UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001-34628

QuinStreet, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		77-0512121
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification No.)
950 Tower Lane, 6th Floor
Foster City, California		94404
(Address of principal executive offices)		(Zip Code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     Number of shares of common stock outstanding as of April 29, 2011: 46,931,647

 

 

QUINSTREET, INC.
INDEX

PART I. FINANCIAL INFORMATION			3
Item 1. Condensed Consolidated Financial Statements			3
Condensed Consolidated Balance Sheets at March 31, 2011 and June 30, 2010			3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2011 and 2010			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2011 and 2010			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			33
PART II. OTHER INFORMATION			35
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 3. Defaults Upon Senior Securities			52
Item 4. (Removed and Reserved)			52
Item 5. Other Information			52
Item 6. Exhibits			52
SIGNATURES			53
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUINSTREET, INC.

		March 31,				June 30,
		2011				2010
Assets
Current assets
Cash and cash equivalents		$	124,684			$	155,770
Marketable securities			25,420				—
Accounts receivable, net			52,704				51,466
Deferred tax assets			8,526				8,528
Prepaid expenses and other assets			7,775				3,123
Total current assets			219,109				218,887
Property and equipment, net			9,195				5,419
Goodwill			211,710				158,582
Other intangible assets, net			71,366				47,156
Deferred tax assets, noncurrent			3,972				3,972
Other assets, noncurrent			487				614
Total assets		$	515,839			$	434,630
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	23,535			$	16,776
Accrued liabilities			34,397				30,144
Deferred revenue			2,371				1,241
Debt			11,080				15,562
Total current liabilities			71,383				63,723
Deferred revenue, noncurrent			122				305
Debt, noncurrent			100,010				78,046
Other liabilities, noncurrent			3,457				2,534
Total liabilities			174,972				144,608
Commitments and contingencies (See Note 8)
Stockholders’ equity
Common stock: $0.001 par value; 100,000,000 shares authorized; 49,085,803 and 47,247,147 shares issued, and 46,908,351 and 45,069,695 shares outstanding at March 31, 2011 and June 30, 2010, respectively			49				47
Additional paid-in capital			247,692				217,581
Treasury stock, at cost (2,177,452 shares at March 31, 2011 and June 30, 2010)			(7,779	)			(7,779	)
Accumulated other comprehensive (loss) income			(27	)			9
Retained earnings			100,932				80,164
Total stockholders’ equity			340,867				290,022
Total liabilities and stockholders’ equity		$	515,839			$	434,630

See notes to condensed consolidated financial statements

QUINSTREET, INC.

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2011				2010				2011				2010
Net revenue		$	107,705			$	90,773			$	308,903			$	246,288
Cost of revenue (1)			78,578				66,268				222,869				177,872
Gross profit			29,127				24,505				86,034				68,416
Operating expenses: (1)
Product development			6,836				5,325				18,320				14,534
Sales and marketing			4,687				4,575				14,097				12,190
General and administrative			5,525				4,467				15,190				14,111
Operating income			12,079				10,138				38,427				27,581
Interest income			25				16				139				33
Interest expense			(1,091	)			(1,302	)			(3,108	)			(2,931	)
Other income (expense), net			66				(64	)			151				221
Income before income taxes			11,079				8,788				35,609				24,904
Provision for taxes			(4,740	)			(3,538	)			(14,841	)			(10,731	)
Net income		$	6,339			$	5,250			$	20,768			$	14,173
Net income attributable to common stockholders
Basic		$	6,339			$	3,714			$	20,768			$	6,371
Diluted		$	6,339			$	3,797			$	20,768			$	6,790
Net income per share attributable to common stockholders
Basic		$	0.14			$	0.12			$	0.45			$	0.33
Diluted		$	0.13			$	0.11			$	0.42			$	0.31
Weighted average shares used in computing net income per share attributable to common stockholders
Basic			46,792				30,795				45,910				19,156
Diluted			50,593				33,938				48,960				22,008

Cost of revenue		$	1,138			$	653			$	3,411			$	2,143
Product development			669				686				2,084				1,570
Sales and marketing			918				1,163				3,116				2,504
General and administrative			782				624				2,242				4,002

See notes to condensed consolidated financial statements

QUINSTREET, INC.

