QUINSTREET, INC. You should read the following discussion and analysis 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 "Cautionary Note on Forward-Looking Statements" and "Risk Factors."
Management Overview
We are a leader in performance marketplaces and technologies for the financial services and home services industries. We specialize in customer acquisition for clients in high value, information-intensive markets or "verticals," including financial services and home services. Our clients include some of the world's largest companies and brands in those markets. The majority of our operations and revenue are inNorth America . We deliver measurable and cost-effective marketing results to our clients, typically in the form of qualified inquiries such as clicks, leads, calls, applications, or customers. Clicks, leads, calls, and applications 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 inquiries in the form of clicks, leads, calls, applications, or customers, as defined by our agreements with them. References to the delivery of customers means a sale or completed customer transaction (e.g., funded loans, bound insurance policies or customer appointments with clients). Because we bear the costs of media, our programs must result in attractive marketing costs to our clients at media costs and margins that provide sound financial outcomes for us. To deliver clicks, leads, calls, applications, and customers to our clients, generally we:
• own or access targeted media through business arrangements (e.g., revenue
sharing arrangements with online publisher partners, large and small) or by
purchasing media (e.g., clicks from major search engines);
• run advertisements or other forms of marketing messages and programs in
that media that result in consumer or visitor responses, typically in the
form of clicks (by a consumer to further qualification or matching steps,
or to online client applications or offerings), leads (e.g., consumer
contact information), calls (from a consumer or to a consumer by our owned
and operated or contracted call centers or by that of our clients or their
agents), applications (e.g., for enrollment or a financial product), or
customers (e.g., funded personal loans); and
• continuously seek to display clients and client offerings to visitors or
consumers that result in the maximum number of consumers finding solutions
that can meet their needs and to which they will take action to respond,
resulting in media buying efficiency (e.g., by segmenting media or traffic
so that the most appropriate clients or client offerings can be displayed
or "matched" to each segment based on fit, response rates or conversion
rates);
• through technology and analytics, seek to optimize combination of
objectives to satisfy the maximum number of shopping or researchingvisitors or consumers, deliver on client marketing objectives, effectively
compete for online media, and generate 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 short-term profits, but rather to achieve target levels of profitability while investing in various growth initiatives, as we continue to believe we are in the early stages of a large, long-term market opportunity. Our business derives its net revenue primarily from fees earned through the delivery of qualified inquiries such as clicks, leads, calls, applications, or customers. Through a vertical focus, targeted media presence and our technology platform, we are able to deliver targeted, measurable marketing results to our clients. Our financial services client vertical represented 74%, 75% and 68% of net revenue in fiscal years 2021, 2020 and 2019. Our home services client vertical represented 23%, 10% and 9% of net revenue in fiscal years 2021, 2020 and 2019. Our results of operations for fiscal year 2021 reflected our acquisition of Modernize, which was completed at the beginning of the fiscal year. Other revenue, which primarily includes our performance marketing agency and technology services, represented 1% of net revenue in fiscal year 2021. In addition, revenue recognized from our divested businesses (including our former education client vertical, business-to-business technology client vertical, mortgage business, andBrazil businesses) represented 2%, 15%, and 23% of net revenue for fiscal years 2021, 2020 and 2019. See Note 7, Divestitures, to our consolidated financial statements for more information related to the divestitures. We generated the majority of our revenue from sales to clients inthe United States . 35
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Trends Affecting our Business COVID-19 We continue to monitor COVID-19 for impacts that may unfavorably affect our business, such as reductions in client spending on marketing and advertising, drops in media availability or performance, deteriorating consumer spending, fluctuations in interest rates, and credit quality of our receivables. The COVID-19 pandemic has affected and may continue to affect our business operations, including our employees, clients, publishers, business partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time. For example, within our financial services client vertical, certain credit-driven lines of business, such as personal loans and credit cards, have seen and may continue to see reductions in near-term demand for our services due to weakening economic and employment conditions, and the uncertainty over the length and depth of the economic downturn. The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably predict, including the duration and scope of the pandemic; business and individuals' actions in response to the pandemic; further actions taken by governmental authorities to limit the human and economic impact of the pandemic (e.g., stimulus payments); the development, efficacy and distribution of vaccines for COVID-19; and the impact on economic activity including the length and depth of the economic downturn or financial market instability. These factors may adversely impact consumer, business, and government spending as well as our clients' ability to pay for our services on an ongoing basis. While there is optimism that the pandemic will come to an end with the development and prevalence of vaccines, there are still significant uncertainties. For example, the resurgence of cases due to emergence and persistency of new variants to COVID-19 and the economic impact due to varying levels of restrictions imposed by each state. Refer to Risk Factors (Part I, Item 1A of this Form 10-K) for a discussion of these factors and other risks.
Client Verticals
Our financial services client vertical has been challenged by a number of factors in the past, including the limited availability of high quality media at acceptable margins caused by the acquisition of media sources by competitors, increased competition for high quality media and changes in search engine algorithms. These factors may impact our business in the future again. To offset this impact, we have enhanced our product set to provide greater segmentation, matching, transparency and right pricing of media that have enabled better monetization to provide greater access to high quality media sources. Moreover, we have entered into strategic partnerships and acquisitions to increase and diversify our access to quality media and client budgets. Our financial services client vertical also benefits from more spending by clients in digital media and performance marketing as digital marketing continues to evolve. In the first quarter of fiscal year 2021, we completed the acquisition of Modernize, a leading home improvement performance marketing company, to broaden our customer and media relationships in the home services client vertical. Our home services client vertical has been expanding over the past several years, primarily driven by successful execution of growth initiatives and ahead-of-schedule integration and synergies with the Modernize acquisition.
In addition, in the first quarter of fiscal year 2021, as a result of the decision to narrow our focus to the best performing businesses and market opportunities, we entered into an agreement with a third-party and completed the divestiture of our former education client vertical.
