of
$2.7 million and increased stock-based compensation expense
of $1.5 million. The increase in compensation
40
expense was due to a 20% increase in average headcount affected
by additional hiring in connection with development projects, as
well as increased performance bonus expense due to the
achievement of specified financial metrics during fiscal year
2010 and an increase in the number of individuals eligible for
such bonus. Professional services fees also increased due to
these development projects.
Sales and
Marketing Expenses
Sales and marketing expenses increased $0.7 million, or 4%,
in fiscal year 2011 compared to fiscal year 2010, primarily due
to increased compensation expense of $0.5 million.
Sales and marketing expenses increased $0.5 million, or 3%,
in fiscal year 2010 compared to fiscal year 2009, due to
increased personnel costs of $1.0 million partially offset
by decreases in various smaller items. The increase in personnel
costs was due to increased stock-based compensation expense of
$1.7 million, partially offset by a decline in compensation
expense of $0.7 million due to a decrease of 18% in average
headcount affected by a reduction in workforce since the third
quarter of fiscal year 2009, while bonuses and commissions
increased due to the achievement of specified financial metrics
during fiscal year 2010.
General
and Administrative Expenses
General and administrative expenses increased $1.9 million,
or 10%, in fiscal year 2011 compared to fiscal year 2010, due to
increased professional service fees of $1.4 million, higher
insurance premiums of $0.3 million, state franchise tax
charges of $0.3 million and various smaller increases in
general and administrative expenses, partially offset by
decreased personnel costs of $0.2 million. Professional
service fees and insurance premiums increased due to our
continued investment in corporate infrastructure and related
expenses associated with being a public company, including
increased compliance costs. The decrease in personnel costs was
driven by a decline in stock-based compensation expense of
$1.6 million primarily due to the grant of fully-vested
options to certain members of the board of directors in fiscal
year 2010. The decrease in stock-based compensation expense was
partially offset by increased compensation expense of
$1.4 million primarily due to higher salaries and
performance bonus expenses associated with the achievement of
specified financial metrics during fiscal year 2011.
General and administrative expenses increased $5.3 million,
or 40%, in fiscal year 2010 compared to fiscal year 2009, due to
increased personnel costs of $3.9 million, increased
professional services fees of $0.8 million, increased
direct acquisition costs of $0.3 million and various
smaller increases in general and administrative expenses,
partially offset by a decline in legal fees of
$0.6 million. The increase in personnel costs was due to
increased stock-based compensation expense of $2.8 million
and increased compensation expense of $1.1 million. The
increase in stock-based compensation expense was driven by the
grant of fully-vested options to certain members of our board of
directors in conjunction with an increase in the fair value our
common stock. The increase in compensation expense was due to a
21% increase in average headcount due to our continued
investment in corporate infrastructure, as well as increased
performance bonus expense associated with the achievement of
specified financial metrics. Professional services fees
increased due to our continued investment in corporate
infrastructure and related expenses associated with being a
public company, including increased accounting and tax fees,
higher insurance premiums, investor relations and compliance
costs. The decline in legal fees was due to the settlement of an
ongoing legal matter prior to the fourth quarter of fiscal year
2009.
Interest
and Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2011 - 2010
|
|
|
2010 - 2009
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
169
|
|
|
$
|
97
|
|
|
$
|
245
|
|
|
|
74
|
%
|
|
|
(60
|
)%
|
Interest expense
|
|
|
(4,213
|
)
|
|
|
(3,977
|
)
|
|
|
(3,544
|
)
|
|
|
6
|
%
|
|
|
12
|
%
|
Other income (expense), net
|
|
|
56
|
|
|
|
1,523
|
|
|
|
(239
|
)
|
|
|
(96
|
)%
|
|
|
(737
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
$
|
(3,988
|
)
|
|
$
|
(2,357
|
)
|
|
$
|
(3,538
|
)
|
|
|
69
|
%
|
|
|
(33
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Interest and other income (expense), net decreased by
$1.6 million, or 69%, in fiscal year 2011 compared to
fiscal year 2010, due to a decrease in other income of
$1.5 million primarily from a gain of $1.2 million in
fiscal year 2010 on the extinguishment of acquisition-related
promissory notes that we paid off at discounts prior to maturity.
Interest and other income (expense), net increased
$1.2 million, or 33%, in fiscal year 2010 compared to
fiscal year 2009, due to an increase in other income (expense),
net of $1.8 million, partially offset by an increase in
interest expense of $0.4 million. Other income (expense),
net increased due to a gain on the extinguishment of
acquisition-related promissory notes of $1.2 million that
we paid off at discounts prior to maturity. The increase in
interest expense is attributable to the draw down on our credit
facility, partially offset by lower non-cash imputed interest on
acquisition-related promissory notes.
Provision
for Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
(In thousands)
|
|
Provision for taxes
|
|
$
|
17,887
|
|
|
$
|
16,276
|
|
|
$
|
13,909
|
|
Effective tax rate
|
|
|
39.7
|
%
|
|
|
44.2
|
%
|
|
|
44.6
|
%
|
The decrease in our effective tax rate in fiscal year 2011
compared to fiscal year 2010, was primarily driven by lower
state income tax expense.
Our effective tax rate remained largely unchanged in fiscal year
2010 compared to fiscal year 2009 as higher non-deductible
stock-based compensation expense was largely offset by a tax
benefit in foreign jurisdictions and the release of
ASC 740-10
reserves.
As of June 30, 2011, we had net deferred tax assets of
$16.1 million. Our net deferred tax assets consist
primarily of stock-based compensation expense, accruals and
reserves not currently deductible for tax purposes.
Selected
Quarterly Financial Data
The following table sets forth our unaudited quarterly
consolidated statements of operations data for the eight
quarters ended June 30, 2011. We have prepared the
statements of operations for each of these quarters on the same
basis as the audited consolidated financial statements included
elsewhere in this report and, in the opinion of the management,
each statement of operations includes all adjustments,
consisting solely of normal recurring adjustments, necessary for
the fair statement of the results of operations for these
periods. This information should be read in conjunction with the
audited consolidated financial statements and related notes
included
42
elsewhere in this report. These quarterly operating results are
not necessarily indicative of our operating results for any
future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sept 30,
|
|
|
June 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sept 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
94,118
|
|
|
$
|
107,705
|
|
|
$
|
97,582
|
|
|
$
|
103,616
|
|
|
$
|
88,547
|
|
|
$
|
90,773
|
|
|
$
|
76,963
|
|
|
$
|
78,552
|
|
Costs of revenue
|
|
|
69,122
|
|
|
|
78,578
|
|
|
|
70,662
|
|
|
|
73,629
|
|
|
|
62,858
|
|
|
|
66,268
|
|
|
|
56,557
|
|
|
|
55,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
24,996
|
|
|
|
29,127
|
|
|
|
26,920
|
|
|
|
29,987
|
|
|
|
25,689
|
|
|
|
24,505
|
|
|
|
20,406
|
|
|
|
23,505
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
5,843
|
|
|
|
6,836
|
|
|
|
5,933
|
|
|
|
5,551
|
|
|
|
5,192
|
|
|
|
5,325
|
|
|
|
4,739
|
|
|
|
4,470
|
|
Sales and marketing
|
|
|
3,285
|
|
|
|
4,687
|
|
|
|
4,665
|
|
|
|
4,745
|
|
|
|
4,508
|
|
|
|
4,575
|
|
|
|
3,990
|
|
|
|
3,625
|
|
General and administrative
|
|
|
5,206
|
|
|
|
5,525
|
|
|
|
4,943
|
|
|
|
4,722
|
|
|
|
4,353
|
|
|
|
4,467
|
|
|
|
6,203
|
|
|
|
3,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
10,662
|
|
|
|
12,079
|
|
|
|
11,379
|
|
|
|
14,969
|
|
|
|
11,636
|
|
|
|
10,138
|
|
|
|
5,474
|
|
|
|
11,969
|
|
Interest income
|
|
|
30
|
|
|
|
25
|
|
|
|
47
|
|
|
|
67
|
|
|
|
64
|
|
|
|
16
|
|
|
|
8
|
|
|
|
9
|
|
Interest expense
|
|
|
(1,105
|
)
|
|
|
(1,091
|
)
|
|
|
(1,028
|
)
|
|
|
(989
|
)
|
|
|
(1,046
|
)
|
|
|
(1,302
|
)
|
|
|
(881
|
)
|
|
|
(748
|
)
|
Other income (expense), net
|
|
|
(95
|
)
|
|
|
66
|
|
|
|
(79
|
)
|
|
|
164
|
|
|
|
1,302
|
|
|
|
(64
|
)
|
|
|
165
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
9,492
|
|
|
|
11,079
|
|
|
|
10,319
|
|
|
|
14,211
|
|
|
|
11,956
|
|
|
|
8,788
|
|
|
|
4,766
|
|
|
|
11,350
|
|
Provision for taxes
|
|
|
(3,046
|
)
|
|
|
(4,740
|
)
|
|
|
(3,391
|
)
|
|
|
(6,710
|
)
|
|
|
(5,545
|
)
|
|
|
(3,538
|
)
|
|
|
(2,356
|
)
|
|
|
( 4,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,446
|
|
|
$
|
6,339
|
|
|
$
|
6,928
|
|
|
$
|
7,501
|
|
|
$
|
6,411
|
|
|
$
|
5,250
|
|
|
$
|
2,410
|
|
|
$
|
6,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
|
$
|
0.15
|
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
|
$
|
0.05
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.14
|
|
|
$
|
0.16
|
|
|
$
|
0.13
|
|
|
$
|
0.11
|
|
|
$
|
0.04
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
20,779
|
|
|
$
|
23,218
|
|
|
$
|
21,718
|
|
|
$
|
24,596
|
|
|
$
|
19,901
|
|
|
$
|
18,339
|
|
|
$
|
14,989
|
|
|
$
|
18,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net income per share for the four quarters of each fiscal year
may not sum to the total for the fiscal year because of the
different number of shares outstanding during each period. |
Adjusted
EBITDA
Our use of Adjusted EBITDA. We include
Adjusted EBITDA in this report because (i) we seek to
manage our business to a consistent level of Adjusted EBITDA as
a percentage of net revenue, (ii) it is a key basis upon
which our management assesses our operating performance,
(iii) it is one of the primary metrics investors use in
evaluating Internet marketing companies, (iv) it is a
factor in the evaluation of the performance of our management in
determining compensation, and (v) it is an element of
certain financial covenants under our debt agreements. We define
Adjusted EBITDA as net income less provision for taxes,
depreciation expense, amortization expense, stock-based
compensation expense, interest and other income (expense), net.