		Nine Months Ended
		March 31,
		2011				2010
Cash Flows from Operating Activities
Net income		$	20,768			$	14,173
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			20,252				13,678
Provision for sales returns and doubtful accounts receivable			(143	)			(234	)
Stock-based compensation			10,853				10,219
Excess tax benefits from stock-based compensation			(6,744	)			(1,821	)
Other non-cash adjustments, net			208				567
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable			(486	)			(11,261	)
Prepaid expenses and other assets			1,896				(5,251	)
Other assets, noncurrent			133				(145	)
Accounts payable			6,567				4,338
Accrued liabilities			3,403				5,635
Deferred revenue			947				(57	)
Other liabilities, noncurrent			923				122
Net cash provided by operating activities			58,577				29,963
Cash Flows from Investing Activities
Capital expenditures and other investing activities			(4,430	)			(2,092	)
Business acquisitions, net of notes payable and cash acquired			(91,723	)			(52,899	)
Internal software development costs			(1,322	)			(1,009	)
Purchases of marketable securities			(33,923	)			—
Proceeds from sales and maturities of marketable securities			8,484				—
Net cash used in investing activities			(122,914	)			(56,000	)
Cash Flows from Financing Activities
Net proceeds from issuance of common stock			(106	)			138,076
Proceeds from exercise of common stock options			12,580				1,550
Proceeds from bank debt			24,425				43,300
Principal payments on bank debt			(2,650	)			(2,250	)
Principal payments on acquisition-related notes payable			(7,725	)			(5,609	)
Excess tax benefits from stock-based compensation			6,744				1,821
Repurchases of common stock			—				(715	)
Net cash provided by financing activities			33,268				176,173
Effect of exchange rate changes on cash and cash equivalents			(17	)			—
Net (decrease) increase in cash and cash equivalents			(31,086	)			150,136
Cash and cash equivalents at beginning of period			155,770				25,182
Cash and cash equivalents at end of period		$	124,684			$	175,318
Supplemental Disclosure of Cash Flow Information
Cash paid for interest			2,836				1,888
Cash paid for taxes			13,017				15,404
Supplemental Disclosure of Noncash Investing and Financing Activities
Notes payable issued in connection with business acquisitions			3,217				10,750
Accrued stock issuance costs			—				1,273

See notes to condensed consolidated financial statements

QUINSTREET, INC.

(Unaudited)

1. The Company

     QuinStreet, Inc. (the “Company”) is an online vertical marketing and media company. The Company was incorporated in California on April 16, 1999 and reincorporated in Delaware on December 31, 2009. The Company provides vertically oriented customer acquisition programs for its clients. The Company also provides hosted solutions for direct selling companies. The corporate headquarters are located in Foster City, California, with offices in Arkansas, Connecticut, Florida, Massachusetts, Nevada, New Jersey, New York, North Carolina, Oklahoma, Oregon, India and the United Kingdom.

2. Summary of Significant Accounting Policies

Basis of Presentation

Principles of Consolidation

     The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

Unaudited Interim Financial Information

     The accompanying condensed consolidated financial statements and the notes to the condensed consolidated financial statements as of March 31, 2011 and for the three and nine months ended March 31, 2011 and 2010 are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010, as filed with the SEC on September 13, 2010. The condensed consolidated balance sheet as of June 30, 2010 included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes required by GAAP.

     The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for the fair statement of the Company’s condensed consolidated balance sheet at March 31, 2011, its condensed consolidated statements of operations for the three and nine months ended March 31, 2011 and 2010, and its condensed consolidated statements of cash flows for the nine months ended March 31, 2011 and 2010. The results of operations for the three and nine months ended March 31, 2011 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2011 or any other future period.

Use of Estimates

     The preparation of financial statements in conformity with GAAP requires management 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. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.

Revenue Recognition

     The Company derives its revenue from two sources: Direct Marketing Services (“DMS”) and Direct Selling Services (“DSS”). DMS revenue, which constituted 99.7% of net revenue for both the three and nine months ended March 31, 2011 and 99.7% and

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

99.4% of net revenue for the three and nine months ended March 31, 2010, respectively, is derived from fees which are earned through the delivery of qualified leads, clicks and, to a lesser extent, display advertisements (“impressions”). The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured. Delivery is deemed to have occurred at the time a qualified lead, click or impression is delivered to the client, provided that no significant obligations remain.

     On July 1, 2010, as required under GAAP, the Company adopted the amended accounting standard for multiple deliverable revenue arrangements which provides guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated. The adoption of this amended standard did not have a significant impact on the Company’s revenue recognition for multiple deliverable revenue arrangements.

     The guidance requires an entity to allocate revenue in an arrangement using the estimated selling price (“ESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) of selling price based on historical stand-alone sales or third-party evidence (“TPE”) of selling price. Due to the unique nature of some of its multiple deliverable revenue arrangements, the Company may not be able to establish selling prices based on historical stand-alone sales or third party evidence, therefore the Company may use its best estimate to establish selling prices for these arrangements under the new standard. The Company establishes best estimates within a range of selling prices considering multiple factors including, but not limited to, factors such as class of client, size of transaction, available media inventory, pricing strategies and market conditions. The Company believes the use of the best estimate of selling price allows revenue recognition in a manner consistent with the underlying economics of the transaction.