Acquisitions and Divestitures
Acquisitions have historically been, and continue to be, an important element of our overall corporate strategy and use of capital. We have completed several strategic acquisitions during the past three fiscal years, including the acquisitions of Modernize,Mayo Labs and FCE completed in fiscal year 2021, and the acquisitions of AmOne, CCM, and MBT completed in fiscal year 2019. Furthermore, as a result of the decision to narrow our focus to the best performing businesses and market opportunities, we completed a series of business divestitures in the past two fiscal years, including the divestiture of our former education client vertical completed in fiscal year 2021, and the divestitures of our former B2B client vertical, our businesses inBrazil consisting of QSB and VEMM along with its interests in EDB, and our mortgage business completed in fiscal year 2020.
For detailed information regarding our acquisitions and divestitures, refer to Note 6, Acquisitions, and Note 7, Divestitures, respectively, to our consolidated financial statements.
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--------------------------------------------------------------------------------Development, Acquisition and Retention of High Quality Targeted Media
One of the primary challenges of our business is finding or creating media that is high quality and targeted enough to attract prospects for our clients at costs that provide a sound financial outcome for us. In order to grow our business, we must be able to find, develop, or acquire and retain quality targeted media on a cost-effective basis. Consolidation of media sources, changes in search engine algorithms and increased competition for available media has, during some periods, limited and may continue to limit our ability to generate revenue at acceptable margins. To offset this impact, we have developed new sources of media, including entering into strategic partnerships with other marketing and media companies and acquisitions. Such partnerships include takeovers of performance marketing functions for large web media properties; backend monetization of unmatched traffic for clients with large media buys; and white label products for other performance marketing companies. We have also focused on growing our revenue from call center, email, mobile and social media traffic sources. Seasonality Our results are subject to significant fluctuation as a result of seasonality. In particular, our quarters endingDecember 31 (our second fiscal quarter) are typically characterized by seasonal weakness. In our second fiscal quarters, there is generally lower availability of media during the holiday period on a cost effective basis and some of our clients have lower budgets. In our quarters endingMarch 31 (our third fiscal quarter), this trend generally reverses with better media availability and often new budgets at the beginning of the year for our clients with fiscal years endingDecember 31 . Our results are also subject to fluctuation as a result of seasonality in our clients' business. For example, revenue in our home services client vertical is subject to cyclical and seasonal trends, as the consumer demand for home services typically rises during the spring and summer seasons and declines during the fall and winter seasons. Other factors affecting our clients' businesses include macro factors such as credit availability in the market, interest rates, the strength of the economy and employment.
Regulations
Our revenue has fluctuated in part as a result of federal, state and
industry-based regulations and developing standards with respect to the
enforcement of those regulations. Our business is affected directly because we
operate websites and conduct telemarketing and email marketing, and indirectly
affected as our clients adjust their operations as a result of regulatory
changes and enforcement activity that affect their industries.
Clients in our financial services vertical have been affected by laws and
regulations and the increased enforcement of new and pre-existing laws and
regulations. The effect of these regulations, or any future regulations, may
continue to result in fluctuations in the volume and mix of our business with
these clients.
An example of a regulatory change that may affect our business is the amendment
of the Telephone Consumer Protection Act (the "TCPA") that affects telemarketing
calls. Our clients may make business decisions based on their own experiences
with the TCPA regardless of our products and compliance practices. Those
decisions may negatively affect our revenue and profitability.
37
--------------------------------------------------------------------------------Basis of Presentation Net Revenue Our business generates revenue primarily from fees earned through the delivery of qualified inquiries such as clicks, leads, calls, applications, or customers. We deliver targeted and measurable results through a vertical focus, which includes financial services client vertical and home services client vertical. All remaining businesses that are not significant enough for separate reporting are included in other revenue. Our revenue recognized in fiscal years 2021, 2020 and 2019 also included the revenue generated from the divested businesses (including our former education client vertical, business-to-business technology client vertical, mortgage business, andBrazil businesses). See Note 7, Divestitures, to our consolidated financial statements for more information related to the divestitures.
Cost of Revenue
Cost of revenue consists primarily of media and marketing costs, personnel costs, amortization of intangible assets, depreciation expense and facilities expense. Media and marketing costs consist primarily of fees paid to third-party publishers, media owners or managers, or to strategic partners that are directly related to a revenue-generating event and of pay-per-click, or PPC, ad purchases from Internet search companies. We pay these third-party publishers, media owners or managers, strategic partners and Internet search companies on a revenue-share, a cost-per-lead, or CPL, or cost-per-click, or CPC, basis. Personnel costs include salaries, stock-based compensation expense, bonuses, commissions and employee benefit costs. Personnel costs are primarily related to individuals associated with maintaining our servers and websites, our call center operations, our editorial staff, client management, creative team, content, compliance group and media purchasing analysts. Costs associated with software incurred in the development phase or obtained for internal use are capitalized and amortized to cost of revenue over the software's estimated useful life.
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, facilities fees and other costs. Personnel costs for each category of operating expenses generally include salaries, stock-based compensation expense, bonuses, commissions and related taxes, and employee benefit costs.
Product Development. Product development expenses consist primarily of personnel costs, facilities fees and professional services fees related to the development and maintenance of our products and media management platform. We are constraining expenses generally to the extent practicable.
Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs, facilities fees and professional services fees. We are constraining expenses generally to the extent practicable.
General and Administrative. General and administrative expenses consist primarily of personnel costs of our finance, legal, employee benefits and compliance, technical support and other administrative personnel, accounting and legal professional services fees, facilities fees and bad debt expense. We are constraining expenses generally to the extent practicable.