We use Adjusted EBITDA as a key performance measure because we
believe it facilitates operating performance comparisons from
period to period by excluding potential differences caused by
variations in capital structures (affecting interest expense),
tax positions (such as the impact on periods or companies of
changes in effective tax rates or fluctuations in permanent
differences or discrete quarterly items) and the non-cash impact
of depreciation, amortization and stock-based compensation
expense. Because Adjusted EBITDA facilitates internal
comparisons of our historical operating performance on a more
consistent basis, we also use Adjusted EBITDA for business
planning purposes, to incentivize and compensate our management
personnel and in evaluating acquisition opportunities.
In addition, we believe Adjusted EBITDA and similar measures are
widely used by investors, securities analysts, ratings agencies
and other interested parties in our industry as a measure of
financial performance and debt-service capabilities. Our use of
Adjusted EBITDA has limitations as an analytical tool, and it
should not be considered in isolation or as a substitute for
analysis of our results as reported under GAAP. Some of these
limitations are:
|
|
|
|
|
Adjusted EBITDA does not reflect our cash expenditures for
capital equipment or other contractual commitments;
|
43
|
|
|
|
|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized may have to be replaced
in the future, and Adjusted EBITDA does not reflect cash capital
expenditure requirements for such replacements;
|
|
|
|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
|
|
|
|
Adjusted EBITDA does not consider the potentially dilutive
impact of issuing stock-based compensation to our management
team and employees;
|
|
|
|
Adjusted EBITDA does not reflect the significant interest
expense or the cash requirements necessary to service interest
or principal payments on our indebtedness;
|
|
|
|
Adjusted EBITDA does not reflect certain tax payments that may
represent a reduction in cash available to us; and
|
|
|
|
other companies, including companies in our industry, may
calculate Adjusted EBITDA measures differently, which reduces
their usefulness as a comparative measure.
|
Because of these limitations, Adjusted EBITDA should not be
considered as a measure of discretionary cash available to us to
invest in the growth of our business. When evaluating our
performance, Adjusted EBITDA should be considered alongside
other financial performance measures, including various cash
flow metrics, net income and our other GAAP results.
The following table presents a reconciliation of Adjusted EBITDA
to net income, the most comparable GAAP measure, for each of the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sept 30,
|
|
|
June 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sept 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
6,446
|
|
|
$
|
6,339
|
|
|
$
|
6,928
|
|
|
$
|
7,501
|
|
|
$
|
6,411
|
|
|
$
|
5,250
|
|
|
$
|
2,410
|
|
|
$
|
6,513
|
|
Interest and other income (expense), net
|
|
$
|
1,170
|
|
|
|
1,000
|
|
|
|
1,060
|
|
|
|
758
|
|
|
|
(320
|
)
|
|
|
1,350
|
|
|
|
708
|
|
|
|
619
|
|
Provision for taxes
|
|
$
|
3,046
|
|
|
|
4,740
|
|
|
|
3,391
|
|
|
|
6,710
|
|
|
|
5,545
|
|
|
|
3,538
|
|
|
|
2,356
|
|
|
|
4,837
|
|
Depreciation and amortization
|
|
$
|
7,020
|
|
|
|
7,632
|
|
|
|
6,723
|
|
|
|
5,897
|
|
|
|
5,113
|
|
|
|
5,075
|
|
|
|
4,651
|
|
|
|
3,952
|
|
Stock-based compensation expense
|
|
$
|
3,097
|
|
|
|
3,507
|
|
|
|
3,616
|
|
|
|
3,730
|
|
|
|
3,152
|
|
|
|
3,126
|
|
|
|
4,864
|
|
|
|
2,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
20,779
|
|
|
$
|
23,218
|
|
|
$
|
21,718
|
|
|
$
|
24,596
|
|
|
$
|
19,901
|
|
|
$
|
18,339
|
|
|
$
|
14,989
|
|
|
$
|
18,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA quarterly trends. We seek to
manage our business to a consistent level of Adjusted EBITDA as
a percentage of net revenue. We do so on a fiscal year basis by
varying our operations to balance revenue growth and costs
throughout the fiscal year. We do not seek to manage our
business to a consistent level of Adjusted EBITDA on a quarterly
basis and investors should expect our Adjusted EBITDA margins to
vary from quarter to quarter.
For quarterly periods ending from September 30, 2009 to
June 30, 2011, Adjusted EBITDA as a percentage of revenue
was 23%, 19%, 20%, 22% and 24%, 22%, 22% and 22%, respectively.
In general, Adjusted EBITDA as a percentage of revenue tends to
be seasonally weaker in the quarter ending December 31, and
stronger in quarters ending March 31 and June 30.
Liquidity
and Capital Resources
Our primary operating cash requirements include the payment of
media costs, personnel costs, costs of information technology
systems and office facilities.
Our principal sources of liquidity as of June 30, 2011,
consisted of cash and cash equivalents of $132.3 million,
short-term marketable securities of $34.9 million, and our
credit facility which had $123.4 million available for
borrowing. We believe that our existing cash and cash
equivalents, short-term marketable securities, available
borrowings under the credit facility and cash generated from
operations will be sufficient to satisfy our currently
anticipated cash requirements through at least the next
12 months.
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
$
|
78,171
|
|
|
$
|
38,509
|
|
|
$
|
32,570
|
|
Cash flows from investing activities
|
|
|
(134,763
|
)
|
|
|
(72,233
|
)
|
|
|
( 27,326
|
)
|
Cash flows from financing activities
|
|
|
33,072
|
|
|
|
164,324
|
|
|
|
(5,012
|
)
|
Net
Cash Provided by Operating Activities
Our net cash provided by operating activities is primarily the
result of our net income adjusted for non-cash expenses and
changes in working capital components, and is influenced by the
timing of cash collections from our clients and cash payments
for purchases of media and other expenses.
Net cash provided by operating activities in fiscal year 2011
was due to net income of $27.2 million, non-cash
depreciation, amortization, stock-based compensation expense and
related tax benefits of $33.8 million, an increase in
accounts payable and accrued liabilities of $8.9 million, a
decrease in prepaid expenses and other assets of
$5.1 million and a decrease in accounts receivable of
$3.9 million, partially offset by an increase in deferred
taxes of $3.3 million. The increase in accounts payable and
accrued liabilities is due to timing of payments and increased
cost of revenue associated with increased revenue. The decrease
in prepaid expenses and other assets is primarily due to timing
of payments. The decrease in accounts receivable is attributable
to timing of receipts. The increase in deferred taxes is due to
larger temporary differences between the financial statement
carrying amount and the tax basis of certain existing assets and
liabilities.
Net cash provided by operating activities in fiscal year 2010
was due to net income of $20.6 million, non-cash
depreciation, amortization, stock-based compensation expense and
related tax benefits of $30.3 million and an increase in
accounts payable and accrued liabilities of $11.3 million,
partially offset by an increase in accounts receivable of
$14.4 million, an increase in deferred taxes of
$6.8 million, as well as a gain from the early
extinguishment of debt of $1.2 million. The increase in
accounts payable and accrued liabilities is due to timing of
payments and increased cost of sales associated with increased
revenue. The increase in accounts receivable is attributable to
increased revenue, as well as timing of receipts. The increase
in deferred taxes is primarily due to larger temporary
differences between the financial statement carrying amount and
the tax basis of certain existing assets and liabilities.
Net cash provided by operating activities in fiscal year 2009
was due to net income of $17.3 million, non-cash
depreciation, amortization, stock-based compensation expense and
related tax benefits of $21.7 million and increased
accounts payable and accrued liabilities of $5.9 million,
partially offset by an increase in accounts receivable of
$9.0 million and increased deferred taxes of
$4.1 million. The increase in accounts payable and accrued
liabilities is due to timing of payments. The increase in
accounts receivable is due to increased revenue, as well as due
to timing of receipts. The increase in deferred taxes is due to
larger temporary differences between the financial statement
carrying amount and the tax basis of certain existing assets and
liabilities.
Net
Cash Used in Investing Activities
Our investing activities include acquisitions of media websites
and businesses; purchases, sales and maturities of marketable
securities; capital expenditures; and capitalized internal
development costs.