     From time to time, the Company may agree to credit a client for certain leads, clicks or impressions if they fail to meet the contractual or other guidelines of a particular client. The Company has established a sales reserve based on historical experience. To date, such credits have been immaterial and within management’s expectations.

     For a portion of its revenue, the Company has agreements with providers of online media or traffic (“Publishers”) used in the generation of leads and clicks. The Company receives a fee from its clients and pays a fee to Publishers as a portion of revenue generated or on a cost per lead, cost per click or cost per thousand impressions basis. The Company is the primary obligor in the transaction. As a result, the fees paid by the Company’s clients are recognized as revenue and the fees paid to its Publishers are included in cost of revenue.

     DSS revenue, which constituted 0.3% of net revenue for both the three and nine months ended March 31, 2011 and 0.3% and 0.6% for the three and nine months ended March 31, 2010, respectively, comprises (i) set-up and professional services fees and (ii) usage fees. Set-up and professional service fees that do not provide stand-alone value to a client are recognized over the contractual term of the agreement or the expected client relationship period, whichever is longer, effective when the application reaches the “go-live” date. The Company defines the “go-live” date as the date when the application enters into a production environment or all essential functionalities have been delivered. Usage fees are recognized on a monthly basis as earned.

     Deferred revenue is comprised of contractual billings in excess of recognized revenue and payments received in advance of revenue recognition.

Concentrations of Credit Risk

     Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and accounts receivable. The Company’s investment portfolio consists of liquid high-quality fixed income US government securities, time deposits with financial institutions and money market funds. Cash and time deposits are deposited with financial institutions that management believes are creditworthy. Historically, the Company has not experienced any losses of its deposits.

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

     The Company’s accounts receivable are derived from clients located principally in the United States. The Company performs ongoing credit evaluation of its clients, does not require collateral and maintains allowances for potential credit losses on client accounts when deemed necessary. To date, such losses have been within management’s expectations.

     One client accounted for 10% of net revenue for the nine months ended March 31, 2010. No client accounted for 10% or more of net revenue for any other period presented. No client accounted for 10% or more of net accounts receivable as of March 31, 2011 or June 30, 2010.

Fair Value of Financial Instruments

     The Company’s financial instruments consist principally of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, acquisition-related notes payable, a term loan and a revolving credit line. The fair value of the securities held as cash equivalents or marketable securities is determined based on quoted prices if an active market for identical assets exists. If quoted prices for identical assets are not available, the fair value is determined by using quoted prices for similar assets in active markets or observable inputs, such as interest rates. The recorded values of the Company’s accounts receivable and accounts payable approximate their current fair values due to the relatively short-term nature of these accounts. The fair value of acquisition-related notes payable approximates their recorded amounts at March 31, 2011 as the interest rates on similar financing arrangements available to the Company at March 31, 2011 approximates the interest rates implied when these acquisition-related notes payable were originally issued and recorded. The Company believes that the fair values of the term loan and revolving credit line, after consideration of nonperformance and credit risk, approximate their recorded amounts at March 31, 2011 as the interest rates on these instruments are variable and based on market interest rates.

Goodwill

     Goodwill is tested for impairment at the reporting unit level on an annual basis and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. 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 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.

     The Company has determined that DMS and DSS constitute two separate reporting units. The Company performs its annual goodwill impairment review during its fourth fiscal quarter. No impairment charges were recorded in the periods presented.

Long-Lived Assets

     The Company evaluates 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. The Company applies judgment when assessing the fair value of the assets based on the undiscounted future cash flows the assets are expected to generate and recognizes an impairment loss if estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, it reduces 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. No impairment charges were recorded in the periods presented.

Income Taxes

     The Company accounts for income taxes using an asset and liability approach to record deferred taxes. The Company’s deferred income tax assets represent temporary differences between the financial statement carrying amount and the tax basis of certain existing assets and liabilities that will result in deductible amounts in future years, including net operating loss carry forwards. Based on estimates, the carrying value of the Company’s net deferred tax assets assumes that it is more likely than not that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions. The Company’s judgments regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors.

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

     In December 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“2010 Tax Relief Act”) was signed into law. The 2010 Tax Relief Act, among other provisions, provides for the extension of certain tax cuts for two years, the retroactive reinstatement of the research and development credits, as well as certain depreciation benefits. The Company expects a favorable impact on the effective tax rate as a result of the extension of the research and development credits.