Interest and Other Income, Net
Interest and other income, net, consists primarily of interest expense, interest income, and other income and expense. Interest expense is related to imputed interest on post-closing payments related to our acquisitions. We have no borrowing agreements outstanding as ofJune 30, 2021 ; however interest expense could increase if, among other things, we enter into a new borrowing agreement to manage liquidity or make additional acquisitions through debt financing. Interest income represents interest earned on our cash and cash equivalents, which may increase or decrease depending on market interest rates and the amounts invested. Other income and expense includes gains and losses on foreign currency exchange, gains and losses on divestitures of subsidiaries, client verticals and assets that were not considered to be strategically important to our business, and other non-operating items.
(Provision for) Benefit from Income Taxes
We are subject to tax inthe 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 toU.S. income tax. 38
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Results of Operations
The following table sets forth our consolidated statements of operations for the
periods indicated:
Fiscal Year Ended June 30,
2021 2020 2019
(In thousands, except percentages)
Net revenue $ 578,487 100.0 % $ 490,339 100.0 % $ 455,154 100.0 %
Cost of revenue (1) 507,956 87.8 437,864 89.3 393,509 86.5
Gross profit 70,531 12.2 52,475 10.7 61,645 13.5
Operating expenses:
(1)
Product development 19,344 3.3 14,206 2.9 12,329 2.6
Sales and marketing 10,991 1.9 8,876 1.8 8,755 1.9
General and
administrative 26,270 4.6 23,188 4.7 29,834 6.6
Operating income 13,926 2.4 6,205 1.3 10,727 2.4
Interest income 39 - 230 - 290 -
Interest expense (1,296 ) (0.2 ) (696 ) (0.1 ) (367 ) -
Other income, net 16,660 2.9 12,947 2.6 69 -
Income before income
taxes 29,329 5.1 18,686 3.8 10,719 2.4
(Provision for)
benefit from income
taxes (5,774 ) (1.0 ) (584 ) (0.1 ) 51,761 11.3
Net income $ 23,555 4.1 % $ 18,102 3.7 % $ 62,480 13.7 %
(1) Cost of revenue and operating expenses include stock-based compensation
expense as follows:
Cost of revenue $ 8,997 1.6 % $ 8,569 1.7 % $ 7,354 1.6 %
Product development 2,339 0.4 1,819 0.4 1,606 0.4
Sales and marketing 2,459 0.4 1,701 0.3 1,358 0.3
General and administrative 5,838 1.0 4,628 0.9 3,810 0.8
Gross Profit
Fiscal Year Ended June 30, 2021 - 2020 2020- 2019
2021 2020 2019 % Change % Change
(In thousands)
Net revenue $ 578,487 $ 490,339 $ 455,154 18 % 8 %
Cost of revenue 507,956 437,864 393,509 16 % 11 %
Gross profit $ 70,531 $ 52,475 $ 61,645 34 % (15 %)
Net Revenue
Net revenue increased by $88.1 million , or 18%, in fiscal year 2021 compared to
fiscal year 2020. Revenue from our home services client vertical increased by
$84.6 million , or 169%, primarily as a result of inorganic and organic (synergy)
revenue effects from the acquisition of Modernize completed in fiscal year 2021.
Revenue from our financial services client vertical increased by $60.5 million ,
or 17%, primarily due to our enhanced product set and data analytics that
enabled access to more media and an increase in client budgets in our insurance
business, offset by a decline in revenue in the credit-driven businesses due to
weakening economic and employment conditions caused by COVID-19. Other revenue,
which primarily includes performance marketing agency and technology services,
contributed $5.5 million of revenue for fiscal year 2021. The business
divestitures completed in fiscal years 2021 and 2020 decreased revenue by $62.5
million for fiscal year 2021.
Net revenue increased by $35.2 million , or 8%, in fiscal year 2020 compared to
fiscal year 2019. Revenue from our financial services client vertical increased
by $57.7 million , or 19%, primarily due to our enhanced product set and data
analytics that enabled access to more media and an increase in client budgets in
our insurance business. The change in revenue from our financial services client
vertical was also driven by increased revenue from our personal loans business,
primarily as a result of the acquisition of AmOne completed in the first quarter
of fiscal year 2019, and increased revenue from our credit cards and banking
businesses driven by expanding media sources, offset by a decline in revenue in
the credit-driven businesses during the last fiscal quarter due to
39
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weakening economic and employment conditions caused by COVID-19. Revenue from
our home services client vertical increased by $9.7 million , or 24%, primarily
attributable to increased client demand. Revenue from our former education
client vertical (disposed in fiscal year 2021) decreased by $7.3 million , or
11%, primarily due to the loss of a large not-for-profit education client who
entered federal receivership in January 2019 . The business divestitures
completed in fiscal year 2020 decreased revenue by $24.9 million for fiscal year
2020.
Cost of Revenue and Gross Profit Margin
Cost of revenue increased by$70.1 million , or 16%, in fiscal year 2021 compared to fiscal year 2020. This was primarily driven by increased media and marketing costs of$58.0 million , increased personnel costs including stock-based compensation expense of$6.0 million , and increased amortization of intangible assets of$4.7 million . The increase in media and marketing costs was associated with higher revenue volumes. The increase in personnel costs was primarily due to higher headcount associated with the Modernize acquisition, increased incentive compensation associated with the achievement of performance objectives for fiscal year 2021 and increased stock-based compensation expense. The increase in amortization expense was primarily due to the acquisitions of intangible assets in fiscal year 2021. Gross profit margin, which is the difference between net revenue and cost of revenue as a percentage of net revenue, was 12% in fiscal year 2021 compared to 11% in fiscal year 2020. The increase in gross profit margin was primarily attributable to decreased media and marketing costs as a percentage of revenue. Cost of revenue increased by$44.4 million , or 11%, in fiscal year 2020 compared to fiscal year 2019. This was primarily driven by increased media and marketing costs of$34.0 million , increased personnel costs including stock-based compensation expense of$7.6 million , and increased amortization of intangible assets of$2.5 million . The increase in media and marketing costs was associated with higher revenue volumes. The increase in personnel costs and stock-based compensation was primarily due to higher headcount as a result of the acquisitions completed in fiscal year 2019. The increase in amortization expense was primarily due to the acquisitions of intangible assets in fiscal year 2019. Gross profit margin was 11% in fiscal year 2020 compared to 14% in fiscal year 2019. The decrease in gross profit margin was attributable to increased media fees and personnel costs as a percentage of revenue. Operating Expenses Fiscal Year Ended June 30, 2021 - 2020 2020- 2019 2021 2020 2019 % Change % Change (In thousands) Product development$ 19,344 $ 14,206 $ 12,329 36 % 15 % Sales and marketing 10,991 8,876 8,755 24 % 1 % General and administrative 26,270 23,188 29,834 13 % (22 %) Operating expenses$ 56,605 $ 46,270 $ 50,918 22 % (9 %)
Product Development Expenses
Product development expenses increased by$5.1 million , or 36%, in fiscal year 2021 compared to fiscal year 2020. This was primarily due to increased personnel costs of$4.5 million as a result of higher headcount associated with the Modernize acquisition, increased incentive compensation associated with the achievement of performance objectives for fiscal year 2021 and increased stock-based compensation expense. Product development expenses increased by$1.9 million , or 15%, in fiscal year 2020 compared to fiscal year 2019, primarily due to increased personnel costs of$1.8 million as a result of annual compensation increases.