Cash used in investing activities in fiscal year 2011 was
primarily due to our acquisition of CarInsurance.com for an
initial cash payment of $49.7 million and Insurance.com for
an initial cash payment of $33.0 million. Cash used in
investing activities was also impacted by purchases of the
operations of 13 other online publishing businesses for an
aggregate of $9.2 million in cash payments, which included
$4.5 million of contingent consideration related to a prior
period acquisition, as well as net investments in marketable
securities of $35.2 million. Capital expenditures and
internal software development costs totaled $7.2 million in
fiscal year 2011.
Cash used in investing activities in fiscal year 2010 was
primarily due to our acquisitions of Internet.com, Insure.com
and HSH. We acquired the website business of the Internet.com
division of WebMediaBrands, Inc., a New York-based Internet
media company, for an initial cash payment of
$15.9 million. We acquired the website
45
business of Insure.com from LifeQuotes, Inc., an Illinois-based
online insurance quote service and brokerage business, for an
initial cash payment of $15.0 million. We acquired HSH, a
New Jersey-based online company providing comprehensive mortgage
rate information, for an initial cash payment of
$6.0 million. Cash used in investing activities was also
affected by purchases of the operations of 30 other website
publishing businesses for an aggregate of $31.2 million in
cash payments, which included $4.5 million of contingent
consideration related to the acquisition of SureHits in fiscal
year 2008. Capital expenditures and internal software
development costs totaled $4.1 million in fiscal year 2010.
Cash used in investing activities in fiscal year 2009 was
affected by the acquisition of CardRatings for an initial cash
payment of $10.4 million, as well as purchases of the
operations of 33 other website publishing businesses for an
aggregate of $19.1 million in cash payments, which included
$4.5 million of contingent consideration related to the
acquisition of SureHits in fiscal year 2008. Capital
expenditures and internal software development costs totaled
$2.4 million in fiscal year 2009. Cash used in investing
activities was partially offset by proceeds from sales and
maturities of marketable securities of $2.3 million.
Net
Cash Provided by or Used in Financing Activities
Cash provided by financing activities in fiscal year 2011 was
primarily due to net proceeds from the draw-down of our
revolving credit line of $24.4 million, proceeds from the
exercise of stock options of $16.7 million and excess tax
benefits from stock-based compensation of $7.5 million,
partially offset by $15.4 million in principal payments on
acquisition-related promissory notes and our term loan.
Cash provided by financing activities in fiscal year 2010 was
primarily due to proceeds from our IPO, net of issuance costs,
of $136.8 million, draw-down of our credit facility, net of
principal payments, of $40.2 million, proceeds from stock
option exercises of $1.6 million and excess tax benefits of
$1.9 million, partially offset by $15.5 million of
principal payments on acquisition-related promissory notes.
Cash used in financing activities in fiscal year 2009 was due to
principal payments on acquisition-related promissory notes and
our term loan of $13.1 million and stock repurchases of
$1.3 million, partially offset by proceeds from a draw-down
of our revolving credit line of $8.6 million.
Off-Balance
Sheet Arrangements
During the periods presented, we did not have any 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 relate primarily to borrowings under
the credit facility, acquisition-related promissory notes,
operating leases and purchase obligations.
The following table sets forth payments due under our
contractual obligations as of June 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1 to
|
|
|
3 to
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Credit facility
|
|
$
|
96,741
|
|
|
$
|
7,000
|
|
|
$
|
89,741
|
|
|
$
|
|
|
|
$
|
|
|
Notes payable
|
|
|
10,967
|
|
|
|
3,597
|
|
|
|
6,760
|
|
|
|
610
|
|
|
|
|
|
Operating lease obligatio
|
|
|
19,462
|
|
|
|
1,881
|
|
|
|
5,970
|
|
|
|
5,736
|
|
|
|
5,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
127,170
|
|
|
$
|
12,478
|
|
|
$
|
102,471
|
|
|
$
|
6,346
|
|
|
$
|
5,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table does not include approximately $2.3 million
of long-term income tax liabilities for uncertainty in income
taxes due to the fact that we are unable to reasonably estimate
the timing of these potential future payments.
46
In connection with the acquisition of SureHits and contingent
upon the achievement of specified financial targets we may be
required to make an earn-out payment of $4.5 million in
January of 2012.
Credit
Facility
In January 2010, we replaced our existing credit facility with a
credit facility totaling $175.0 million. The new facility
consisted of a $35.0 million four-year term loan, with
principal amortization of 10%, 15%, 35% and 40% annually, and a
$140.0 million four-year revolving credit line with an
option to increase the revolving credit line by
$50.0 million. We exercised this option in February 2011,
thereby increasing the total capacity of the credit facility to
$225.0 million.
Borrowings under the credit facility are collateralized by our
assets and interest is payable at specified margins above either
LIBOR or the Prime Rate. The interest rate varies dependent upon
the ratio of funded debt to adjusted EBITDA and ranges from
LIBOR + 2.125% to 2.875% or Prime + 1.00% to 1.50% for the
revolving credit line and from LIBOR + 2.50% to 3.25% or Prime +
1.00% to 1.50% for the term loan. Adjusted EBITDA is defined as
net income less provision for taxes, depreciation expense,
amortization expense, stock-based compensation expense, interest
and other income (expense), net and acquisition costs for
business combinations. The revolving credit line requires a
facility fee of 0.375% of the revolving credit line capacity.
The credit facility expires in January 2014. The credit facility
agreement restricts our ability to raise additional debt
financing and pay dividends. In addition, we are required to
maintain financial ratios computed as follows:
1. Quick ratio: ratio of (i) the sum of unrestricted
cash and cash equivalents and trade receivables less than
90 days from invoice date to (ii) current liabilities
and face amount of any letters of credit less the current
portion of deferred revenue.
2. Fixed charge coverage: ratio of (i) trailing twelve
months of adjusted EBITDA to (ii) the sum of capital
expenditures, net cash interest expense, cash taxes, cash
dividends and trailing twelve months payments of indebtedness.
Payment of unsecured indebtedness is excluded to the degree that
sufficient unused revolving credit line exists such that the
relevant debt payment could be made from the credit facility.
3. Funded debt to adjusted EBITDA: ratio of (i) the
sum of all obligations owed to lending institutions, the face
amount of any letters of credit, indebtedness owed in connection
with acquisition-related notes and indebtedness owed in
connection with capital lease obligations to (ii) trailing
twelve months of adjusted EBITDA.
Under the terms of the credit facility we must maintain a
minimum quick ratio of 1.15:1.00, a minimum fixed charge
coverage ratio of 1.15:1.00 and a maximum funded debt to
adjusted EBITDA ratio of 2.50:1.00, and the terms also require
us to comply with other non-financial covenants. We were in
compliance with the covenants as of June 30, 2011 and 2010.
New
Lease
As the previous lease for our corporate headquarters located at
1051 Hillsdale Boulevard, Foster City, California expired in
October 2010, we entered into a new lease agreement in February
2010 for approximately 63,998 square feet of office space
located at 950 Tower Lane, Foster City, California. The term of
the lease began on November 1, 2010 and expires on
October 31, 2018. We have two options to extend the term of
the lease for one additional year for each option following the
expiration date of the lease or renewal term, as applicable. The
monthly base rent is abated for the first 12 calendar months
under the lease. Thereafter the base rent will be $118,000
through the 24th calendar month of the term of the lease,
after which the monthly base rent will increase to $182,000 for
the subsequent 12 months.
In the following years the monthly base rent will increase
approximately 3% after each
12-month
anniversary during the term of the lease, including any
extensions under our options to extend.
47
Critical
Accounting Policies and Estimates
We have prepared our consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America (GAAP). In doing so, we are required to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at 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, estimates and
assumptions and, therefore, could have the greatest potential
impact on our consolidated financial statements. In addition, we
believe that a discussion of these policies is necessary to
understand and evaluate the consolidated financial statements
contained in this report.
For further information on our critical and other significant
accounting policies, see Note 2 of our consolidated
financial statements included in this report.
Revenue
Recognition
We derive our revenue from two sources: Direct Marketing
Services (DMS) and Direct Selling Services
(DSS).
DMS revenue is derived primarily from fees which are earned
through the delivery of qualified leads or clicks and, to a
lesser extent, display advertisements, or impressions. We
recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable
and collectability is reasonably assured. Delivery is deemed to
have occurred at the time a qualified lead or click is delivered
to the client provided that no significant obligations remain.
On July 1, 2010, as required under GAAP, we adopted the
amended accounting guidance for multiple deliverable revenue
arrangements which provides guidance on whether multiple
deliverables exist, how the deliverables in an arrangement
should be separated, and how the consideration should be
allocated. The adoption of this amended guidance did not have a
significant impact on our revenue recognition for multiple
deliverable revenue arrangements.
The guidance requires the allocation of revenue in an
arrangement using the estimated selling price (ESP)
of deliverables if vendor-specific objective evidence
(VSOE) of selling price based on historical
stand-alone sales or third-party evidence (TPE) of
selling price do not exist. Due to the unique nature of some of
our multiple deliverable revenue arrangements, we may not be
able to establish selling prices based on historical stand-alone
sales or third party evidence, therefore we may use our best
estimate to establish selling prices for these arrangements
under the new standard. We establish best estimates within a
range of selling prices considering multiple factors including,
but not limited to, factors such as class of client, size of
transaction, available media inventory, pricing strategies and
market conditions. We believe the use of the best estimate of
selling price allows revenue recognition in a manner consistent
with the underlying economics of the transaction.
From time to time, we may agree to credit a client for certain
leads or clicks if they fail to meet the contractual or other
guidelines of a particular client. We have established a sales
reserve based on historical experience. To date, such credits
have been immaterial and within our expectations.
