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OFFON

QUINSTREET, INC.

(QNST)
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QUINSTREET : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/07/2021 | 01:57pm EDT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes appearing elsewhere in this Quarterly
Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended
June 30, 2020, filed with the Securities and Exchange Commission ("SEC").

This Quarterly Report on Form 10-Q contains "forward-looking statements" that
involve risks and uncertainties, as well as assumptions that, if they do not
materialize or if they prove incorrect, could cause our results to differ
materially from those expressed or implied by such forward-looking statements.
The statements contained in this Quarterly Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are often
identified by the use of words such as, but not limited to, "anticipate,"
"believe," "expect," "can," "continue," "could," "estimate," "expect," "intend,"
"outlook," "may," "will," "plan," "project," "seek," "should," "target," "will,"
"would," and similar expressions or variations intended to identify
forward-looking statements. These statements reflect the beliefs and assumptions
of our management based on information currently available to management. Such
forward-looking statements are subject to risks, uncertainties and other
important factors that could cause actual results and the timing of certain
events to differ materially from future results expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified in "Part II -Item
1A. Risk Factors" below, and those discussed in the sections titled "Special
Note Regarding Forward-Looking Statements" and "Risk Factors" included in our
Annual Report on Form 10-K for the fiscal year ended June 30, 2020, filed with
the SEC. Furthermore, such forward-looking statements speak only as of the date
of this report. Except as required by law, we undertake no obligation to update
any forward-looking statements to reflect events or circumstances after the date
of such statements.

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 in North 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 researching visitors or

consumers, deliver on client marketing objectives, effectively compete for

      online media, and generate a sound financial outcome for us.


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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 76% and 74% of net revenue
for the three and nine months ended March 31, 2021 and 77% and 74% of net
revenue for the three and nine months ended March 31, 2020. Our home services
client vertical represented 23% of net revenue for both the three and nine
months ended March 31, 2021 and 9% and 10% of net revenue for the three and nine
months ended March 31, 2020. Our results of operations for the three and nine
months ended March 31, 2021 reflected our acquisition of Modernize, which was
completed in the first quarter of fiscal year 2021. Other revenue, which
primarily includes performance marketing agency and technology services,
represented 1% of net revenue for both the three and nine months ended March 31,
2021. In addition, revenue recognized from our divested businesses (including
our former education client vertical, business-to-business technology client
vertical, mortgage business, and Brazil businesses) represented 0% and 2% of net
revenue for the three and nine months ended March 31, 2021 and 14% and 16% of
net revenue for the three and nine months ended March 31, 2020. See Note 7,
Divestitures, to our condensed consolidated financial statements for more
information related to the divestitures. We generated the majority of our
revenue from sales to clients in the United States.

One client in our financial services client vertical accounted for 26% and 25%
of our net revenue for the three and nine months ended March 31, 2021 and 22%
and 19% of our net revenue for the three and nine months ended March 31, 2020.
No other client accounted for 10% or more of our net revenue for the three and
nine months ended March 31, 2021 and 2020.

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. 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 II, Item 1A of this Form 10-Q) 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.

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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.


The COVID-19 pandemic is also affecting our client verticals to varying degrees.
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.

Acquisitions and Divestitures


Acquisitions have historically been, and continue to be, an important element of
our overall corporate strategy and use of capital. In the past three fiscal
years, we have completed several strategic acquisitions, including the
acquisitions of Modernize, Mayo and FCE completed in the first three quarters of
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 the first quarter of fiscal
year 2021, and the divestitures of our former B2B client vertical, our
businesses in Brazil 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 8, Acquisitions, and Note 7, Divestitures, respectively, to our condensed
consolidated financial statements.

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 ending December 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
ending March 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 ending December 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.

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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.

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, home services, and other revenue. Our revenue
recognized during the three and nine months ended March 31, 2021 and 2020 also
included the revenue generated from the businesses we divested in fiscal year
2020 and in the first quarter of fiscal year 2021 (including our former
education client vertical, business-to-business technology client vertical,
mortgage business, and Brazil businesses).