Sales and Marketing Expenses
Sales and marketing expenses increased by$2.1 million , or 24%, in fiscal year 2021 compared to fiscal year 2020. This was primarily due to increased personnel costs of$2.2 million as a result of increased incentive compensation associated with the achievement of performance objectives for fiscal year 2021 and increased stock-based compensation expense.
Sales and marketing expenses increased by
40
--------------------------------------------------------------------------------General and Administrative Expenses
General and administrative expenses increased by$3.1 million , or 13%, in fiscal year 2021 compared to fiscal year 2020. This was primarily due to increased personnel costs of$2.0 million as a result of increased stock-based compensation expense and increased incentive compensation associated with the achievement of performance objectives for fiscal year 2021. General and administrative expenses decreased by$6.6 million , or 22%, in fiscal year 2020 compared to fiscal year 2019, primarily due to a charge of$8.7 million for bad debt expense related to a large former education client recorded in fiscal year 2019, offset by increased personnel costs including stock-based compensation expense of$1.4 million , and increased facilities expense of$0.6 million .
Interest and Other Income, Net
Fiscal Year Ended June 30, 2021 - 2020 2020- 2019
2021 2020 2019 % Change % Change
(In thousands)
Interest income $ 39 $ 230 $ 290 (83 %) (21 %)
Interest expense (1,296 ) (696 ) (367 ) 86 % 90 %
Other income, net 16,660 12,947 69 29 % NM
Interest and other income, net
23 % NM NM - not meaningful
Interest income relates to interest earned on our cash and cash equivalents in fiscal years 2021, 2020 and 2019.
Interest expense increased by$0.6 million , or 86%, in fiscal year 2021 compared to fiscal year 2020 primarily due to increased imputed interest on a higher average outstanding balance of the post-closing payments related to our business acquisitions completed in fiscal year 2021. Interest expense increased by$0.3 million , or 90%, in fiscal year 2020 compared to fiscal year 2019 primarily due to increased imputed interest on a higher average outstanding balance of the post-closing payments related to our business acquisitions completed in fiscal year 2019. Other income, net, was$16.7 million in fiscal year 2021 primarily due to a gain of$16.6 million recognized from the divestiture of our education client vertical. Other income, net, was$12.9 million in fiscal year 2020 primarily due to a net disposition gain of$13.6 million recognized from the business divestitures completed during the fiscal year. Other income, net, was immaterial in fiscal year 2019.
(Provision for) Benefit from Income Taxes
Fiscal Year Ended June 30,
2021 2020 2019
(In thousands)
(Provision for) benefit from income taxes $ (5,774 ) $ (584 ) $ 51,761
Effective tax rate 19.7 % 3.1 % (482.9 %)
We recorded a provision for income taxes of $5.8 million in fiscal year 2021,
primarily as a result of deferred federal and state income taxes of $5.3 million
and current state and foreign taxes of $0.4 million .
We recorded a provision for income taxes of $0.6 million in fiscal year 2020,
primarily as a result of deferred federal and state income taxes of $3.5
million , offset by an expected tax refund of $3.1 million to be received from
the California Franchise Tax Board, based on a settlement reached in the third
quarter of fiscal year 2020.
We recorded a valuation allowance against the majority of our deferred tax
assets at the end of fiscal year 2014. In the second quarter of fiscal year
2019, due to the preponderance of positive evidence, including our cumulative
profit before taxes and future forecasts of continued profitability in the
United States , we determined that sufficient positive evidence existed to
conclude that substantially all of our valuation allowance was no longer needed.
Accordingly, we recorded a one-time non-cash benefit from income taxes of $49.4
million related to the release of the valuation allowance for the majority of
our federal and states deferred tax assets.
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Our effective tax rate was 19.7%, 3.1%, and (482.9%) in fiscal years 2021, 2020
and 2019. The change in the effective tax rate in fiscal year 2019 was primarily
due to the release of the valuation allowance related to the United States
federal and state deferred tax assets with the exception of California research
and development tax credits and the benefit of excess share-based compensation
tax deductions.