Stock-Based Compensation

     The Company measures and records the expense related to share-based transactions based on the fair value of stock-based payment awards, as determined on the date of grant. To determine the fair value of stock options, the Company has selected the Black-Scholes option pricing model. In applying the Black-Scholes option pricing model, the Company’s determination of fair value of the share-based payment award on the date of grant is affected by the Company’s estimated fair value of common stock for stock options granted prior to the Company’s initial public offering (“IPO”), as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of the stock options, the employees’ projected stock option exercise behaviors and projected pre-vesting employment terminations. The fair value of restricted stock units is determined based on the closing price of the Company’s common stock on the date of grant.

     For awards with graded vesting, the Company recognizes stock-based compensation expense over the requisite service period using the straight-line method, based on awards ultimately expected to vest. The Company estimates future forfeitures at the date of grant and revises the estimates, as necessary, in subsequent periods if actual forfeitures differ from those estimates.

     See Note 9 for further information.

Recent Accounting Pronouncements

     In October 2009, the FASB amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry-specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for multiple deliverable revenue arrangements to

	•		provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;
	•		require an entity to allocate revenue in an arrangement using the estimated selling price (“ESP”) of deliverables if a vendor does not have vendor-specific objective evidence (“VSOE”) of selling price or third-party evidence (“TPE”) of selling price;
	•		and eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.

     Both standards became effective for the Company on July 1, 2010. The adoption of the new standards did not have a material effect on the Company’s consolidated financial statements.

     In December 2010, the FASB issued an update to the accounting standard for business combinations. The revised guidance clarifies how to present pro forma information and mandates that all business combinations that occurred during the current reporting period should be reported as though the business combination had occurred as of the beginning of the comparative prior reporting period. The amendment is effective for annual reporting periods beginning on or after December 15, 2010, with early adoption permitted. The Company adopted the guidance effective in the second quarter of fiscal 2011. The adoption of the amended standard did not have a material effect on the Company’s consolidated financial statements.

3. Net Income Attributable to Common Stockholders and Net Income per Share

     Basic and diluted net income per share attributable to common stockholders is presented in conformity with the “two-class method” required for participating securities. In February 2010, all of the Company’s outstanding convertible preferred stock converted into common stock in connection with the IPO. Prior to the conversion, holders of Series A, Series B and Series C convertible preferred stock were each entitled to receive 8% per annum non-cumulative dividends, payable prior and in preference to any dividends on any other shares of the Company’s capital stock. No such dividends were paid.

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

     For periods prior to the conversion of the convertible preferred stock, net income per share information is computed using the two-class method. Under the two-class method, basic net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of period-to-date earnings that the preferred stockholders would have been entitled to receive pursuant to their dividend rights had this portion of net income been distributed. Diluted net income per share attributable to common stockholders is computed by using the weighted-average number of shares of common stock outstanding, including potential dilutive shares of common stock assuming the dilutive effect of outstanding stock options and restricted stock units using the treasury stock method.

     The following table presents the calculation of basic and diluted net income per share attributable to common stockholders:

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2011				2010(2)				2011				2010(2)
						(In thousands, except per share data)
Numerator:
Basic:
Net income		$	6,339			$	5,250			$	20,768			$	14,173
8% non-cumulative dividends on convertible preferred stock			—				(373	)			—				(2,018	)
Undistributed earnings allocated to convertible preferred stock			—				(1,163	)			—				(5,784	)
Net income attributable to common stockholders — basic		$	6,339			$	3,714			$	20,768			$	6,371
Diluted:
Net income attributable to common stockholders — basic		$	6,339			$	3,714			$	20,768			$	6,371
Undistributed earnings re-allocated to common stock			—				83				—				419
Net income attributable to common stockholders — diluted		$	6,339			$	3,797			$	20,768			$	6,790
Denominator:
Basic:
Weighted average shares of common stock used in computing basic net income per share			46,792				30,795				45,910				19,156
Diluted:
Weighted average shares of common stock used in computing basic net income per share			46,792				30,795				45,910				19,156
Weighted average effect of dilutive securities:
Stock options			3,691				3,143				2,990				2,852
Restricted stock units			110				—				60				—
Weighted average shares of common stock used in computing diluted net income per share			50,593				33,938				48,960				22,008
Net income per share attributable to common stockholders
Basic		$	0.14			$	0.12			$	0.45			$	0.33
Diluted		$	0.13			$	0.11			$	0.42			$	0.31
Securities excluded from weighted average shares used in computing diluted net income per share because the effect would have been anti-dilutive: (1)			1,315				2,495				2,860				2,801

4. Marketable Securities and Fair Value Measurements

Marketable Securities

     All liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Investments with maturities greater than three months at the date of purchase are classified as marketable securities. The Company’s marketable

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the available-for-sale designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a component of stockholders’ equity. The cost of securities sold is based upon the specific identification method.