For a portion of our revenue, we have agreements with providers
of online media or traffic (Publishers) used in the
generation of qualified leads or clicks. We receive a fee from
our clients and pay a fee to Publishers either on a
revenue-share,
cost-per-lead,
cost- per-click or
cost-per-thousand-impressions
basis. We are the primary obligor in the transaction. As a
result, the fees paid by our clients are recognized as revenue
and the fees paid to our Publishers are included in cost of
revenue.
DSS revenue comprises
(i) set-up
and professional services fees and (ii) usage fees.
Set-up and
professional service fees that do not provide stand-alone value
to a client are recognized over the contractual term of the
agreement or the expected client relationship period, whichever
is longer, effective when the application reaches the
48
go-live date. We define the go-live date
as the date when the application enters into a production
environment or all essential functionalities have been
delivered. Usage fees are recognized on a monthly basis as
earned.
Deferred revenue is comprised of contractual billings in excess
of recognized revenue and payments received in advance of
revenue recognition.
Stock-Based
Compensation
We measure and record the expense related to stock-based
transactions based on the fair values of the awards as
determined on the date of grant. For stock options, we selected
the Black-Scholes option pricing model to estimate the fair
value. In applying the Black-Scholes option pricing model, our
determination of fair value is affected by assumptions regarding
a number of highly complex and subjective variables. These
variables include, but are not limited to, the expected stock
price volatility over the term of the stock options and the
employees actual and projected stock option exercise and
pre-vesting employment termination behaviors. The fair value of
restricted stock units is determined based on the closing price
of our common stock on the date of grant.
We recognize stock-based compensation expense over the requisite
service period using the straight-line method, based on awards
ultimately expected to vest. We estimate future forfeitures at
the date of grant and revise the estimates, if necessary, in
subsequent periods if actual forfeitures differ from those
estimates.
Goodwill
Goodwill is tested for impairment at the reporting unit level on
an annual basis and whenever events or changes in circumstances
indicate the carrying value of a reporting unit exceeds its fair
value. The application of the goodwill impairment test requires
judgment, including the identification of reporting units, the
assignment of assets, liabilities and goodwill to reporting
units and the determination of the fair value of each reporting
unit. Significant judgments required to estimate the fair value
of reporting units include estimating future cash flows and
determining appropriate discount rates, growth rates and other
assumptions. Changes in these estimates and assumptions could
materially affect the determination of fair value which could
trigger impairment. We performed our annual goodwill impairment
test in our quarter ending June 30, 2011.
We concluded that DMS and DSS constitute two separate reporting
units. We determined the fair value of our DMS reporting unit by
adjusting the fair value of the business enterprise based on our
market capitalization for the fair value of the DSS reporting
unit. The fair value of our DSS reporting unit was estimated
using the income approach. Under the income approach, we
calculated the fair value of our DSS reporting unit based on the
present value of estimated future cash flows. Our assessment
indicated that the estimated fair value of our DMS reporting
unit was substantially in excess of its carrying value while the
estimated fair value of our DSS reporting unit approximated its
carrying value. The carrying value of our DSS reporting unit
includes allocated goodwill of $1.2 million which
represents less than 1% of our total goodwill balance. No
impairment charges were recorded in the periods presented.
The fair value of the reporting units and hence the valuation of
goodwill could be affected if actual results differ
substantially from our estimates. Circumstances that could
affect the valuation of goodwill include, among other things, a
significant change in our market capitalization, the business
climate and buying habits of our subscriber base, and with
respect to the DSS reporting unit, the loss of a significant
customer.
Long-Lived
Assets
We evaluate long-lived assets, such as property and equipment
and purchased intangible assets with finite lives, for
impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. We
apply judgment when estimating the fair value of the assets
based on the undiscounted future cash flows the assets are
expected to generate and recognize an impairment loss if
estimated undiscounted future cash flows expected to result from
the use of the asset plus net proceeds expected from disposition
of the asset, if any, are less than the carrying value of the
asset. No impairment charges were recorded in the periods
presented.
49
Income
Taxes
We account for income taxes using an asset and liability
approach to record deferred taxes. Our deferred income tax
assets represent temporary differences between the financial
statement carrying amount and the tax basis of existing assets
and liabilities that will result in deductible amounts in future
years, including net operating loss carry forwards. Based on
estimates, the carrying value of our net deferred tax assets
assumes that it is more likely than not that we will be able to
generate sufficient future taxable income in certain tax
jurisdictions. Our judgment regarding future profitability may
change due to future market conditions, changes in U.S. or
international tax laws and other factors.
Recent
Accounting Pronouncements
See Note 2 to our consolidated financial statements for
information with respect to recent accounting pronouncements and
the impact of these pronouncements on our consolidated financial
statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to market risks in the ordinary course of our
business. These risks include primarily foreign currency
exchange and interest rate risks.
Foreign
Currency Exchange Risk
To date, our international client agreements have been
predominately denominated in U.S. dollars, and accordingly,
we have limited exposure to foreign currency exchange rate
fluctuations related to client agreements and do not currently
engage in foreign currency hedging transactions. As the local
accounts for some of our foreign operations are maintained in
the local currency of the respective country, we are subject to
foreign currency exchange rate fluctuations associated with the
remeasurement to U.S. dollars. A hypothetical change of 10%
in foreign currency exchange rates would not have a material
effect on our consolidated financial condition or results of
operations.
Interest
Rate Risk
We invest our cash equivalents and short-term investments
primarily in money market funds, US government securities and
short-term deposits with original maturities of less than twelve
months. The investments are held for working capital purposes
and acquisition financing. We do not enter into investments for
trading or speculative purposes. We believe that we do not have
material exposure to changes in the fair value as a result of
changes in interest rates due to the short-term nature of our
investments. Declines in interest rates may reduce future
investment income. However, a hypothetical decline of 1% in the
interest rate on our investments would not have a material
effect on our consolidated financial condition or results of
operations.
Our credit facility had a borrowing capacity of
$225.0 million. Interest on borrowings under the credit
facility is based at specified margins above either LIBOR or the
Prime Rate. Our exposure to interest rate risk under the credit
facility will depend on the extent to which we utilize such
facility. As of June 30, 2011, we had $96.7 million
outstanding under our credit facility. A hypothetical increase
of 1% in the LIBOR or Prime Rate-based interest rate on our
credit facility would result in an increase in our interest
expense of $1.0 million per year, assuming constant
borrowing levels.
50
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
QUINSTREET,
INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
51
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of QuinStreet, Inc.
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of QuinStreet,
Inc. and its subsidiaries at June 30, 2011 and 2010, and
the results of their operations and their cash flows for each of
the three years in the period ended June 30, 2011 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
June 30, 2011, based on criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
The Companys management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control Over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and
on the Companys internal control over financial reporting
based on our audits (which was an integrated audit in 2011). We
conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
San Jose, California
August 29, 2011
52
QUINSTREET,
INC.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
132,290
|
|
|
$
|
155,770
|
|
Marketable securities
|
|
|
34,927
|
|
|
|
|
|
Accounts receivable, net
|
|
|
48,225
|
|
|
|
51,466
|
|
Deferred tax assets
|
|
|
10,253
|
|
|
|
8,528
|
|
Prepaid expenses and other assets
|
|
|
5,773
|
|
|
|
3,123
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
231,468
|
|
|
|
218,887
|
|
Property and equipment, net
|
|
|
8,875
|
|
|
|
5,419
|
|
Goodwill
|
|
|
211,856
|
|
|
|
158,582
|
|
Other intangible assets, net
|
|
|
65,847
|
|
|
|
47,156
|
|
Deferred tax assets, noncurrent
|
|
|
5,866
|
|
|
|
3,972
|
|
Other assets, noncurrent
|
|
|
1,012
|
