QuinStreet’s (NASDAQ:QNST) Q3 Sales Beat Estimates, Stock Jumps 11.2%

This quarter, QuinStreet reported modest year-on-year revenue growth of 2.4% but beat Wall Street’s estimates by 2.1%. Company management is currently guiding for a 2.7% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 12.9% over the next 12 months, a deceleration versus the last two years. Still, this projection is healthy and suggests the market is baking in success for its products and services.

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Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D.

QuinStreet was roughly breakeven when averaging the last five years of quarterly operating profits, one of the worst outcomes in the business services sector.

Looking at the trend in its profitability, QuinStreet’s operating margin decreased by 1.4 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. QuinStreet’s performance was poor no matter how you look at it – it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, QuinStreet generated an operating margin profit margin of 1.7%, up 2.1 percentage points year on year. This increase was a welcome development and shows it was more efficient.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

QuinStreet’s EPS grew at a solid 9.9% compounded annual growth rate over the last five years. However, this performance was lower than its 16.9% annualized revenue growth, telling us the company became less profitable on a per-share basis as it expanded.

Diving into QuinStreet’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, QuinStreet’s operating margin expanded this quarter but declined by 1.4 percentage points over the last five years. Its share count also grew by 8.3%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For QuinStreet, its two-year annual EPS growth of 320% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q3, QuinStreet reported adjusted EPS of $0.22, in line with the same quarter last year. This print beat analysts’ estimates by 3.8%. Over the next 12 months, Wall Street expects QuinStreet’s full-year EPS of $0.88 to grow 28.3%.

It was encouraging to see QuinStreet beat analysts’ revenue expectations this quarter. We were also glad its EPS was in line with Wall Street’s estimates. Overall, this print had some key positives. The stock traded up 11.2% to $15.40 immediately after reporting.

So do we think QuinStreet is an attractive buy at the current price? We think that the latest quarter is just one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free for active Edge members.