QuinStreet – more an ad agency than an Internet company?

If yes then lower the P/E multiple. For example compare to ValueClick (VLCK) more than Internet Brands (INET), see below ‘compare’

QNST is a low gross margin service business that is apparently losing it’s competitive edge in the education vertical, but is more than making up for that loss in the financial services vertical.

It’s recent success is making it a visible target for its competition, which includes advertising agencies, other direct marketing service companies plus companies like Google, Yahoo and other web portals.

It appears that the competition is gearing up with more sophisticated pay per click and contextual advertising models, that over time could erode QNST’s prior competitive advantage.

QuinStreet	QNST, C+, 7					Post-IPO share: 45mm
Internet marketing			June 30, fiscal
Foster City, CA	2007	2008	2009	'Sept08,3mo	'Sept09,3mo	IPO Mkt
Revenue ($mm)	$167	$182	$260	$64	$79	Cap (mm)
Gross profit %	35%	34%	30%	29%	30%	$810
Operating income %	15%	12%	13%	10%	15%	@$18
Profit (loss)	$16	$13	$17	$3	$7
Profit (loss) % of revenue	9%	7%	7%	5%	8%
Tracking quarterly gross profit
	June '08	Sept '08	Dec '08	March 09	June 09	Sept 09
Revenue ($mm)	57	$64	$59	$70	$68	$79
Gross profit %	32%	29%	28%	33%	31%	30%
VALUATION RATIOS	IPO Mrkt	Price /	Price /	Price /	Price /	% offered
	Cap (mm)	Sales	Earnings	BookValue	TangibleBV	in IPO
QuinStreet (QNST)	$810	10.3	31	2.8	6.0	22%
SCORECARD		Mgt	Market	Market Do-	Proprie-	Total
1-5, 5 is high			Growth	mination	tary	rating
20 is perfect		2	2	2	1	7
COMPARE & CONSTRAST
"STANDARD" RATIOS	Mrkt	Price /	Price /	Price /	Price /	Price
annualized Sept 9 mos	Cap (mm)	Sales	Earnings	BookValue	TangibleBV	Feb 4
QuinStreet (QNST)	$810	10.3	31	2.8	6.0
ValueClick Inc. (VCLK)	$794	1.52	11	1.9	4.2	$9.20
Internet Brands (INET)	$357	3.72	33	1.0	10.8	$7.93
Yahoo (YHOO)	$21,000	3.33	35	1.7	2.6	$15.01
Google (GOOG)	$167,330	7.39	28	4.6	5.3	$527.42
QNST Education Segment		June 30 fiscal year
& DeVry**	2007	2008	2009		'Sept09,3mo
Revenue ($mm)	$167	$182	$260		$79
Education segment % of rev	78%	74%	58%		49%
Ed segement rev	$130	$135	$151		$38
DeVry business % of rev	22%	23%	19%		12%
DeVry rev	$37	$42	$49		$9
** % from page 37 in Feb 2 S-1 filing

BUSINESS

. Generates revenue by delivering measurable online marketing results to clients. . Media costs to generate qualified leads or clicks are borne by QNST as a cost of providing its services . Virtually all clients are based in the U.S. . Two main vertical: financial services & education

Top line revenue

for the September quarter, 2009 compared with 2008

Net revenue increased $14.9 million, or 23%, from the three months ended September 30, 2008 to the three months ended September 30, 2009. Substantially all of this increase was attributable to an increase in revenue from the financial services client vertical. Financial services client vertical net revenue increased from $15.2 million in the three months ended September 30, 2008 to $31.0 million in the corresponding 2009 period, an increase of $15.8 million, or 104%. The increase in financial services client vertical revenue was driven by lead and click volume increases at relatively steady prices.

Sept 39, 2009 quarter compared to June 30, 2009 quarter

Quarterly net revenue increased $10.8 million, or 16%, from $67.8 million for the three months ended June 30, 2009 to $78.6 million for the three months ended September 30, 2009. For these respective periods, education client vertical revenue increased by $938,000; financial services client vertical revenue increased by $9.0 million due to organic growth; other client verticals revenue increased by $987,000; and QNST’s non-direct marketing business revenue decreased by $194,000.