     The following table summarizes unrealized gains and losses related to available-for-sale securities held by the Company as of March 31, 2011 and June 30, 2010:

		As of March 31, 2011
		Gross				Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
US government securities		$	22,158			$	—			$	—			$	22,158
Time deposits			20,838				—				19				20,819
Money market funds			522				—				—				522
		$	43,518			$	—			$	19			$	43,499

		As of June 30, 2010
		Gross				Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Money market funds		$	133,128			$	—			$	—			$	133,128
		$	133,128			$	—			$	—			$	133,128

     As of March 31, 2011 and June 30, 2010, the Company did not hold securities that had maturity dates greater than one year.

Fair Value Measurements

     Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (the “exit price”) in an orderly transaction between market participants at the measurement date. A hierarchy for inputs used in measuring fair value has been defined to minimize the use of unobservable inputs by requiring the use of observable market data when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on active market data. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.

     The fair value hierarchy prioritizes the inputs into three broad levels:

     The securities held by the Company as of March 31, 2011 and June 30, 2010 were categorized as follows in the fair value hierarchy:

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

		Fair Value Measurements at Reporting Date Using
						Quoted Prices in				Significant Other
						Active Markets				Observable
						for Identical Assets				Inputs
		Total				(Level 1)				(Level 2)
Assets:
US government securities		$	22,158			$	22,158			$	—
Time deposits			20,819				—				20,819
Money market funds			522				522				—
Total at March 31, 2011		$	43,499			$	22,680			$	20,819
Assets:
Money market funds		$	133,128			$	133,128			$	—
Total at June 30, 2010		$	133,128			$	133,128			$	—

5. Acquisitions

Acquisitions in Fiscal Year 2011

Acquisition of CarInsurance.com

     On November 5, 2010, the Company acquired 100% of the outstanding shares of Car Insurance.com, Inc., or CarInsurance.com, a Florida-based online insurance business, and certain of its affiliated companies, in exchange for $49,655 in cash paid upon closing of the acquisition. The results of CarInsurance.com’s operations have been included in the consolidated financial statements since the acquisition date. The Company acquired CarInsurance.com for its capacity to generate online visitors in the financial services market. The total purchase price recorded was as follows:

		Amount
Cash		$	49,655
		$	49,655

     The acquisition was accounted for as a purchase business combination. The Company allocated the purchase price to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. The goodwill is deductible for tax purposes. The following table summarizes the preliminary allocation of the purchase price and the estimated useful lives of the identifiable intangible assets acquired as of the date of the acquisition:

		Estimated				Estimated
		Fair Value				Useful Life
Tangible assets acquired		$	661
Liabilities assumed			(807	)
Advertiser relationships			260			6-7 years
Content			16,130			7 years
Website/trade/domain names			4,350			10 years
Acquired technology and others			3,000			2-4 years
Noncompete agreements			40			4 years
Goodwill			26,021			Indefinite
		$	49,655

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

Acquisition of Insurance.com

     On July 26, 2010, the Company acquired the website business of Insurance.com, from Insurance.com Group, Inc., an Ohio-based online insurance business, in exchange for $33,000 in cash paid upon closing of the acquisition and the issuance of a $2,640 non-interest-bearing, unsecured promissory note payable in one installment on the second anniversary of the acquisition date. The results of Insurance.com’s operations have been included in the consolidated financial statements since the acquisition date. The Company acquired Insurance.com for its capacity to generate online visitors in the financial services market. The total purchase price recorded was as follows:

		Amount
Cash		$	33,000
Fair value of debt (net of $157 of imputed interest)			2,483
		$	35,483

     The acquisition was accounted for as a purchase business combination. The Company allocated the purchase price to tangible assets and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. The goodwill is deductible for tax purposes. The following table summarizes the preliminary allocation of the purchase price and the estimated useful lives of the identifiable intangible assets acquired as of the date of the acquisition:

		Estimated				Estimated
		Fair Value				Useful Life
Tangible assets acquired		$	1,204
Advertiser relationships			2,120			7 years
Content			4,290			4 years
Website/trade/domain names			2,940			10 years
Acquired technology and others			5,530			2-4 years
Noncompete agreements			60			5 years
Goodwill			19,339			Indefinite
		$	35,483

Other Acquisitions in Fiscal Year 2011

     During the nine months ended March 31, 2011, in addition to the acquisition of CarInsurance.com and Insurance.com, the Company acquired operations from 12 other online publishing businesses in exchange for $4,598 in cash paid upon closing of the acquisitions and $774 in non-interest-bearing, unsecured promissory notes payable over a period of time ranging from one to three years. The Company also recorded $4,500 in earn-out payments related to a prior period acquisition as addition to goodwill. The aggregate purchase price recorded was as follows:

		Amount
Cash		$	9,098
Fair value of debt (net of $40 of imputed interest)			734
		$	9,832