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, cost-per-click, or CPC, or
cost-per-thousand-impressions, or CPM, 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.

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 (Expense) Income, Net


Interest and other (expense) 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 of March 31, 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.

                                       29

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Provision for Income Taxes


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.

Critical Accounting Policies, Estimates and Judgments


In presenting our consolidated financial statements in conformity with U.S.
generally accepted accounting principles, or GAAP, we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities as of 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, assumptions and estimates and, therefore, could have the
greatest potential impact on our consolidated financial statements.

  • Revenue recognition;


  • Valuation of goodwill and intangible assets;


  • Stock-based compensation;


  • Business combination;


  • Income taxes; and


  • Valuation of long-lived assets.

For further information on our critical and other significant accounting policies and estimates, see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended June 30, 2020, filed with the SEC.

Recently Issued Accounting Standards

See Note 2, Summary of Significant Accounting Policies, to our condensed consolidated financial statements.

                                       30

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Results of Operations

The following table sets forth our condensed consolidated statements of operations for the periods indicated:



                              Three Months Ended March 31,                         Nine Months Ended March 31,
                             2021                      2020                      2021                      2020
                                     (In thousands)                                      (In thousands)
Net revenue          $ 153,052       100.0 %   $ 128,663       100.0 %   $ 427,289       100.0 %   $ 373,378       100.0 %
Cost of revenue
(1)                    132,665        86.7       114,210        88.8       375,334        87.8       332,717        89.1
Gross profit            20,387        13.3        14,453        11.2        51,955        12.2        40,661        10.9
Operating
expenses: (1)
Product
development              4,905         3.2         3,250         2.5        14,776         3.5        10,205         2.7
Sales and
marketing                2,768         1.8         2,116         1.7         8,303         1.9         7,071         1.9
General and
administrative           6,460         4.2         5,076         3.9        19,931         4.7        16,399         4.4
Operating income         6,254         4.1         4,011         3.1         8,945         2.1         6,986         1.9
Interest income              5           -            43           -            40           -           169         0.1

Interest expense (301 ) (0.2 ) (177 ) (0.1 )

   (947 )      (0.2 )        (566 )      (0.2 )
Other (expense)
income, net                (28 )         -        10,491         8.2        16,695         3.9        10,225         2.7
Income before
income taxes             5,930         3.9        14,368        11.2        24,733         5.8        16,814         4.5
Provision for
income taxes              (893 )      (0.6 )        (449 )      (0.3 )      (4,549 )      (1.1 )        (214 )      (0.1 )
Net income           $   5,037         3.3 %   $  13,919        10.9 %   $  20,184         4.7 %   $  16,600         4.4 %




(1) Cost of revenue and operating expenses include stock-based compensation
expense as follows:



Cost of revenue     $ 2,261         1.5 %   $   978         0.8 %   $ 7,006         1.6 %   $ 5,815         1.6 %
Product
development             576         0.4         185         0.1       1,768         0.4       1,187         0.3
Sales and
marketing               584         0.4         152         0.1       1,896         0.4       1,131         0.3
General and
administrative        1,435         0.9         554         0.4       4,521         1.1       3,084         0.8


Gross Profit



                    Three Months Ended           Nine Months Ended          Three          Nine
                         March 31,                   March 31,              Months        Months
                    2021          2020          2021          2020         % Change      % Change
                                    (In thousands)
Net revenue       $ 153,052     $ 128,663     $ 427,289     $ 373,378             19 %          14 %
Cost of revenue     132,665       114,210       375,334       332,717             16 %          13 %
Gross profit      $  20,387     $  14,453     $  51,955     $  40,661             41 %          28 %


Net Revenue

Net revenue increased $24.4 million, or 19%, for the three months ended March
31, 2021 compared to the three months ended March 31, 2020. Revenue from our
home services client vertical increased by $23.5 million, or 204%, primarily as
a result of inorganic and organic (synergy) revenue effects from the acquisition
of Modernize completed in the first quarter of fiscal year 2021. Revenue from
our financial services client vertical increased by $17.5 million, or 18%,
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 $1.7 million of revenue for the three months ended March 31, 2021.
The business divestitures completed in fiscal year 2020 and in the first quarter
of fiscal year 2021 decreased revenue by $18.3 million for the three months
ended March 31, 2021.