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
524,924
|
|
|
$
|
434,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
23,300
|
|
|
$
|
16,776
|
|
Accrued liabilities
|
|
|
33,238
|
|
|
|
30,144
|
|
Deferred revenue
|
|
|
2,531
|
|
|
|
1,241
|
|
Debt
|
|
|
10,038
|
|
|
|
15,562
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
69,107
|
|
|
|
63,723
|
|
Deferred revenue, noncurrent
|
|
|
58
|
|
|
|
305
|
|
Debt, noncurrent
|
|
|
96,010
|
|
|
|
78,046
|
|
Other liabilities, noncurrent
|
|
|
4,360
|
|
|
|
2,534
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
169,535
|
|
|
|
144,608
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (See Note 10)
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Common stock: $0.001 par value; 100,000,000 shares
authorized; 49,564,877 and 47,247,147 shares issued, and
47,387,425 and 45,069,695 shares outstanding at June 30,
2011 and 2010, respectively
|
|
|
50
|
|
|
|
47
|
|
Additional paid-in capital
|
|
|
255,689
|
|
|
|
217,581
|
|
Treasury stock, at cost (2,177,452 shares at June 30,
2011 and 2010)
|
|
|
(7,779
|
)
|
|
|
(7,779
|
)
|
Accumulated other comprehensive income
|
|
|
51
|
|
|
|
9
|
|
Retained earnings
|
|
|
107,378
|
|
|
|
80,164
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
355,389
|
|
|
|
290,022
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
524,924
|
|
|
$
|
434,630
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
53
QUINSTREET,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
403,021
|
|
|
$
|
334,835
|
|
|
$
|
260,527
|
|
Cost of revenue(1)
|
|
|
291,991
|
|
|
|
240,730
|
|
|
|
181,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
111,030
|
|
|
|
94,105
|
|
|
|
78,934
|
|
Operating expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
24,163
|
|
|
|
19,726
|
|
|
|
14,887
|
|
Sales and marketing
|
|
|
17,382
|
|
|
|
16,698
|
|
|
|
16,154
|
|
General and administrative
|
|
|
20,396
|
|
|
|
18,464
|
|
|
|
13,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
49,089
|
|
|
|
39,217
|
|
|
|
34,721
|
|
Interest income
|
|
|
169
|
|
|
|
97
|
|
|
|
245
|
|
Interest expense
|
|
|
(4,213
|
)
|
|
|
(3,977
|
)
|
|
|
(3,544
|
)
|
Other income (expense), net
|
|
|
56
|
|
|
|
1,523
|
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
45,101
|
|
|
|
36,860
|
|
|
|
31,183
|
|
Provision for taxes
|
|
|
(17,887
|
)
|
|
|
(16,276
|
)
|
|
|
(13,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
27,214
|
|
|
$
|
20,584
|
|
|
$
|
17,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
27,214
|
|
|
$
|
12,782
|
|
|
$
|
5,399
|
|
Diluted
|
|
$
|
27,214
|
|
|
$
|
13,201
|
|
|
$
|
5,798
|
|
Net income per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.59
|
|
|
$
|
0.50
|
|
|
$
|
0.41
|
|
Diluted
|
|
$
|
0.55
|
|
|
$
|
0.46
|
|
|
$
|
0.39
|
|
Weighted average shares used in computing net income per share
attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
46,222
|
|
|
|
25,616
|
|
|
|
13,294
|
|
Diluted
|
|
|
49,130
|
|
|
|
28,429
|
|
|
|
14,971
|
|
|
|
|
(1) |
|
Cost of revenue and operating expenses include stock-based
compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
4,506
|
|
|
$
|
3,111
|
|
|
$
|
1,916
|
|
Product development
|
|
|
2,705
|
|
|
|
2,176
|
|
|
|
669
|
|
Sales and marketing
|
|
|
3,747
|
|
|
|
3,463
|
|
|
|
1,761
|
|
General and administrative
|
|
|
2,992
|
|
|
|
4,621
|
|
|
|
1,827
|
|
See notes to consolidated financial statements
54
QUINSTREET,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Shareholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Equity
|
|
|
Income
|
|
|
|
(In thousands, except share data)
|
|
Balance at June 30, 2008
|
|
|
21,176,533
|
|
|
$
|
43,403
|
|
|
|
|
15,243,284
|
|
|
$
|
15
|
|
|
|
(1,934,377
|
)
|
|
$
|
(5,727
|
)
|
|
$
|
13,683
|
|
|
$
|
34
|
|
|
$
|
42,306
|
|
|
$
|
50,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
169,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
304
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,173
|
|
|
|
|
|
|
|
|
|
|
|
6,173
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
474
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163,275
|
)
|
|
|
(1,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,337
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,274
|
|
|
|
17,274
|
|
|
$
|
17,274
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
$
|
(10
|
)
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
|
21,176,533
|
|
|
$
|
43,403
|
|
|
|
|
15,413,000
|
|
|
$
|
15
|
|
|
|
(2,097,652
|
)
|
|
$
|
(7,064
|
)
|
|
$
|
20,634
|
|
|
$
|
21
|
|
|
$
|
59,580
|
|
|
$
|
73,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
657,614
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1,639
|
|
|
|
|
|
|
|
|
|
|
|
1,640
|
|
|
|
|
|
Issuance of common stock in connection with initial public
offering, net of issuance costs of $13,215
|
|
|
|
|
|
|
|
|
|
|
|
10,000,000
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
136,775
|
|
|
|
|
|
|
|
|
|
|
|
136,785
|
|
|
|
|
|
Conversion of preferred stock to common stock in connection with
initial public offering
|
|
|
(21,176,533
|
)
|
|
|
(43,403
|
)
|
|
|
|
21,176,533
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
43,382
|
|
|
|
|
|
|
|
|
|
|
|
43,403
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,371
|
|
|
|
|
|
|
|
|
|
|
|
13,371
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,780
|
|
|
|
|
|
|
|
|
|
|
|
1,780
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79,800
|
)
|
|
|
(715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(715
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,584
|
|
|
|
20,584
|
|
|
$
|
20,584
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
47,247,147
|
|
|
$
|
47
|
|
|
|
(2,177,452
|
)
|
|
$
|
(7,779
|
)
|
|
$
|
217,581
|
|
|
$
|
9
|
|
|
$
|
80,164
|
|
|
$
|
290,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
2,317,730
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
16,967
|
|
|
|
|
|
|
|
|
|
|
|
16,970
|
|
|
|
|
|
Payment of initial public offering issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
(101
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,950
|
|
|
|
|
|
|
|
|
|
|
|
13,950
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,292
|
|
|
|
|
|
|
|
|
|
|
|
7,292
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,214
|
|
|
|
27,214
|
|
|
$
|
27,214
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
40
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2011
|
|
|
|
|
|
$
|
|
|
|
|
|
49,564,877
|
|
|
$
|
50
|
|
|
|
(2,177,452
|
)
|
|
$
|
(7,779
|
)
|
|
$
|
255,689
|
|
|
$
|
51
|
|
|
$
|
107,378
|
|
|
$
|
355,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
55
QUINSTREET,
INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
27,214
|
|
|
$
|
20,584
|
|
|
$
|
17,274
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
27,272
|
|
|
|
18,791
|
|
|
|
15,978
|
|
Provision for sales returns and doubtful accounts receivable
|
|
|
(35
|
)
|
|
|
(751
|
)
|
|
|
1,473
|
|
Stock-based compensation
|
|
|
13,950
|
|
|
|
13,371
|
|
|
|
6,173
|
|
Excess tax benefits from stock-based compensation
|
|
|
(7,458
|
)
|
|
|
(1,859
|
)
|
|
|
(474
|
)
|
Other non-cash adjustments, net
|
|
|
99
|
|
|
|
(1,622
|
)
|
|
|
563
|
|
Changes in assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,885
|
|
|
|
(14,403
|
)
|
|
|
(9,042
|
)
|
Prepaid expenses and other assets
|
|
|
4,947
|
|
|
|
29
|
|
|
|
485
|
|
Other assets, noncurrent
|
|
|
120
|
|
|
|
11
|
|
|
|
(710
|
)
|
Deferred taxes
|
|
|
(3,252
|
)
|
|
|
(6,771
|
)
|
|
|
(4,081
|
)
|
Accounts payable
|
|
|
6,375
|
|
|
|
3,363
|
|
|
|
3,359
|
|
Accrued liabilities
|
|
|
2,552
|
|
|
|
7,900
|
|
|
|
2,491
|
|
Deferred revenue
|
|
|
1,043
|
|
|
|
(112
|
)
|
|
|
(720
|
)
|
Other liabilities, noncurrent
|
|
|
1,459
|
|
|
|
(22
|
)
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
78,171
|
|
|
|
38,509
|
|
|
|
32,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(5,363
|
)
|
|
|
(2,710
|
)
|
|
|
(1,347
|
)
|
Business acquisitions, net of notes payable and cash acquired
|
|
|
(91,838
|
)
|
|
|
(68,176
|
)
|
|
|
(27,932
|
)
|
Internal software development costs
|
|
|
(1,841
|
)
|
|
|
(1,414
|
)
|
|
|
(1,060
|
)
|
Purchases of marketable securities
|
|
|
(54,433
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of marketable securities
|
|
|
19,227
|
|
|
|
|
|
|
|
2,302
|
|
Other investing activities
|
|
|
(515
|
)
|
|
|
67
|
|
|
|
711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(134,763
|
)
|
|
|
(72,233
|
)
|
|
|
(27,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
(106
|
)
|
|
|
136,790
|
|
|
|
|
|
Proceeds from exercise of common stock options
|
|
|
16,710
|
|
|
|
1,640
|
|
|
|
304
|
|
Proceeds from bank debt
|
|
|
24,425
|
|
|
|
43,300
|
|
|
|
8,607
|
|
Principal payments on bank debt
|
|
|
(3,963
|
)
|
|
|
(3,100
|
)
|
|
|
(3,500
|
)
|
Principal payments on acquisition-related notes payable
|
|
|
(11,452
|
)
|
|
|
(15,450
|
)
|
|
|
(9,560
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
7,458
|
|
|
|
1,859
|
|
|
|
474
|
|
Repurchases of common stock
|
|
|
|
|
|
|
(715
|
)
|
|
|
(1,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
33,072
|
|
|
|
164,324
|
|
|
|
(5,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
40
|
|
|
|
(12
|
)
|
|
|
(3
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(23,480
|
)
|
|
|
130,588
|
|
|
|
229
|
|
Cash and cash equivalents at beginning of period
|
|
|
155,770
|
|
|
|
25,182
|
|
|
|
24,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
132,290
|
|
|
$
|
155,770
|
|
|
$
|
25,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
|
4,128
|
|
|
|
3,860
|
|
|
|
2,269
|
|
Cash paid for taxes
|
|
|
16,885
|
|
|
|
22,109
|
|
|
|
20,354
|
|
Supplemental Disclosure of Noncash Investing and Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued in connection with business acquisitions
|
|
|
3,311
|
|
|
|
14,501
|
|
|
|
8,151
|
|
Conversion of preferred stock to common stock
|
|
|
|
|
|
|
43,403
|
|
|
|
|
|
See notes to consolidated financial statements
56
QUINSTREET,
INC.