     The acquisitions were accounted for as purchase business combinations. In each of the acquisitions, the Company allocated the purchase price to identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. Goodwill deductible for tax purposes is $7,768. The following table summarizes the preliminary allocation of the purchase prices of these other acquisitions during the nine months ended March 31, 2011 and the estimated useful lives of the identifiable intangible assets acquired as of the respective dates of these acquisitions:

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

		Estimated				Estimated
		Fair Value				Useful Life
Customer/publisher relationships		$	221			5 years
Content			1,252			3-5 years
Website/trade/domain names			518			4-5 years
Noncompete agreements			73			1-3 years
Goodwill			7,768			Indefinite
		$	9,832

Acquisitions in Fiscal Year 2010

Acquisition of Internet.com

     On November 30, 2009, the Company acquired the website business of Internet.com, a division of WebMediaBrands, Inc., a New York-based Internet media company, in exchange for $16,000 in cash paid upon closing of the acquisition and the issuance of a $2,000 non-interest-bearing, unsecured promissory note payable in one installment. The Company received $357 in a working capital adjustment following the closing of the acquisition. The adjustment reduced the face value of the note payable by $300 and the cash paid by $57. The results of Internet.com’s operations have been included in the consolidated financial statements since the acquisition date. The Company acquired Internet.com to broaden its media access and client base in the business-to-business market. The total purchase price recorded was as follows:

		Amount
Cash		$	15,943
Fair value of debt (net of $46 of imputed interest)			1,654
		$	17,597

     The acquisition was accounted for as a purchase business combination. The Company allocated the purchase price to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. The goodwill is deductible for tax purposes. The following table summarizes the allocation of the purchase price and the estimated useful lives of the identifiable intangible assets acquired as of the date of the acquisition:

		Estimated				Estimated
		Fair Value				Useful Life
Tangible assets acquired		$	3,136
Liabilities assumed			(503	)
Advertiser relationships			1,300			5 - 7 years
Content			2,400			4 years
Website/trade/domain names			2,500			5 years
Noncompete agreements			200			2 years
Goodwill			8,564			Indefinite
		$	17,597

Acquisition of Insure.com

     On October 8, 2009, the Company acquired the website business Insure.com, from Life Quotes, Inc., an Illinois-based online marketing company, in exchange for $15,000 in cash paid upon closing of the acquisition and the issuance of a $1,000 non-interest-bearing, unsecured promissory note payable in one installment. The results of Insure.com’s acquired operations have been included in the consolidated financial statements since the acquisition date. The Company acquired Insure.com for its capacity to generate online visitors in the financial services market. The total purchase price recorded was as follows:

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

		Amount
Cash		$	15,000
Fair value of debt (net of $24 of imputed interest)			976
		$	15,976

     The acquisition was accounted for as a purchase business combination. The Company allocated the purchase price to identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. The goodwill is deductible for tax purposes. The following table summarizes the allocation of the purchase price and the estimated useful lives of the identifiable intangible assets acquired as of the date of the acquisition:

		Estimated				Estimated
		Fair Value				Useful Life
Advertiser relationships		$	900			3 years
Content			3,900			8 years
Website/trade/domain names			1,250			8 years
Goodwill			9,926			Indefinite
		$	15,976

Acquisition of Payler Corp. D/B/A HSH Associates Financial Publishers (“HSH”)

     On September 14, 2009, the Company acquired 100% of the outstanding shares of HSH, a New Jersey-based online marketing business, in exchange for $6,000 in cash paid upon closing of the acquisition and the issuance of $4,000 in non-interest-bearing, unsecured promissory notes payable in five installments over five years. The results of HSH’s acquired operations have been included in the consolidated financial statements since the acquisition date. The Company acquired HSH for its capacity to generate online visitors in the financial services market. The total purchase price recorded was as follows:

		Amount
Cash		$	6,000
Fair value of debt (net of $241 of imputed interest)			3,759
		$	9,759

     The acquisition was accounted for as a purchase business combination. The Company allocated the purchase price to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. The goodwill is not deductible for tax purposes. The following table summarizes the allocation of the purchase price and the estimated useful lives of the identifiable intangible assets acquired as of the date of the acquisition:

		Estimated				Estimated
		Fair Value				Useful Life
Tangible assets acquired		$	50
Liabilities assumed			(1,695	)
Advertiser relationships			1,100			3 years
Content			1,400			6 years
Website/trade/domain names			800			6 years
Goodwill			8,104			Indefinite
		$	9,759

Other Acquisitions in Fiscal Year 2010

     During fiscal year 2010, in addition to the acquisition of Internet.com, Insure.com and HSH, the Company acquired operations from 30 other online publishing businesses in exchange for $29,882 in cash paid upon closing of the acquisitions and $8,643 in non-