Net revenue increased $53.9 million, or 14%, for the nine months ended March 31,
2021 compared to the nine months ended March 31, 2020. Revenue from our home
services client vertical increased by $62.0 million, or 174%, primarily as a
result of inorganic and organic (synergy) revenue effects from the acquisition
of Modernize completed in the first quarter of fiscal year 2021.

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Revenue from our financial services client vertical increased by $36.8 million,
or 13%, 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 $3.5 million of revenue for the nine months ended March 31, 2021.
The business divestitures completed in fiscal year 2020 and in the first quarter
of fiscal year 2021 decreased revenue by $48.4 million for the nine months ended
March 31, 2021.

Cost of Revenue and Gross Profit Margin


Cost of revenue increased by $18.5 million, or 16%, for the three months ended
March 31, 2021 compared to the three months ended March 31, 2020. This was
primarily driven by increased media and marketing costs of $14.7 million,
increased personnel costs of $2.7 million, and increased amortization of
intangible assets of $1.0 million. The increase in media and marketing costs
was associated with higher revenue volumes. The increase in personnel costs was
due to increased incentive compensation associated with the expected achievement
of performance objectives for fiscal year 2021 and increased stock-based
compensation expense. The increase in amortization expense was due to the
acquisition of Modernize intangible assets. Gross profit margin, which is the
difference between net revenue and cost of revenue as a percentage of net
revenue, was 13% and 11% for the three months ended March 31, 2021 and 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 $42.6 million, or 13%, for the nine months ended
March 31, 2021 compared to the nine months ended March 31, 2020. This was
primarily driven by increased media and marketing costs of $33.6
million, increased personnel costs of $5.1 million, and increased amortization
of intangible assets of $3.4 million. The increase in media and marketing costs
was associated with higher revenue volumes. The increase in personnel costs was
due to increased incentive compensation associated with the expected achievement
of performance objectives for fiscal year 2021 and increased stock-based
compensation expense. The increase in amortization expense was due to the
acquisition of Modernize intangible assets. Gross profit margin was 12% and 11%
for the nine months ended March 31, 2021 and 2020. The increase in gross profit
margin was primarily attributable to decreased media and marketing costs as a
percentage of revenue.

Operating Expenses



                                     Three Months Ended          Nine Months Ended          Three           Nine
                                          March 31,                  March 31,              Months         Months
                                      2021          2020         2021          2020        % Change       % Change
                                                     (In thousands)
Product development                $    4,905     $  3,250     $  14,776     $ 10,205             51 %           45 %
Sales and marketing                     2,768        2,116         8,303        7,071             31 %           17 %
General and administrative              6,460        5,076        19,931       16,399             27 %           22 %
Operating expenses                 $   14,133     $ 10,442     $  43,010     $ 33,675             35 %           28 %

Product Development Expenses


Product development expenses increased by $1.7 million, or 51%, for the three
months ended March 31, 2021 compared to the three months ended March 31, 2020.
This was primarily due to increased personnel costs of $1.5 million as a result
of higher headcount associated with the Modernize acquisition, increased
incentive compensation expense associated with the expected achievement of
performance objectives for fiscal year 2021 and increased stock-based
compensation expense.

Product development expenses increased by $4.6 million, or 45%, for the nine
months ended March 31, 2021 compared to the nine months ended March 31, 2020.
This was primarily due to increased personnel costs of $4.1 million as a result
of higher headcount associated with the Modernize acquisition, increased
incentive compensation expense associated with the expected achievement of
performance objectives for fiscal year 2021 and increased stock-based
compensation expense, and increased facilities expense of $0.3 million.