(In
thousands, except share and per share data)
QuinStreet, Inc. (the Company) is an online vertical
marketing and media company. The Company was incorporated in
California on April 16, 1999 and reincorporated in Delaware
on December 31, 2009. The Company provides vertically
oriented customer acquisition programs for its clients. The
Company also provides hosted solutions for direct selling
companies. The corporate headquarters are located in Foster
City, California, with offices in Arkansas, Florida,
Massachusetts, Nevada, New Jersey, New York, North Carolina,
Oklahoma, Oregon, India and the United Kingdom.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Consolidation
The consolidated financial statements include the accounts of
the Company and its subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (GAAP) requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of
revenue and expenses during the reporting period. These
estimates are based on information available as of the date of
the financial statements; therefore, actual results could differ
from those estimates.
Revenue
Recognition
The Company derives its revenue from two sources: Direct
Marketing Services (DMS) and Direct Selling Services
(DSS). DMS revenue, which constituted more than 99%
in fiscal year 2011 and 99% of net revenue in both fiscal year
2010 and 2009 is derived from fees which are earned through the
delivery of qualified leads, clicks and, to a lesser extent,
display advertisements (impressions). The Company
recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable
and collectability is reasonably assured. Delivery is deemed to
have occurred at the time a qualified lead, click or impression
is delivered to the client provided that no significant
obligations remain.
On July 1, 2010, as required under GAAP, the Company
adopted the amended accounting standard for multiple deliverable
revenue arrangements which provides guidance on whether multiple
deliverables exist, how the deliverables in an arrangement
should be separated, and how the consideration should be
allocated. The adoption of this amended standard did not have a
significant impact on the Companys revenue recognition for
multiple deliverable revenue arrangements.
The guidance requires an entity to allocate revenue in an
arrangement using the estimated selling price (ESP)
of deliverables if it does not have vendor-specific objective
evidence (VSOE) of selling price based on historical
stand-alone sales or third-party evidence (TPE) of
selling price. Due to the unique nature of some of its multiple
deliverable revenue arrangements, the Company may not be able to
establish selling prices based on historical stand-alone sales
or third party evidence, therefore the Company may use its best
estimate to establish selling prices for these arrangements
under the new standard. The Company establishes best estimates
within a range of selling prices considering multiple factors
including, but not limited to, class of client, size of
transaction, available media inventory, pricing strategies and
market conditions. The Company believes the use of the best
estimate of selling price allows revenue recognition in a manner
consistent with the underlying economics of the transaction.
57
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
From time to time, the Company may agree to credit a client for
certain leads, clicks or impressions if they fail to meet the
contractual or other guidelines of a particular client. The
Company has established a sales reserve based on historical
experience. To date, such credits have been immaterial and
within managements expectations.
For a portion of its revenue, the Company has agreements with
providers of online media or traffic (Publishers)
used in the generation of leads and clicks. The Company receives
a fee from its clients and pays a fee to Publishers as a portion
of revenue generated or on a cost per lead, cost per click or
cost per thousand impressions basis. The Company is the primary
obligor in the transaction. As a result, the fees paid by the
Companys clients are recognized as revenue and the fees
paid to its Publishers are included in cost of revenue.
DSS revenue, which constituted less than 1% in fiscal year 2011
and 1% of net revenue in both fiscal year 2010 and 2009,
comprises
(i) set-up
and professional services fees and (ii) usage fees.
Set-up and
professional service fees that do not provide stand-alone value
to a client are recognized over the contractual term of the
agreement or the expected client relationship period, whichever
is longer, effective when the application reaches the
go-live date. The Company defines the
go-live date as the date when the application enters
into a production environment or all essential functionalities
have been delivered. Usage fees are recognized on a monthly
basis as earned.
Deferred revenue is comprised of contractual billings in excess
of recognized revenue and payments received in advance of
revenue recognition.
Concentrations
of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash and cash equivalents, marketable securities and accounts
receivable. The Companys investment portfolio consists of
liquid high-quality fixed income US government or municipal
securities, certificates of deposit with financial institutions
and money market funds. Cash and certificates of deposit are
deposited with financial institutions that management believes
are creditworthy. To date, the Company has not experienced any
losses on its investment portfolio.
The Companys accounts receivable are derived from clients
located principally in the United States. The Company performs
ongoing credit evaluation of its clients, does not require
collateral, and maintains allowances for potential credit losses
on client accounts when deemed necessary. To date, such losses
have been within managements expectations.
Fair
Value of Financial Instruments
The Companys financial instruments consist principally of
cash equivalents, accounts receivable, accounts payable,
acquisition-related promissory notes, a term loan and a
revolving credit line. The fair value of the Companys cash
equivalents is determined based on quoted prices in active
markets for identical assets. The recorded values of the
Companys accounts receivable and accounts payable
approximate their current fair values due to the relatively
short-term nature of these accounts. The fair value of
acquisition-related promissory notes approximates their recorded
amounts as the interest rates on similar financing arrangements
available to the Company at June 30, 2011 approximates the
interest rates implied when these acquisition-related promissory
notes were originally issued and recorded. The Company believes
that the fair values of the term loan and revolving credit line
approximate their recorded amounts at June 30, 2011 as the
interest rates on these instruments are variable and based on
market interest rates and after consideration of default and
credit risk.
Cash
and Cash Equivalents
All highly liquid investments with maturities of three months or
less at the date of purchase are classified as cash equivalents.
Cash equivalents consist primarily of money market funds,
municipal securities and certificates of
58
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
deposit with original maturities of three months or less. Cash
equivalents amounted to $59,398 and $135,630 at June 30,
2011 and 2010.
Property
and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization, and are depreciated on a
straight-line basis over the estimated useful lives of the
assets, as follows:
|
|
|
Computer equipment
|
|
3 years
|
Software
|
|
3 years
|
Furniture and fixtures
|
|
3 to 5 years
|
Leasehold improvements
|
|
the shorter of the lease term or the estimated useful lives of
the improvements
|
Internal
Software Development Costs
The Company incurs costs to develop software for internal use.
The Company expenses all costs that relate to the planning and
post-implementation phases of development as product development
expense. Costs incurred in the development phase are capitalized
and amortized over the products estimated useful life if
the product is expected to have a useful life beyond six months.
Costs associated with repair or maintenance of existing sites or
the developments of website content are included in cost of
revenue in the accompanying statements of operations. The
Companys policy is to amortize capitalized internal
software development costs on a
product-by-product
basis using the straight-line method over the estimated economic
life of the application, which is generally two years. The
Company capitalized $1,841, $1,414 and $1,060 in fiscal years
2011, 2010 and 2009, respectively. Amortization of internal
software development costs is reflected in cost of revenue.
Goodwill
Goodwill is tested for impairment at the reporting unit level on
an annual basis and whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable.
Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assigning
assets and liabilities to reporting units, assigning goodwill to
reporting units, and determining the fair value of each
reporting unit. Significant judgments required to estimate the
fair value of reporting units include estimating future cash
flows and determining appropriate discount rates, growth rates
and other assumptions. Changes in these estimates and
assumptions could materially affect the determination of fair
value for each reporting unit which could trigger impairment.
The Company has determined that DMS and DSS constitute two
separate reporting units. The Company performs its annual
goodwill impairment review during its fourth fiscal quarter and
concluded that goodwill was not impaired. No impairment charges
were recorded in the periods presented.
Long-Lived
Assets
The Company evaluates long-lived assets, such as property and
equipment and purchased intangible assets with finite lives, for
impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. The
Company applies judgment when assessing the fair value of the
assets based on the undiscounted future cash flows the assets
are expected to generate and recognizes an impairment loss if
estimated undiscounted future cash flows expected to result from
the use of the asset plus net proceeds expected from disposition
of the asset, if any, are less than the carrying value of the
asset. When the Company identifies an impairment, it reduces the
carrying amount of the asset to its estimated fair value based
on a discounted cash flow
59
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
approach or, when available and appropriate, to comparable
market values. No impairment charges were recorded in the
periods presented.
Advertising
Costs
The Company expenses advertising costs as they are incurred.
Advertising expenses for fiscal years 2011, 2010 and 2009 were
$190, $139 and $185, respectively.
Income
Taxes
The Company accounts for income taxes using an asset and
liability approach to record deferred taxes. The Companys
deferred income tax assets represent temporary differences
between the financial statement carrying amount and the tax
basis of existing assets and liabilities that will result in
deductible amounts in future years. Based on estimates, the
carrying value of the Companys net deferred tax assets
assumes that it is more likely than not that the Company will be
able to generate sufficient future taxable income in the
respective tax jurisdictions. The Companys judgments
regarding future profitability may change due to future market
conditions, changes in U.S. or international tax laws and
other factors.
Foreign
Currency Translation
The Companys foreign operations are subject to exchange
rate fluctuations. The majority of the Companys sales and
expenses are denominated in U.S. dollars. The functional
currency for the majority of the Companys foreign
subsidiaries is the U.S. dollar. For these subsidiaries,
assets and liabilities denominated in foreign currency are
remeasured into U.S. dollars at current exchange rates for
monetary assets and liabilities and historical exchange rates
for nonmonetary assets and liabilities. Net revenue, cost of
revenue and expenses are generally remeasured at average
exchange rates in effect during each period. Gains and losses
from foreign currency remeasurement are included in other income
(expense), net. Certain foreign subsidiaries designate the local
currency as their functional currency. For those subsidiaries,
the assets and liabilities are translated into U.S. dollars
at exchange rates in effect at the balance sheet date. Income
and expense items are translated at average exchange rates for
the period. The foreign currency translation adjustments are
included in accumulated other comprehensive income (loss) as a
separate component of stockholders equity. Foreign
currency transaction gains or losses are recorded in other
income (expense), net and were not material for any period
presented.