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

interest-bearing, unsecured promissory notes payable over a period of time ranging from one to five years. The aggregate purchase price recorded was as follows:

		Amount
Cash		$	29,882
Fair value of debt (net of $531 of imputed interest)			8,112
		$	37,994

     The acquisitions were accounted for as purchase business combinations. In each of the acquisitions, the Company allocated the purchase price to tangible assets acquired and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. Goodwill deductible for tax purposes is $24,299. The following table summarizes the allocation of the purchase prices of these other acquisitions and the estimated useful lives of the identifiable intangible assets acquired as of the respective dates of these acquisitions:

		Estimated				Estimated
		Fair Value				Useful Life
Tangible assets acquired		$	45
Customer/publisher relationships			1,150			1-7 years
Content			8,384			1-6 years
Website/trade/domain names			2,748			5 years
Acquired technology			199			3 years
Noncompete agreements			224			2-3 years
Goodwill			25,244			Indefinite
		$	37,994

Pro Forma Financial Information

     The pro forma financial information in the table below summarizes the combined results of operations for the Company and other companies that were acquired since the beginning of fiscal year 2011. The pro forma financial information includes the business combination accounting effects resulting from these acquisitions including amortization charges from acquired intangible assets and the related tax effects as though the aforementioned companies were combined as of the beginning of fiscal year 2010. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of fiscal year 2010.

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2011				2010				2011				2010
Net revenue		$	107,927			$	91,826			$	310,659			$	251,135
Net income			7,144				1,165				21,535				9,770
Basic net income per share		$	0.15			$	0.02			$	0.47			$	0.21
Diluted net income per share		$	0.14			$	0.02			$	0.44			$	0.20

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

6. Intangible Assets, Net and Goodwill

     Intangible assets, net balances, excluding goodwill, consisted of the following:

		March 31, 2011												June 30, 2010
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
Customer/publisher/advertiser relationships		$	29,257			$	(15,565	)		$	13,692			$	26,656			$	(11,455	)		$	15,201
Content			56,641				(22,841	)			33,800				34,969				(16,454	)			18,515
Website/trade/domain names			23,510				(7,676	)			15,834				15,701				(5,198	)			10,503
Acquired technology and others			20,175				(12,135	)			8,040				11,477				(8,540	)			2,937
		$	129,583			$	(58,217	)		$	71,366			$	88,803			$	(41,647	)		$	47,156

     Amortization of intangible assets was $6,124 and $16,575 in the three and nine months ended March 31, 2011, respectively, and $4,110 and $11,070 in the three and nine months ended March 31, 2010, respectively.

     Future amortization expense for the Company’s acquisition-related intangible assets as of March 31, 2011 was as follows:

Year Ending June 30,
2011 (remaining three months)		$	5,589
2012			20,899
2013			15,313
2014			10,622
2015			6,731
2016 and thereafter			12,212
		$	71,366

     The change in the carrying amount of goodwill for the nine months ended March 31, 2011 was as follows:

		DMS				DSS				Total
Balance at June 30, 2010		$	157,351			$	1,231			$	158,582
Additions			53,128				—				53,128
Balance at March 31, 2011		$	210,479			$	1,231			$	211,710

     In the nine months ended March 31, 2011, the additions to goodwill relate to the Company’s acquisitions as described in Note 5, and primarily reflect the value of the synergies expected to be generated from combining the Company’s technology and know-how with the acquired businesses’ access to online visitors.

7. Debt

Promissory Notes

     During the nine months ended March 31, 2011 and 2010, the Company issued total promissory notes for the acquisition of businesses of $3,217 and $10,750, respectively, net of imputed interest amounts of $197 and $606, respectively. All of the promissory notes are non-interest-bearing and unsecured. For these notes, interest was imputed such that the notes carry an interest rate commensurate with that available to the Company in the market for similar debt instruments. The Company recorded accretion of promissory notes of $133 and $436 as interest expense for the three and nine months ended March 31, 2011, respectively, and $304 and $946 for the three and nine months ended March 31, 2010, respectively.

Credit Facility

     In January 2010, the Company replaced its existing credit facility with a new credit facility with a total borrowing capacity of $175,000. The new credit facility consisted of a $35,000 four-year term loan, with principal amortization of 10%, 15%, 35% and 40% annually, and a $140,000 four-year revolving credit line with an option to increase the revolving credit line by an additional $50,000. In February 2011, the Company exercised this option, thereby increasing the total capacity of the credit facility to $225,000.

