Thursday, November 10, 2011


I saw the above status update on one of my former colleague's wall and I thought it was hilarious.  This is true beyond measure.  But if you don't get the inside joke, you probably either haven't worked there long enough, or never worked there to begin with.  I guess you'll just have to find out.

It's really sad to see a stock crash so hard after missing their earnings.  There has been a lot of speculation that the prior price was so low (just take a look at any of their metrics vs. their peers.  Right now, their Enterprise Value to Annual Revenue ratio is less than 1!) because these concerns have already been priced in, but based on the reaction from the last earnings call, this may not be the case.  Maybe investors just don't have a lot of faith in this sub-segment of the online marketing industry to begin with, but in terms of share price, they seem to be tracking pretty closely to  Either investors don't really understand the company, or there are additional skeletons in the closet that even I was not aware of during my time there.

The for-profit education industry, rightfully so under pressure from the government, is starting to seek out higher quality leads.  This pressure actually ends up benefiting the for-profits as much as the government's financial aid pocketbooks.  Acquisition of a student from lead to enrollment is an expensive proposition.  There is a lot of front end cost associated with reaching out to, screening, and the application/ financial aid process.  These costs the educational facility will hope to eventually re-cooperate during the student's tenure at the institution. This revenue model is true for both for-profit and non-profit institutions.  By forcing schools to acquire more qualified students, this allows the average lifetime value of the student to increase, and therefore hopefully ultimately decreasing the cost to educate this student for everyone.  The downside I see is there is a subset of our population that just wants an easy way out.  They want to have a degree, but do not want to put in the time necessary to acquire one.  I'm not too sure how to solve this dilemma.

In theory, these new government policies should filter out all of the bad online marketers while giving more market share to those who acquire their leads properly.  The downside of having such an opaque system like the one that QNST has is clients have a very hard time telling what really is in the "black box".  Although during my tenure there, I helped acquire quite a collection of organically ranked websites (which theoretically provides the best quality leads since users generally find them mainly via long tail terms), some of the lead volume from QNST comes from other less respectable sources.  Because Quinstreet mainly serves as an aggregator (translation: middle man) for their clients, they have a large vendor base of publishers who do email, PPC, and run organic websites that feed into QNST's overall volume.  It is questionable whether any of the company's publishers still is involved with co-reg, but they do acquire a good portion of their leads through online sources.  In fact, Quinstreet and their publishers are probably one of the biggest players in the PPC ("Pay Per Click") category for Google, Yahoo, and Bing.  Quinstreet has even developed their own internal keyword management system to manage the tens of millions of keywords they bid on daily.  I was surprised when one VP told me that only ~1% of the volume is from organic websites I have acquired.

That being said, I was kicking myself back when I sold my shares in November and December, thinking that there was a high chance that the stock could go through the roof.  After the massive quantity of "brain drain" that QNST has experienced since the lockout has expired, it looks like the move may not have been so bad.  One of the best aspects of working there was the people I worked with.  They were some of the most talented, hard-working, and humble individuals I have ever met.  Although they had in the past done a great job attracting top talent, they now have trouble retaining them.  As part of their goal to manage to 20% EBITDA, there isn't a lot of levers that the company can pull to hit that target.  Most of the cost associated to the QNST business model are fixed.  The one area that the executives can actively manage is compensation.  A company's employees is one of their most valuable resources, and I believe QNST is starting to learn now that not all employees are interchangeable (though I probably was).  A lot of people, including myself, expected to be compensated for our hard work once the company went public.  There was a lot of hope that as we go public, management will share the wealth and start pricing their compensation according to their now public peers.  This never materialized.  I noticed that the stocks started to drop as more of the top talent that help grow the business become frustrated and left.  Some are still there, but just waiting for the right opportunity to snatch them away.  I can't imagine these remaining individuals being too vested in the outcome of the company. I would love to take any credit I can fore the foresight, but honestly, it was just blind luck.

Right now the stock is hovering around 8.67/share.  That was less than many people's option strike price 4-5 years ago.  I really do feel sorry for people who have stuck it through.

This Motley Fool article gives another interesting perspective back in Jan about the troubles that QNST was about to face.  I never thought about looking at A/R and DSO trends as an early indicator of the company trying to make their targets in the short term by borrowing future revenue, but this seems to have played out.

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