Sales and Marketing Expenses


Sales and marketing expenses increased by $0.7 million, or 31%, for the three
months ended March 31, 2021 compared to the three months ended March 31, 2020,
primarily due to increased personnel costs of $0.6 million related to increased
incentive compensation associated with the expected achievement of performance
objectives for fiscal year 2021 and increased stock-based compensation expense.

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Sales and marketing expenses increased by $1.2 million, or 17%, for the nine
months ended March 31, 2021 compared to the nine months ended March 31, 2020,
primarily due to increased personnel costs of $1.4 million related to increased
incentive compensation associated with the expected achievement of performance
objectives for fiscal year 2021 and increased stock-based compensation expense.

General and Administrative Expenses


General and administrative expenses increased by $1.4 million, or 27%, for the
three months ended March 31, 2021 compared to the three months ended March 31,
2020, primarily due to increased personnel costs of $1.1 million associated with
the expected achievement of performance objectives for fiscal year 2021 and
increased stock-based compensation expense.

General and administrative expenses increased by $3.5 million, or 22%, for the
nine months ended March 31, 2021 compared to the nine months ended March 31,
2020, primarily due to increased personnel costs of $2.2 million associated with
the expected achievement of performance objectives for fiscal year 2021 and
increased stock-based compensation expense, increased professional services fees
of $0.7 million, and increased facilities expense of $0.4 million.

Provision for Income Taxes



                               Three Months Ended          Nine Months Ended
                                    March 31,                  March 31,
                               2021           2020          2021          2020
                                               (In thousands)
Provision for income taxes   $    (893 )     $  (449 )   $    (4,549 )   $ (214 )


As of March 31, 2021, we have not recorded any significant valuation allowance
adjustments based on the information and evidence available at the time.
However, if there are unfavorable changes to actual operating results or to
projections of future income, we may determine that it is more likely than not
that such deferred tax assets may not be realizable.

We recorded a provision for income taxes of $0.9 million and $4.5 million for
the three and nine months ended March 31, 2021, and a provision for income
taxes of $0.4 million and $0.2 million for the three and nine months ended March
31, 2020.

Liquidity and Capital Resources


As of March 31, 2021, our principal sources of liquidity consisted of cash and
cash equivalents of $103.2 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
year 2021 and fiscal year 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.

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:



                                                        Nine Months Ended
                                                            March 31,
                                                        2021          2020
                                                          (In thousands)
Net cash provided by operating activities             $  36,203     $ 

34,635

Net cash (used in) provided by investing activities (35,062 ) 6,134 Net cash used in financing activities

                    (5,385 )     (6,287 )


                                       33
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Operating Activities

Cash flows from operating activities are primarily the result of our net income
adjusted for depreciation and amortization, stock-based compensation expense,
gains and losses on divestitures of businesses, and changes in working capital
components.

Cash provided by operating activities was $36.2 million for the nine months ended March 31, 2021, compared to cash provided by operating activities of $34.6 million for the nine months ended March 31, 2020.


Cash provided by operating activities for the nine months ended March 31,
2021 consisted of a net income of $20.2 million, non-cash adjustments of $14.6
million and a net increase in cash from changes in working capital of
$1.4 million. The non-cash adjustments primarily consisted of stock-based
compensation expense of $15.2 million, depreciation and amortization expense of
$12.0 million, and a decrease in deferred tax assets of $4.3 million due to
provision for income taxes recorded for the first three quarters of fiscal year
2021, offset by a net disposition gain of $16.6 million recognized from the
divestiture of our former education client vertical completed in the first
quarter of fiscal year 2021. The changes in working capital accounts were
primarily attributable to an increase in accrued liabilities of $9.8 million, a
decrease in prepaid expenses and other assets of $5.1 million, and an increase
in accounts payable of $1.0 million, offset by an increase in accounts
receivable of $14.5 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 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 for the nine months ended March 31, 2020
consisted of a net income of $16.6 million, non-cash adjustments of $13.3
million and a net increase in cash from changes in working capital of $4.8
million. The non-cash adjustments primarily consisted of stock-based
compensation expense of $11.2 million and depreciation and amortization of $8.5
million, offset by a net disposition gain of $10.8 million recognized from the
business divestitures completed in the third quarter of fiscal year 2020. The
changes in working capital accounts were primarily attributable to a decrease in
accounts receivable of $3.6 million and an increase in accounts payable of $3.3
million, offset by an increase in prepaid expenses and other assets of $2.8
million. The decrease in accounts receivable was due to the timing of receipts.
The increase in accounts payable was due to the timing of payments. The increase
in prepaid expenses and other assets was primarily attributable to 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.

