Observations on the QuinStreet S-1

QuinStreet filed their S-1 for a proposed $250MM IPO last Thursday. While this has been rumored for months, it is exciting to finally get to read the fully disclosed story on this famously secretive lead provider. Read the full S-1 on the SEC website here. First of all, a huge congrats to the whole QuinStreet team for building a fantastic business and for wearing the white hats in the lead gen industry.

My observations on the company after reading the filing:

• QuinStreet has built a great business but it took time. 10 years of solid growth.
  • $260MM in FY 2009 revenue, on target for $320MM in FY 2010
  • $56MM in EBITDA in FY 2009, on target for $72MM in FY 2010 – note to self – does it take $70MM in EBITDA to IPO these days?

• QuinStreet’s competitive advantage is driven by 1) Technology 2) Content assets and URL libraries 3) Affiliate network 4) A superior monetization engine that allows them to be an M&A machine (100+ small acquisitions)

• Growth is going to be hard for QuinStreet in the long-term. At present, lead gen is pretty small outside of education and financial services. Doug Valenti must be banking on a) M&A b) international c) secular growth in online direct marketing d) new verticals.

• M&A is a major growth driver. They have used M&A to drive growth: “Since the beginning of fiscal year 2007, we have completed over 100 acquisitions of third-party website publishing businesses and other businesses that are complementary to our own for an aggregate purchase price of approximately $189.5 million.” Wow!!!!

• Here is how the M&A machine works. QuinStreet finds small lead provider with a) good content b) good URLs and/or c) good lead volume. They buy the lead provider for a small revenue multiple and then run the traffic through their monetization engine. Presto – they double the effective CPL and revenue generated by the set of URLs. This is identical to the TripAdvisor M&A growth strategy in the travel vertical.

• DeVry! DeVry! DeVry! One client, DeVry, represented 19% of 2009 revenue of $49.5MM. Note that they only spent $10MM in Q1 2010 which shows that they are cutting their QuinStreet spending 20% in 2010. Note to DeVry CMO – you might be able to save even more money on this. Please call Sparkroom for help.  :)

• Verticals
  • Education is the base of the business and DeVry is a huge part of the EDU business. QuinStreet generated $151MM in revenue in the EDU vertical in FY 2009. DeVry represented 33% of that revenue. Surprisingly, their growth in EDU lead gen is reasonably muted – 6% growth in FY 2009.
  • Financial services growth driven by SureHits acquisition and organic growth. QuinStreet is taking share from LowerMyBills and LendingTree. Financial services also includes insurance lead gen. Sadly, EDU vs. mortgage vs. credit card vs. deposits is not broken out in the S-1.

• Media mix: QuinStreet owned URLs, PPC, affiliate networks, email lists, display. I wish this was broken out in the S-1 but alas it is not.

• Culture. See page 61 of the S-1. I am a culture nut and now a bigger fan of Doug Valenti after reading the QuinStreet business values.

• Doug Valenti is the largest shareholder at 18.33% before the offering. Nice work Doug! I love stories where the entrepreneur makes money and makes money for the investors.

• See the notes to the financial statements (starting on page F-20) for details (price, earnout, etc.) on their big acquisitions

Congrats again to Doug and the QuinStreet team. This is a great story.