By Kris Tuttle
We published a short research note on QuinStreet (QNST) on Friday based on our initial investigation into the “vertical” online direct marketing space. The company is on the road for an IPO managed by Credit Suisse, Bank of America/Merrill Lynch and JP Morgan. (Interestingly an old hand in the tech IPO space, Frank Quattrone, is back in the game acting as special “IPO advisor” to the company. We like that trend.)
Most investors got an education on this market from companies like BankRate (RATE - acquired by Apax for $571M) and more currently companies like Monster Worldwide (NYSE: MWW) and WebMD (NASDAQ: WBMD) which have a readership and traffic slice that is far more specific to the domain area than the more general traffic at “horizontal” online marketing locations like Google (GOOG), Microsoft (MSFT), Yahoo (YHOO) or AOL.
The marketing spend has been moving online for some time now and is poised to continue, given that it still has quite a bit of “catch up” to do in order to reach current viewing levels of online versus offline content. So the space is large and has strong fundamentals. In the S-1 filing the company cites a total market of $149B for direct marketing, of which about 16% is spent online. So the TAM looks good.
However companies like QuinStreet are focused on more of what we would call a considered purchase. That is a decision that will require some thought and investigation. These include high ticket and complex products and services. Things like online education programs, insurance, a medical operation and home remodeling all fall into this category.
For purchases like this, content is important. So QuinStreet actually owns a large number of “feeder” sites that are used to attract, qualify and harvest potential purchasers for their clients. QuinStreet has purchased online properties like www.insure.com and many smaller sites. It might not be fair to call the company a roll-up but it is clear that acquisitions (there have been over 100 of them since 2007) will be a major component to the strategy.
QuinStreet gets paid based on success versus general advertising which is based on “impressions” or even clicks. Marketers using QuinStreet only pay for qualified leads, opt-in decisions and other results which are more readily quantifiable in business and financial terms than online branding and traffic generation.
QuinStreet has been growing this business steadily for over a decade. With current revenues around $300M on a run-rate basis and 20% EBITDA margins, the business is financially very attractive. The vertical online direct marketing space hasn’t received the same degree of attention that the broader search and advertising area has but it looks like an attractive niche.
The maturity and profitability of the company would suggest to us that a public-market transaction can happen (unlike FriendFinder Networks which pulled their IPO again). The current pricing range is a bit aggressive given that mid-point is only a few dollars from our estimate of full intrinsic value, but in the end, the market will decide where the shares should trade.
At the same time, more established companies like WebMD and Monster Worldwide may get some additional credit for having the same or very similar opportunity to receive fees from vendors based on lead generation, opt-in and other “no lose” propositions.
Disclosure: The Research 2.0 model portfolio has a long position in Google. No positions for any of the other companies at the time of this writing.