Comprehensive
Income
Comprehensive income consists of two components, net income and
other comprehensive income (loss). Other comprehensive income
(loss) refers to revenue, expenses, gains, and losses that under
GAAP are recorded as an element of stockholders equity but
are excluded from net income. The Companys comprehensive
income (loss) and accumulative other comprehensive income (loss)
consists of foreign currency translation adjustments from those
subsidiaries not using the U.S. dollar as their functional
currency and unrealized gains and losses on marketable
securities categorized as
available-for-sale.
Total accumulated other comprehensive income (loss) is displayed
as a separate component of stockholders equity.
Loss
Contingencies
The Company is subject to the possibility of various loss
contingencies arising in the ordinary course of business.
Management considers the likelihood of loss or impairment of an
asset or the incurrence of a liability, as well as its ability
to reasonably estimate the amount of loss, in determining loss
contingencies. An estimated loss contingency is accrued when it
is probable that an asset has been impaired or a liability has
been incurred and the amount of loss can be reasonably
estimated. The Company regularly evaluates current information
available to its management to determine whether such accruals
should be adjusted and whether new accruals are required.
60
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
From time to time, the Company is involved in disputes,
litigation and other legal actions. The Company records a charge
equal to at least the minimum estimated liability for a loss
contingency only when both of the following conditions are met:
(i) information available prior to issuance of the
financial statements indicates that it is probable that an asset
had been impaired or a liability had been incurred at the date
of the financial statements, and (ii) the range of loss can
be reasonably estimated. The actual liability in any such
matters may be materially different from the Companys
estimates, which could result in the need to adjust the
liability and record additional expenses.
Stock-Based
Compensation
The Company measures and records the expense related to
stock-based transactions based on the fair values of stock-based
payment awards, as determined on the date of grant. To estimate
the fair value of stock options, the Company selected the
Black-Scholes option pricing model. In applying the
Black-Scholes option pricing model, the Companys
determination of the fair value of the stock option is affected
by assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not
limited to, the Companys expected stock price volatility
over the term of the stock options and the employees
actual and projected stock option exercise and pre-vesting
employment termination behaviors. The fair value of restricted
stock units is determined based on the closing price of the
Companys common stock on the date of grant.
For awards with graded vesting the Company recognizes
stock-based compensation expense over the requisite service
period using the straight-line method, based on awards
ultimately expected to vest. The Company estimates future
forfeitures at the date of grant and revises the estimates, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates.
See Note 11 for further information.
401(k)
Savings Plan
The Company sponsors a 401(k) defined contribution plan covering
all U.S. employees. Contributions made by the Company are
determined annually by the Board of Directors. There were no
employer contributions under this plan for fiscal years 2011,
2010 and 2009.
Recent
Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board
(FASB) amended the accounting guidance for revenue
recognition to remove tangible products containing software
components and non-software components that function together to
deliver the products essential functionality from the
scope of industry-specific software revenue recognition
guidance. In October 2009, the FASB also amended the accounting
guidance for multiple deliverable revenue arrangements to
|
|
|
|
|
provide updated guidance on whether multiple deliverables exist,
how the deliverables in an arrangement should be separated, and
how the consideration should be allocated;
|
|
|
|
require an entity to allocate revenue in an arrangement using
the estimated selling price (ESP) of deliverables if
a vendor does not have vendor-specific objective evidence
(VSOE) of selling price or third-party evidence
(TPE) of selling price;
|
|
|
|
and eliminate the use of the residual method and require an
entity to allocate revenue using the relative selling price
method.
|
Both sets of guidance became effective for the Company on
July 1, 2010. The adoption of the new guidance did not have
a material effect on the Companys consolidated financial
statements.
61
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
In December 2010, the FASB issued an update to the accounting
guidance for business combinations. The revised guidance
clarifies how to present pro forma information and mandates that
all business combinations that occurred during the current
reporting period should be reported as though the business
combination had occurred as of the beginning of the comparative
prior reporting period. The amendment is effective for annual
reporting periods beginning on or after December 15, 2010,
with early adoption permitted. The Company adopted the guidance
effective in the second quarter of fiscal year 2011. The
adoption of the amended guidance did not have a material effect
on the Companys consolidated financial statements.
In June 2011, the FASB issued an update that requires an entity
to present the total of comprehensive income, the components of
net income, and the components of other comprehensive income
either in a single continuous statement of comprehensive income
or in two separate but consecutive statements. The guidance
eliminates the option to present the components of other
comprehensive income as part of the statement of equity. It is
effective for the Company in the first quarter of fiscal year
2013 and should be applied retrospectively. The Company is
currently evaluating the impact of the adoption of the new
guidance on its consolidated financial statements.
|
|
3.
|
Net
Income Attributable to Common Stockholders and Net Income per
Share
|
Basic and diluted net income per share attributable to common
stockholders is presented in conformity with the two-class
method required for participating securities. In February
2010, all of the Companys outstanding convertible
preferred stock converted into common stock in connection with
the IPO. Prior to the conversion, holders of Series A,
Series B and Series C convertible preferred stock were
each entitled to receive 8% per annum non-cumulative dividends,
payable prior and in preference to any dividends on any other
shares of the Companys capital stock. No such dividends
were paid.
For periods prior to the conversion of the convertible preferred
stock, net income per share information is computed using the
two-class method. Under the two-class method, basic net income
per share attributable to common stockholders is computed by
dividing the net income attributable to common stockholders by
the weighted average number of shares of common stock
outstanding during the period. Net income attributable to common
stockholders is computed by subtracting from net income the
portion of
period-to-date
earnings that the preferred stockholders would have been
entitled to receive pursuant to their dividend rights had this
portion of net income been distributed. Diluted net income per
share attributable to common stockholders is computed by using
the weighted-average number of shares of common stock
outstanding, including potential dilutive shares of common stock
assuming the dilutive effect of outstanding stock options and
restricted stock units using the treasury stock method.
62
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
The following table presents the calculation of basic and
diluted net income per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2011
|
|
|
2010(2)
|
|
|
2009(2)
|
|
|
|
(In thousands, except per share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
27,214
|
|
|
$
|
20,584
|
|
|
$
|
17,274
|
|
8% non-cumulative dividends on convertible preferred stock
|
|
|
|
|
|
|
(2,018
|
)
|
|
|
(3,276
|
)
|
Undistributed earnings allocated to convertible preferred stock
|
|
|
|
|
|
|
(5,784
|
)
|
|
|
(8,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders basic
|
|
$
|
27,214
|
|
|
$
|
12,782
|
|
|
$
|
5,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders basic
|
|
$
|
27,214
|
|
|
$
|
12,782
|
|
|
$
|
5,399
|
|
Undistributed earnings re-allocated to common stock
|
|
|
|
|
|
|
419
|
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
diluted
|
|
$
|
27,214
|
|
|
$
|
13,201
|
|
|
$
|
5,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in computing basic
net income per share
|
|
|
46,222
|
|
|
|
25,616
|
|
|
|
13,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in computing basic
net income per share
|
|
|
46,222
|
|
|
|
25,616
|
|
|
|
13,294
|
|
Weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,845
|
|
|
|
2,813
|
|
|
|
1,677
|
|
Restricted stock units
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in computing
diluted net income per share
|
|
|
49,130
|
|
|
|
28,429
|
|
|
|
14,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.59
|
|
|
$
|
0.50
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.55
|
|
|
$
|
0.46
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities excluded from weighted average shares used in
computing diluted net income per share because the effect would
have been anti-dilutive:(1)
|
|
|
2,689
|
|
|
|
2,918
|
|
|
|
4,740
|
|
|
|
|
(1) |
|
These weighted shares relate to anti-dilutive stock options and
restricted stock units as calculated using the treasury stock
method and could be dilutive in the future. |
|
(2) |
|
Earnings per share for the fiscal years ended June 30, 2010
and 2009 include the effects of the convertible preferred stock
under the two-class method before its conversion in connection
with the IPO. |
63
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
|
|
4.
|
Marketable
Securities and Fair Value Measurements
|
Marketable
Securities
All liquid investments with maturities of three months or less
at the date of purchase are classified as cash equivalents.
Investments with maturities greater than three months at the
date of purchase are classified as marketable securities. The
Companys investments have been classified and accounted
for as
available-for-sale.
Management determines the appropriate classification of its
investments at the time of purchase and reevaluates the
available-for-sale
designation as of each balance sheet date.
Available-for-sale
securities are carried at fair value, with unrealized gains and
losses, net of tax, reported as a component of
stockholders equity. The cost of securities sold is based
upon the specific identification method.
As of June 30, 2011 and 2010, the Company did not hold
securities that had maturity dates greater than one year.