Selected Quarterly Financial Data
The following table sets forth our unaudited quarterly condensed consolidated statements of operations for the eight quarters endedJune 30, 2021 . We have prepared the statements of operations for each of these quarters on the same basis as the audited consolidated financial statements included elsewhere in this report and, in the opinion of management, each statement of operations includes all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this report. These quarterly operating results are not necessarily indicative of our operating results for any future period. Three Months Ended June 30, Mar 31, Dec 31, Sept 30, June 30, Mar 31, Dec 31, Sept 30, 2021 2021 2020 2020 2020 2020 2019 2019 (In
thousands, except per share data)
(unaudited)
Net revenue$ 151,198 $ 153,052 $ 134,968 $
139,269
132,623 132,665 120,437 122,231 105,147 114,210 105,318 113,189 Gross profit
18,575 20,387 14,531 17,038 11,814 14,453 12,783 13,425 Operating expenses: Product development
4,568 4,905 4,980 4,891 4,001 3,250 3,399 3,556 Sales and marketing
2,688 2,768 2,892 2,643 1,805 2,116 2,592 2,363 General and administrative
6,339 6,460 6,890 6,581 6,789 5,076 5,498 5,825
Operating income (loss) 4,980 6,254 (231 ) 2,923 (781 ) 4,011 1,294 1,681
Interest income - 5 12 22 61 43 54 72
Interest expense (349 ) (301 ) (307 ) (339 ) (130 ) (177 ) (177 ) (212 )
Other (expense) income,
net (35 ) (28 ) 34 16,689 2,722 10,491 (9 ) (257 )
Income (loss) before
income taxes 4,596 5,930 (492 ) 19,295 1,872 14,368 1,162 1,284 (Provision for) benefit from income taxes
(1,225 ) (893 ) 958 (4,614 ) (370 ) (449 ) 387 (152 ) Net income
$ 3,371 $ 5,037 $ 466 $
14,681
Net income per share: (1) Basic$ 0.06 $ 0.09 $ 0.01 $ 0.28 $ 0.03 $ 0.27 $ 0.03 $ 0.02 Diluted$ 0.06 $ 0.09 $ 0.01 $ 0.27 $ 0.03 $ 0.26 $ 0.03 $ 0.02 Other Financial Data: Adjusted EBITDA$ 14,242 $ 15,411 $ 10,032 $ 12,503 $ 8,398 $ 9,332 $ 9,063 $ 9,436
(1) Net income per share for the four quarters of each fiscal year may not sum to
the total for the fiscal year as a result of the different number of shares
outstanding during each period.
Adjusted EBITDA
We include adjusted EBITDA in this report because (i) we seek to manage our
business to a level of adjusted EBITDA as a percentage of net revenue, (ii) is
used internally by management for planning purposes, including preparation of
internal budgets; to allocate resources; to evaluate the effectiveness of
operational strategies and capital expenditures as well as the capacity to
service debt, (iii) it is a key basis upon which management assesses our
operating performance, (iv) it is one of the primary metrics investors use in
evaluating Internet marketing companies, (v) it is a factor in determining
compensation, (vi) it is an element of certain financial covenants under our
historical borrowing arrangements, and (vii) it is a factor that assists
investors in the analysis of ongoing operating trends. We define adjusted EBITDA
as net income less interest and other expense, net, provision for (benefit from)
income
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taxes, depreciation expense, amortization expense, stock-based compensation expense, acquisition and divestiture costs, gain on divestitures of businesses, net, strategic review costs, litigation settlement expense, tax settlement expense, and restructuring costs.
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 of changes in effective tax rates or fluctuations in permanent differences or discrete quarterly items), non-recurring charges and certain other items that we do not believe are indicative of our core operating activities (such as acquisition and divestiture related expense, gain or loss on divestitures of businesses, strategic review costs, litigation settlement expense, tax settlement expense, restructuring costs, and other expense, net) and the non-cash impact of depreciation expense, amortization expense and stock-based compensation expense. 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, debt-service capabilities and as a metric for analyzing company valuations. 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;
• 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 ofissuing stock-based compensation to our management team and employees;
• should we enter into borrowing arrangements in the future, adjusted EBITDA
does not reflect the interest expense or the cash requirements that may be
necessary to service interest or principal payments on such 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.
Due to 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 (loss) and our other GAAP results.
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--------------------------------------------------------------------------------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,
2021 2021 2020 2020 2020 2020 2019 2019
(In thousands)
(unaudited)
Net income $ 3,371 $ 5,037 $ 466 $ 14,681 $ 1,502 $ 13,919 $ 1,549 $ 1,132
Interest and other
expense, net 384 324 261 243 106 462 132 397Provision for (benefit from) income taxes 1,225 893 (958 ) 4,614 370 449 (387 ) 152 Depreciation and amortization 4,191 3,874 4,003 4,133 2,959 2,851 2,854 2,812 Stock-based compensation expense 4,442 4,856 5,555 4,780 5,500 1,869 4,700 4,648 Acquisition and divestiture costs 45 160 330 276 634 40 16 295 Gain on divestitures of businesses, net - - - (16,615 ) (2,759 ) (10,819 ) - - Strategic review costs - - - - 68 63 199 - Litigation settlement expense 231 - - - 15 80 - - Tax settlement expense 310 - - - - - - - Restructuring costs 43 267 375 391 3 418 - - Adjusted EBITDA$ 14,242 $ 15,411 $ 10,032 $
12,503
Net revenue$ 151,198 $ 153,052 $ 134,968 $ 139,269 $ 116,961 $ 128,663 $ 118,101 $ 126,614 Net income as a percentage of net revenue 2 % 3 % - % 11 % 1 % 11 % 1 % 1 % Adjusted EBITDA as a percentage of net revenue 9 % 10 % 7 % 9 % 7 % 7 % 8 % 7 % We seek to manage our business to a 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 level of adjusted EBITDA on a quarterly basis and we expect our adjusted EBITDA margins to vary from quarter to quarter.