GROWTH STRATEGY INCLUDES TARGETED ACQUISITIONS During fiscal years 2008 and 2009, QNSTquired an aggregate of 21 and 34 online publishing businesses, respectively

TWO LARGE VERTICALS

Education

The education vertical has historically been QNST’s largest vertical, representing 78%, 74%, 58% and 51% of net revenue in fiscal years 2007, 2008 and 2009 and the first three months of fiscal year 2010, respectively.

Education issues: DeVry

DeVry Inc., a for-profit education company and QNST’s largest client, accounted for 22%, 23%, 19%, and 13% of total net revenue for fiscal years 2007, 2008 and 2009 and the first three months of fiscal year 2010, respectively.

DeVry has recently retained an advertising agency and has reduced its purchases of leads from QNST. QNST has been addressing this challenge by working with DeVry and the agency to understand their evolving needs and strategies and how QNST can best serve them going forward. In addition, QNST has been expanding its business with other clients in the education client vertical. QNST is also expanding its client base in education to replace visitor matches previously delivered to DeVry.

Financial services

The financial services vertical, which QNST has grown both organically and through acquisitions, represented 7%, 11%, 31% and 39% of net revenue in fiscal years 2007, 2008 and 2009 and the first three months of fiscal year 2010, respectively.

Other verticals

Other erticals, consisting primarily of home services, business-to-business, or B2B, and healthcare, represented 10%, 13%, 10% and 9% of net revenue in fiscal years 2007, 2008 and 2009 and the first three months of fiscal year 2010, respectively.

RISK

Development and Acquisition of Vertical Media

One of the primary challenges for QNST is finding or creating media that is targeted enough to attract prospects economically for clients and at costs that work for QNST’s business model. In order to continue to grow its business, QNST must be able to continue to find or develop quality vertical media on a cost-effective basis.

QNST’s inability to find or develop vertical media could impair its growth or adversely affect its financial performance.

It appears that QNST may have has lost its relative competitive edge in the education segment, which creates uncertainty regarding financial segment, over time.

SEASONALITY

Rresults from the education client vertical are subject to significant fluctuation as a result of seasonality. In particular, the quarters ending December 31 (the second fiscal quarter) typically demonstrate seasonal weakness. In those quarters, there is lower availability of lead supply from some forms of media during the holiday period and education clients often request fewer leads due to holiday staffing.

In the quarters ending March 31, this trend generally reverses with better lead availability and often new budgets at the beginning of the year for clients with financial years ending December 31. For example, in the quarters ended December 31, 2007 and 2008 net revenue from education clients declined 6% and 13%, respectively, from the previous quarter.

THE MARKETING PROCESS

Clients pay QNST for the actual opt-in actions by prospects or customers that result from 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.

QNST has 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 QNST converts into qualified leads or clicks for clients.

QNST owns or partners 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.

Also acquires targeted visitors for QNST websites through the purchase of pay-per-click, or PPC, advertisements on search engines.

COMPETITION

Primary competition falls into two categories: advertising and direct marketing services agencies and online marketing and media companies.

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 QNST primarily competes. So, while they are sometimes competitors, agencies are also often clients.

When spending online, agencies spend with QuinStreet and with portals, other websites and ad networks.

Online marketing and media companies

Competes with other Internet marketing and media companies, in many forms, for online marketing budgets. Most of these competitors compete with QNST in one vertical. Examples include BankRate in the financial services vertical and Monster Worldwide in the education vertical. Some of the competition also comes from agencies or clients spending directly with larger websites or portals, including Google, Yahoo!, MSN, and AOL.

VENTURE FUNDED

Split Rock Partners, Sutter Hill Ventures, GGV Capital, W Capital Partners, Catterton Partners, Partech International

EMPLOYEES

As of December 31, 2009, QNST had 568 employees, which included 162 employees in product development and engineering, 80 in sales and marketing, 52 in general and administration and 274 in operations. None of the employees are represented by a labor union.

USE OF IPO PROCEEDS

Expected $165mm

For working capital, capital expenditures and other general corporate purposes.

May also use a portion of the net proceeds to repay debt, including for the credit facility, or acquire other businesses, products or technologies.