The following table summarizes unrealized gains and losses
related to
available-for-sale
securities held by the Company as of June 30, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
US municipal securities
|
|
$
|
23,625
|
|
|
$
|
12
|
|
|
$
|
|
|
|
$
|
23,637
|
|
Certificates of deposit
|
|
|
19,046
|
|
|
|
|
|
|
|
10
|
|
|
|
19,036
|
|
Money market funds
|
|
|
51,654
|
|
|
|
|
|
|
|
|
|
|
|
51,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94,325
|
|
|
$
|
12
|
|
|
$
|
10
|
|
|
$
|
94,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Money market funds
|
|
$
|
133,128
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
133,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
133,128
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
133,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company did not realize any gains or losses from sales of
its investments in fiscal years 2011, 2010 or 2009.
Fair
Value Measurements
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability (i.e., the
exit price) in an orderly transaction between market
participants at the measurement date. A hierarchy for inputs
used in measuring fair value has been defined to minimize the
use of unobservable inputs by requiring the use of observable
market data when available. Observable inputs are inputs that
market participants would use in pricing the asset or liability
based on active market data. Unobservable inputs are inputs that
reflect the Companys assumptions about the assumptions
market participants would use in pricing the asset or liability
based on the best information available in the circumstances.
The fair value hierarchy prioritizes the inputs into three broad
levels:
Level 1 Inputs are unadjusted quoted prices in
active markets for identical assets or liabilities.
Level 2 Inputs are quoted prices for similar
assets and liabilities in active markets or inputs that are
observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the
full term of the financial instrument.
64
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Level 3 Inputs are unobservable inputs based on
the Companys assumptions.
The financial instruments held by the Company as of
June 30, 2011 and 2010 were categorized as follows in the
fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of June 30, 2011 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
|
|
|
|
Active Markets
|
|
|
Observable
|
|
|
|
|
|
|
for Identical Assets
|
|
|
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
US municipal securities
|
|
$
|
23,637
|
|
|
$
|
|
|
|
$
|
23,637
|
|
Certificates of deposit
|
|
|
19,036
|
|
|
|
|
|
|
|
19,036
|
|
Money market funds
|
|
|
51,654
|
|
|
|
51,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94,327
|
|
|
$
|
51,654
|
|
|
$
|
42,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of June 30, 2010 Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
|
|
|
|
Active Markets
|
|
|
Observable
|
|
|
|
|
|
|
for Identical Assets
|
|
|
Inputs
|
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
Money market funds
|
|
$
|
133,128
|
|
|
$
|
133,128
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
133,128
|
|
|
$
|
133,128
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Balance
Sheet Components
|
Accounts
Receivable, Net
Accounts receivable, net are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Accounts receivable
|
|
$
|
50,948
|
|
|
$
|
54,224
|
|
Less: Allowance for doubtful accounts
|
|
|
(276
|
)
|
|
|
(324
|
)
|
Less: Allowance for sales returns
|
|
|
(2,447
|
)
|
|
|
(2,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,225
|
|
|
$
|
51,466
|
|
|
|
|
|
|
|
|
|
|
65
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Property
and Equipment, Net
Property and equipment, net is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Computer equipment
|
|
$
|
11,448
|
|
|
$
|
11,506
|
|
Software
|
|
|
6,344
|
|
|
|
5,946
|
|
Furniture and fixtures
|
|
|
2,404
|
|
|
|
1,976
|
|
Leasehold improvements
|
|
|
1,863
|
|
|
|
917
|
|
Internal software development costs
|
|
|
16,711
|
|
|
|
14,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,770
|
|
|
|
35,215
|
|
Less: Accumulated depreciation and amortization
|
|
|
(29,895
|
)
|
|
|
(29,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,875
|
|
|
$
|
5,419
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $3,629, $2,227 and $2,742 for fiscal
years 2011, 2010 and 2009, respectively. Amortization expense
related to internal software development costs was $1,478,
$1,275 and $1,500 for fiscal years 2011, 2010 and 2009,
respectively.
Accrued
liabilities
Accrued liabilities are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Accrued media costs
|
|
$
|
17,516
|
|
|
$
|
15,760
|
|
Accrued compensation and related expenses
|
|
|
12,403
|
|
|
|
11,872
|
|
Accrued taxes payable
|
|
|
517
|
|
|
|
642
|
|
Accrued professional service and other business expenses
|
|
|
2,802
|
|
|
|
1,870
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
33,238
|
|
|
$
|
30,144
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
in Fiscal Year 2011
Acquisition
of CarInsurance.com
On November 5, 2010, the Company acquired 100% of the
outstanding shares of Car Insurance.com, Inc., or
CarInsurance.com, a Florida-based online insurance business, and
certain of its affiliated companies, in exchange for $49,655 in
cash paid upon closing of the acquisition. The results of
CarInsurance.coms operations have been included in the
consolidated financial statements since the acquisition date.
The Company acquired CarInsurance.com for its capacity to
generate online visitors in the financial services market. The
total purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
|
$
|
49,655
|
|
|
|
|
|
|
|
|
$
|
49,655
|
|
|
|
|
|
|
66
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
The acquisition was accounted for as a purchase business
combination. The Company allocated the purchase price to
tangible assets acquired, liabilities assumed and identifiable
intangible assets acquired based on their estimated fair values.
The excess of the purchase price over the aggregate fair value
was recorded as goodwill. The goodwill is deductible for tax
purposes. The following table summarizes the preliminary
allocation of the purchase price and the estimated useful lives
of the identifiable intangible assets acquired as of the date of
the acquisition:
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
|
Fair Value
|
|
|
Useful Life
|
|
|
Tangible assets acquired
|
|
$
|
661
|
|
|
|
|
|
Liabilities assumed
|
|
|
(807
|
)
|
|
|
|
|
Advertiser relationships
|
|
|
260
|
|
|
|
6-7 years
|
|
Content
|
|
|
16,130
|
|
|
|
7 years
|
|
Website/trade/domain names
|
|
|
4,350
|
|
|
|
10 years
|
|
Acquired technology and others
|
|
|
3,000
|
|
|
|
2-4 years
|
|
Noncompete agreements
|
|
|
40
|
|
|
|
4 years
|
|
Goodwill
|
|
|
26,021
|
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Insurance.com
On July 26, 2010, the Company acquired the website business
of Insurance.com, from Insurance.com Group, Inc., an Ohio-based
online insurance business, in exchange for $33,000 in cash paid
upon closing of the acquisition and the issuance of a $2,640
non-interest-bearing, unsecured promissory note payable in one
installment on the second anniversary of the acquisition date.
The results of Insurance.coms operations have been
included in the consolidated financial statements since the
acquisition date. The Company acquired Insurance.com for its
capacity to generate online visitors in the financial services
market. The total purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
|
$
|
33,000
|
|
Fair value of debt (net of $157 of imputed interest)
|
|
|
2,483
|
|
|
|
|
|
|
|
|
$
|
35,483
|
|
|
|
|
|
|
The acquisition was accounted for as a purchase business
combination. The Company allocated the purchase price to
tangible assets and identifiable intangible assets acquired
based on their estimated fair values. The excess of the purchase
price over the aggregate fair value was recorded as goodwill.
The goodwill is deductible for tax
67
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
purposes. The following table summarizes the allocation of the
purchase price and the estimated useful lives of the
identifiable intangible assets acquired as of the date of the
acquisition:
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
|
Fair Value
|
|
|
Useful Life
|
|
|
Tangible assets acquired
|
|
$
|
1,204
|
|
|
|
|
|
Advertiser relationships
|
|
|
2,120
|
|
|
|
7 years
|
|
Content
|
|
|
4,290
|
|
|
|
4 years
|
|
Website/trade/domain names
|
|
|
2,940
|
|
|
|
10 years
|
|
Acquired technology and others
|
|
|
5,530
|
|
|
|
2-4 years
|
|
Noncompete agreements
|
|
|
60
|
|
|
|
5 years
|
|
Goodwill
|
|
|
19,339
|
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Acquisitions in Fiscal Year 2011
During fiscal year 2011, in addition to the acquisitions of
CarInsurance.com and Insurance.com, the Company acquired
operations from 13 other online publishing businesses in
exchange for $4,722 in cash paid upon closing of the
acquisitions and $864 in non-interest-bearing, unsecured
promissory notes payable over a period of time ranging from one
to three years. The Company also recorded $4,500 in earn-out
payments related to a prior period acquisition as addition to
goodwill. The aggregate purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
|
$
|
9,222
|
|
Fair value of debt (net of $36 of imputed interest)
|
|
|
828
|
|
|
|
|
|
|
|
|
$
|
10,050
|
|
|
|
|
|
|
The acquisitions were accounted for as purchase business
combinations. In each of the acquisitions, the Company allocated
the purchase price to identifiable intangible assets acquired
based on their estimated fair values. The excess of the purchase
price over the aggregate fair value was recorded as goodwill.
Goodwill deductible for tax purposes is $7,914. The following
table summarizes the preliminary allocation of the purchase
prices of these other acquisitions and the estimated useful
lives of the identifiable intangible assets acquired as of the
respective dates of these acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
|
Fair Value
|
|
|
Useful Life
|
|
|
Customer/publisher relationships
|
|
$
|
233
|
|
|
|
3-5 years
|
|
Content
|
|
|
1,274
|
|
|
|
3-5 years
|
|
Website/trade/domain names
|
|
|
541
|
|
|
|
4-5 years
|
|
Noncompete agreements
|
|
|
88
|
|
|
|
1-3 years
|
|
Goodwill
|
|
|
7,914
|
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
in Fiscal Year 2010
In fiscal year 2010, the Company acquired the website business
of Internet.com, a division of WebMediaBrands, Inc., a New
York-based Internet media company, to broaden its media access
and client base
68
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)