Liquidity and Capital Resources
As ofJune 30, 2021 , our principal sources of liquidity consisted of cash and cash equivalents of$110.3 million and cash we expect to generate from future operations. Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. We believe our cash equivalents are liquid and accessible. Our short-term and long-term liquidity requirements primarily arise from our working capital requirements, capital expenditures, internal software development costs and acquisitions from time to time. Our acquisitions in fiscal years 2021 and 2019 also have deferred purchase price components and contingent consideration which requires us to make a series of payments following the acquisition closing date. Our primary operating cash requirements include the payment of media costs, personnel costs, costs of information technology systems and office facilities. Our ability to fund these requirements will depend on our future cash flows, which are determined, in part, by future operating performance and are, therefore, subject to prevailing global macroeconomic conditions including the impact of COVID-19, and financial, business and other factors, some of which are beyond our control. Even though we may not need additional funds to fund anticipated liquidity requirements, we may still elect to obtain debt financing or issue additional equity securities for other reasons. 44 --------------------------------------------------------------------------------
We believe that our principal sources of liquidity will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months.
The following table summarizes our cash flows for the periods indicated:
Fiscal Year Ended June 30,
2021 2020 2019
(In thousands)
Net cash provided by operating
activities $ 50,615 $ 47,608 $ 37,965
Net cash (used in) provided by
investing activities (36,457 ) 8,868 (36,989 )
Net cash used in financing
activities (11,312 ) (11,632 ) (4,054 )
Net Cash Provided by Operating Activities
Cash flows from operating activities are primarily the result of our net income adjusted for depreciation and amortization, benefit from or provision for sales returns and doubtful accounts receivable, stock-based compensation expense, non-cash lease expense, gains and losses on divestitures of businesses, deferred income taxes and changes in working capital components.
Cash provided by operating activities was
Cash provided by operating activities in fiscal year 2021 consisted of net income of$23.6 million , adjusted for non-cash adjustments of$24.2 million and changes in working capital accounts of$2.8 million . The non-cash adjustments primarily consisted of stock-based compensation expense of$19.6 million , depreciation and amortization of$16.2 million , and a decrease in deferred tax assets of$5.4 million primarily due to provision for income taxes recorded in fiscal year 2021, offset by a gain of$16.6 million recognized from the divestiture of our education client vertical. The changes in working capital accounts were primarily attributable to an increase in accrued liabilities of$10.6 million , an increase in accounts payable of$6.6 million , and a decrease in prepaid expenses and other assets of$6.0 million , offset by an increase in accounts receivable of$20.1 million . The increases in accounts payable and accrued liabilities were due to the timing of payments. The decrease in prepaid expenses and other assets was primarily due to the refund of an unamortized prepaid expense of$5.3 million . The increase in accounts receivable was due to the timing of receipts. Cash provided by operating activities in fiscal year 2020 consisted of net income of$18.1 million , adjusted for non-cash adjustments of$19.4 million and changes in working capital accounts of$10.1 million . The non-cash adjustments primarily consisted of stock-based compensation expense of$16.7 million and depreciation and amortization of$11.5 million , offset by a net disposition gain of$13.6 million recognized from the business divestitures completed in fiscal year 2020. The changes in working capital accounts were primarily attributable to a decrease in accounts receivable of$11.4 million and a decrease in other assets, noncurrent of$5.5 million , offset by an increase in prepaid expenses and other assets of$8.1 million . The decrease in accounts receivable was due to the timing of receipts. The decrease in other assets, noncurrent, was primarily due to a reclassification of unamortized prepaid expense of$4.3 million from long-term to short-term as we expected to receive payment within the next 12 months. The increase in prepaid expenses and other assets was primarily due to the reclassification of$4.3 million as discussed above, as well as an expected tax refund of$3.1 million to be received from the California Franchise Tax Board, based on a settlement reached in the third quarter of fiscal year 2020. Cash provided by operating activities in fiscal year 2019 consisted of net income of$62.5 million , adjusted for non-cash adjustments of$19.0 million and changes in working capital accounts of$5.6 million . The non-cash adjustments primarily consisted of a one-time non-cash benefit of$49.4 million related to our release of the valuation allowance for the majority of our federal and states deferred tax assets, offset by stock-based compensation expense of$14.1 million , depreciation and amortization of$9.0 million , and bad debt expense of$8.7 million related to a large former education client. The changes in working capital accounts were primarily attributable to an increase in accounts receivable of$8.3 million and a decrease in accrued liabilities of$3.4 million , offset by an increase in accounts payable of$4.5 million . The increase in accounts receivable is primarily due to the increase in revenue, the decrease in accrued liabilities is primarily due to a decrease in accrued performance incentive compensation associated with the lower achievement of performance objectives and the increase in accounts payable is primarily due to the timing of payments.
Cash flows from investing activities generally include capital expenditures,
capitalized internal software development costs, acquisitions from time to time,
business divestitures, and investment in equity securities.
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Cash used in investing activities was
Cash used in investing activities in fiscal year 2021 was primarily due to payments for the acquisitions of Modernize,Mayo Labs and FCE, net of cash acquired, of$49.3 million , capital expenditures and internal software development costs of$5.1 million , and investment in equity securities of$4.0 million , offset by$21.9 million of cash received from the divestitures of our education client vertical and B2B client vertical. Cash provided by investing activities in fiscal year 2020 was primarily due to$15.4 million cash received from the business divestitures completed in fiscal year 2020, net of cash divested of$0.3 million , offset by capital expenditures and internal software development costs of$4.3 million , and a cash payment of$2.0 million associated with an insignificant business acquisition completed in fiscal year 2020. Cash used in investing activities in fiscal year 2019 was primarily due to our acquisitions of AmOne, CCM and MBT in fiscal year 2019 for$32.7 million , net of cash acquired of$3.1 million and capital expenditures and internal software development costs of$4.3 million .
Cash flows from financing activities generally include payment of withholding taxes related to the release of restricted stock, net of share settlement, proceeds from the exercise of stock options, and post-closing payments related to business acquisitions.