Investing Activities


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.

Cash used in investing activities was $35.1 million for the nine months ended March 31, 2021, compared to cash provided by investing activities of $6.1 million for the nine months ended March 31, 2020.


Cash used in investing activities in the nine months ended March 31, 2021 was
primarily due to payments for the acquisitions of Modernize, Mayo and FCE, net
of cash acquired, of $49.3 million, investment in equity securities of $4.0
million, and capital expenditures and internal software development costs of
$3.7 million, offset by $20.0 million of cash received from the divestiture of
our former education client vertical completed in the first quarter of fiscal
year 2021, and $1.9 million of cash received from the divestiture of our former
B2B client vertical completed in the third quarter of fiscal year 2020.

Cash provided by investing activities in the nine months ended March 31, 2020
was primarily due to $11.4 million cash received from the business divestitures
completed in the third quarter of fiscal year 2020, net of cash divested of $0.3
million, offset by capital expenditures and internal software development costs
of $3.0 million, and a cash payment of $2.0 million associated with an
insignificant business acquisition completed in January 2020.

Financing Activities


Cash flows from financing activities generally include 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 our acquisitions.

Cash used in financing activities was $5.4 million for the nine months ended
March 31, 2021, compared to cash used in financing activities of $6.3 million
for the nine months ended March 31, 2020.

Cash used in financing activities in the nine months ended March 31, 2021 was
due to the payment of withholding taxes related to the release of restricted
stock, net of share settlement of $6.5 million, and payment of post-closing
payments and contingent consideration related to acquisitions of $3.0 million,
offset by proceeds from the exercise of stock options of $4.2 million.

                                       34

--------------------------------------------------------------------------------


Cash used in financing activities in the nine months ended March 31, 2020 was
due to the payment of withholding taxes related to the release of restricted
stock, net of share settlement of $5.4 million and post-closing payments and
contingent consideration related to acquisitions of $4.7 million, offset by
proceeds from the exercise of stock options of $3.8 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
of March 31, 2021:



                                   Total        Less than 1 Year       1-3 Years       3-5 Years       Thereafter
                                                                   (In thousands)
Operating leases (1)             $  17,606     $            6,390     $    10,029     $     1,187     $           -
Post-closing payment related
to acquisitions (2)                 39,622                 14,274          15,707           9,641                 -
Contingent consideration
related to acquisitions (2)          5,748                    868           4,637             243                 -
Total                            $  62,976     $           21,532     $    30,373     $    11,071     $           -



(1) We lease various office facilities, including our corporate headquarters in

Foster City, California. The terms of certain lease agreements include rent

escalation provisions and tenant improvement allowances.



In February 2010, we entered into a lease agreement for our corporate
headquarters located at 950 Tower Lane, Foster City, California with an
expiration date in October 2018 and an option to extend the term of the lease
twice by one additional year. In April 2018, the lease agreement was amended to
extend the lease term through October 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 following
October 31, 2023.

(2) In accordance with the terms of the acquisitions completed in fiscal year

2021 and fiscal year 2019, we are required to make post-closing payments and

contingent consideration payments. See Note 8, Acquisitions, to our condensed

consolidated financial statements for more information on the post-closing

payments and contingent consideration payments related to our acquisitions.

The above table does not include approximately $2.4 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.





                                       35

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