Cash used in financing activities was
Cash used in financing activities in fiscal year 2021 was due to the payment of withholding taxes related to the release of restricted stock, net of share settlement of$8.0 million , and payment of post-closing payments and contingent consideration related to acquisitions of$7.7 million , offset by proceeds from the exercise of stock options of$4.4 million . Cash used in financing activities in fiscal year 2020 was due to the post-closing payments and contingent consideration related to acquisitions of$9.3 million , and payments of withholding taxes related to the release of restricted stock, net of share settlement of$6.4 million , offset by proceeds from the exercise of stock options of$4.1 million . Cash used in financing activities in fiscal year 2019 was due to the payments of withholding taxes related to the release of restricted stock, net of share settlement of$9.9 million and post-closing payments related to acquisitions of$2.0 million , offset by proceeds from the exercise of stock options of$7.8 million .
Off-Balance Sheet Arrangements
During the periods presented, we did not have any material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Contractual Obligations
The following table sets forth payments due under our contractual obligations as ofJune 30, 2021 : Total Less than 1 Year 1-3 Years 3-5 Years (In thousands) Operating leases (1)$ 16,621 $ 6,432$ 9,432 $ 757 Post-closing payment related to acquisitions (2) 34,954 10,262 14,966 9,726 Contingent consideration related to acquisitions (2) 5,432 2,584 2,848 - Total$ 57,007 $ 19,278$ 27,246 $ 10,483
(1) We lease various office facilities, including our corporate headquarters in
escalation provisions and tenant improvement allowances.
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-------------------------------------------------------------------------------- InFebruary 2010 , we entered into a lease agreement for our corporate headquarters located at950 Tower Lane ,Foster City, California with an expiration date inOctober 2018 and an option to extend the term of the lease twice by one additional year. InApril 2018 , the lease agreement was amended to extend the lease term throughOctober 31, 2023 . Under the amended lease agreement, during the first year of the extended lease term, the monthly base rent was abated for the first eight months and increased to$0.2 million for the remaining four months. During the second year of the extended lease term, the monthly base rent was abated for the first five months and increased to$0.3 million for the remaining seven months. Subsequently, after each 12-month anniversary, the monthly base rent increases by approximately 3%. We have an option to extend the term of the lease for an additional five years followingOctober 31, 2023 .
(2) In accordance with the terms of the acquisitions completed in fiscal years
2021 and 2019, we are required to make post-closing payments and contingent
consideration payments. See Note 6, Acquisitions, to our consolidated
financial statements for more information on the post-closing payments and
contingent consideration payments related to our business acquisitions.
The above table does not include approximately
Critical Accounting Policies and Estimates
We have prepared our consolidated financial statements in conformity with accounting principles generally accepted inthe 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. Actual results may differ significantly from these estimates. 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. Additionally, COVID-19 is a factor which may cause actual results to differ from estimates. COVID-19 is contributing to a general slowdown in the global economy and may affect our business, results of operations, financial condition, and future strategic plans. At this time, the extent to which the COVID-19 may impact our financial condition or results of operations is uncertain. We refer to these estimates and assumptions as critical accounting policies and 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.
See Note 2, Summary of Significant Accounting Principles, to our consolidated financial statements for further information on our critical and other significant accounting policies.
Revenue Recognition
We generate our revenue primarily from fees earned through the delivery of
qualified inquiries such as clicks, leads, calls, applications, or customers. We
recognize revenue when we transfer control of promised goods or services to our
clients in an amount that reflects the consideration to which we expect to be
entitled in exchange for those goods or services. We recognize revenue pursuant
to the five-step framework contained in ASC 606, Revenue from Contracts with
Customers: (i) identify the contract with a client; (ii) identify the
performance obligations in the contract, including whether they are distinct in
the context of the contract; (iii) determine the transaction price, including
the constraint on variable consideration; (iv) allocate the transaction price to
the performance obligations in the contract; and (v) recognize revenue when (or
as) the Company satisfies the performance obligations.
As part of determining whether a contract exists, probability of collection is
assessed on a client-by-client basis at the outset of the contract. Clients are
subjected to a credit review process that evaluates the clients' financial
position and the ability and intention to pay. If it is determined from the
outset of an arrangement that the client does not have the ability or intention
to pay, we will conclude that a contract does not exist and will continuously
reassess our evaluation until we are able to conclude that a contract does
exist.
Generally, our contracts specify the period of time as one month, but in some
instances the term may be longer. However, for most of our contracts with
clients, either party can terminate the contract at any time without penalty.
Consequently, enforceable rights and obligations only exist on a day-to-day
basis, resulting in individual daily contracts during the specified term of the
contract or until one party terminates the contract prior to the end of the
specified term.
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We have assessed the services promised in our contracts with clients and have
identified one performance obligation, which is a series of distinct services.
Depending on the client's needs, these services consist of a specified or an
unlimited number of clicks, leads, calls, applications, customers, etc.
(hereafter collectively referred to as "marketing results") to be delivered over
a period of time. We satisfy these performance obligations over time as the
services are provided. We do not promise to provide any other significant goods
or services to our clients.
Transaction price is measured based on the consideration that we expect to
receive from a contract with a client. Our contracts with clients contain
variable consideration as the price for an individual marketing result varies on
a day-to-day basis depending on the market-driven amount a client has committed
to pay. However, because we ensure the stated period of our contracts does not
generally span multiple reporting periods, the contractual amount within a
period is based on the number of marketing results delivered within the period.
Therefore, the transaction price for any given period is fixed and no estimation
of variable consideration is required.
If a marketing result delivered to a client does not meet the contractual
requirements associated with that marketing result, our contracts allow for
clients to return a marketing result generally within 5-10 days of having
received the marketing result. Such returns are factored into the amount billed
to the client on a monthly basis and consequently result in a reduction to
revenue in the same month the marketing result is delivered. No warranties are
offered to our clients.
We do not allocate transaction price as we have only one performance obligation
and our contracts do not generally span multiple periods. Taxes collected from
clients and remitted to governmental authorities are not included in revenue. We
elected to use the practical expedient which allows us to record sales
commissions as expense as incurred when the amortization period would have been
one year or less.
We bill clients monthly in arrears for the marketing results delivered during
the preceding month. Our standard payment terms are 30-60 days. Consequently, we
do not have significant financing components in our arrangements.
Separately from the agreements that we have with clients, we have agreements
with Internet search companies, third-party publishers and strategic partners
that we engage with to generate targeted marketing results for our clients. We
receive a fee from our clients and separately pay a fee to the Internet search
companies, third-party publishers and strategic partners. We evaluate whether we
are the principal (i.e., report revenue on a gross basis) or agent (i.e., report
revenue on a net basis). In doing so, we first evaluate whether we control the
goods or services before they are transferred to the clients. If we control the
goods or services before they are transferred to the clients, we are the
principal in the transaction. As a result, the fees paid by our clients are
recognized as revenue and the fees paid to our Internet search companies,
third-party publishers and strategic partners are included in cost of revenue.
If we do not control the goods or services before they are transferred to the
clients, we are the agent in the transaction and recognize revenue on a net
basis. We have one subsidiary, CCM, which provides performance marketing agency
and technology services to clients in financial services, education and other
markets, recognizing revenue on a net basis. Determining whether we control the
goods or services before they are transferred to the clients may require
judgment.
Stock-Based Compensation
We measure and record the expense related to stock-based transactions based on
the fair value of the stock-based payment awards as determined on the date of
grant. The fair value of restricted stock units with a service condition
("service-based RSU") is determined based on the closing price of our common
stock on the date of grant. For stock options, we have selected and used the
Black-Scholes option pricing model to estimate the fair value. The fair value of
restricted stock units with a service and performance condition
("performance-based RSU") is determined based on the closing price of our common
stock on the date of grant. Grant date as defined by ASC 718 is determined when
the components that comprise the performance targets have been fully
established. If a grant date has not been established, the compensation expense
associated with the performance-based RSU is re-measured at each reporting date
based on the closing price of our common stock at each reporting date until the
grant date has been established. For restricted stock units with a service and
market condition ("market-based RSU"), we have selected and used the Monte Carlo
simulation model to estimate the fair value on the date of grant.
In applying these models, our determination of fair value is affected by
assumptions regarding a number of subjective variables. These variables include,
but are not limited to, the expected stock price volatility over the term of the
award and the employees' actual and projected stock option exercise and
pre-vesting employment termination behaviors. We estimate the expected
volatility of our common stock based on our historical volatility over the
expected term of the award. We have no history or expectation of paying
dividends on our common stock. The risk-free interest rate is based on the U.S.
Treasury yield for a term consistent with the expected term of the award.
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We recognize stock-based compensation expense for options and service-based RSUs
using the straight-line method, and for performance-based RSUs and market-based
RSUs using the graded vesting method, based on awards ultimately expected to
vest. We estimate future forfeitures at the date of grant. On an annual basis,
we assess changes in our estimate of expected forfeitures based on recent
forfeiture activity. The effect of adjustments made to forfeiture rates, if any,
is recognized in the period that the change is made.
Business Combinations
We account for business combinations using the acquisition method, which requires that the total consideration for each of the acquired business be allocated to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. In determining the fair value of assets acquired and liabilities assumed in a business combination, we used the income approach to value our most significant acquired assets. Significant assumptions relating to our estimates in the income approach include base revenue, revenue growth rate net of client attrition, projected gross margin, discount rates, projected operating expenses and the future effective income tax rates. The valuations of our acquired businesses have been performed by a third-party valuation specialist under our management's supervision. We believe that the estimated fair value assigned to the assets acquired and liabilities assumed are based on reasonable assumptions and estimates that marketplace participants would use. However, such assumptions are inherently uncertain and actual results could differ from those estimates. Future changes in our assumptions or the interrelationship of those assumptions may negatively impact future valuations. In future measurements of fair value, adverse changes in discounted cash flow assumptions could result in an impairment of goodwill or intangible assets that would require a non-cash charge to the consolidated statements of operations and may have a material effect on our financial condition and operating results. Acquisition related costs are not considered part of the consideration, and are expensed as operating expenses as incurred. Contingent consideration, if any, is measured at fair value initially on the acquisition date as well as subsequently at the end of each reporting period until settlement at the end of the assessment period. We include the results of operations of the businesses acquired as of the beginning of the acquisition dates.
We conduct a test for the impairment of goodwill at the reporting unit level on at least an annual basis and whenever there are events or changes in circumstances that would more likely than not reduce the estimated fair value of a reporting unit below its carrying value. 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, an appropriate control premium 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. We perform our annual goodwill impairment test onApril 30 and conduct a qualitative assessment to determine whether it is necessary to perform a quantitative goodwill impairment test. In assessing the qualitative factors, we consider the impact of key factors such as changes in the general economic conditions including the impact of COVID-19, changes in industry and competitive environment, stock price, actual revenue performance compared to previous years, forecasts and cash flow generation. We had one reporting unit for purposes of allocating and testing goodwill for fiscal years 2021 and 2020. Based on the results of the qualitative assessment completed as ofApril 30, 2021 and 2020, there were no indicators of impairment.
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. If necessary, a quantitative test is performed that requires the application of judgment when assessing the fair value of an asset. When we identify an impairment, we reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. As ofApril 30, 2021 and 2020, we evaluated our long-lived assets and concluded there were no indicators of impairment. 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. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized. We regularly assess the realizability of our deferred tax assets. Judgment is required to determine whether a valuation allowance is necessary and the amount of such valuation allowance, if appropriate. We consider all available evidence, both positive and negative, to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the need, or continued need, for a valuation allowance we consider, among other things, the nature, frequency and severity of current and cumulative taxable income or losses, forecasts of future profitability, and the duration of statutory carryforward periods. Our judgment regarding future profitability may change due to future market conditions including the impact of COVID-19, changes inU.S. or international tax laws and other factors. We recognize tax benefits from an uncertain tax position only if it is more likely than not, based on the technical merits of the position, that the tax position will be sustained on examination by the tax authorities. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements for information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements.
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