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

     Borrowings under the credit facility are collateralized by the Company’s assets and interest is payable quarterly at specified margins above either LIBOR or the Prime Rate. The interest rate varies dependent upon the ratio of funded debt to adjusted EBITDA and ranges from LIBOR + 2.125% to 2.875% or Prime + 1.00% to 1.50% for the revolving credit line and from LIBOR + 2.50% to 3.25% or Prime + 1.00% to 1.50% for the term loan. Adjusted EBITDA is defined as net income less provision for taxes, depreciation expense, amortization expense, stock-based compensation expense, interest and other income (expense), net and acquisition costs for business combinations. The revolving credit line requires a facility fee of 0.375% of the revolving credit line capacity. The credit facility expires in January 2014. The credit facility agreement restricts the Company’s ability to raise additional debt financing and pay dividends. In addition, the Company is required to maintain financial ratios computed as follows:

     1. Quick ratio: ratio of (i) the sum of unrestricted cash and cash equivalents and trade receivables less than 90 days from invoice date to (ii) current liabilities and face amount of any letters of credit less the current portion of deferred revenue.

     2. Fixed charge coverage: ratio of (i) trailing twelve months of adjusted EBITDA to (ii) the sum of capital expenditures, net cash interest expense, cash taxes, cash dividends and trailing twelve months payments of indebtedness. Payment of unsecured indebtedness is excluded to the degree that sufficient unused revolving credit line exists such that the relevant debt payment could be made from the credit facility.

     3. Funded debt to adjusted EBITDA: ratio of (i) the sum of all obligations owed to lending institutions, the face amount of any letters of credit, indebtedness owed in connection with acquisition-related notes and indebtedness owed in connection with capital lease obligations to (ii) trailing twelve months of adjusted EBITDA.

     Under the terms of the credit facility the Company must maintain a minimum quick ratio of 1.15:1.00, a minimum fixed charge coverage ratio of 1.15:1.00 and a maximum funded debt to adjusted EBITDA ratio of 2.50:1.00, and the terms also require the Company to comply with other nonfinancial covenants. The Company was in compliance with the covenants as of March 31, 2011 and June 30, 2010.

     Upfront arrangement fees incurred in connection with the credit facility are deferred and amortized over the remaining term of the arrangement as interest expense. As of March 31, 2011 and June 30, 2010, $31,500 and $34,150, respectively, was outstanding under the term loan. Under the revolving credit line, $66,553 and $41,754 was outstanding as of March 31, 2011 and June 30, 2010, respectively.

Debt Maturities

     The maturities of debt as of March 31, 2011 were as follows:

		Promissory				Credit
Year Ending June 30,		Notes				Facility
2011 (remaining three months)		$	3,992			$	1,312
2012			3,527				7,000
2013			4,924				12,688
2014			1,702				77,053
2015			560				—
2016			50				—
			14,755				98,053
Less: imputed interest and unamortized discounts			(359	)			(1,359	)
Less: current portion			(6,318	)			(4,762	)
Noncurrent portion of debt		$	8,078			$	91,932

Letters of Credit

     The Company has a $350 letter of credit agreement with a financial institution that is used as collateral for fidelity bonds placed with an insurance company and a $500 letter of credit agreement with a financial institution that is used as collateral for the

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

Company’s corporate headquarters’ operating lease. The letters of credit automatically renew annually without amendment unless cancelled by the financial institutions within 30 days of the annual expiration date.

8. Commitments and Contingencies

Leases

     The Company leases office space and equipment under non-cancelable operating leases with various expiration dates through 2018. Rent expense for the three and nine months ended March 31, 2011 was $785 and $2,472, respectively, and $787 and $2,457 for the three and nine months ended March 31, 2010, respectively. The Company recognizes rent expense on a straight-line basis over the lease period and accrues for rent expense incurred but not paid.

     Future annual minimum lease payments under noncancelable operating leases as of March 31, 2011 were as follows:

		Operating
Year Ending June 30,		Leases
2011 (remaining three months)		$	283
2012			1,614
2013			2,624
2014			2,805
2015			2,822
2016			2,837
Thereafter			5,875
		$	18,860

     The lease for the Company’s previous corporate headquarters located at 1051 Hillsdale Boulevard, Foster City, California expired in October 2010.

     In February 2010, the Company entered into a new lease agreement for office space located at 950 Tower Lane, Foster City, California. The term of the lease began on November 1, 2010 and expires on October 31, 2018. The monthly base rent is abated for the first 12 calendar months under the lease. Thereafter, the monthly base rent will be $118 through the 24th calendar month of the term of the lease, after which the monthly base rent will increase to $182 for the subsequent 12 months. In the following years the monthly base rent will increase approximately 3% after each 12-month anniversary during the term of the lease, including any extensions under the Company’s options to extend.

     The Company has two options to extend the term of the lease for one additional year for each option following the expiration date of the lease or renewal term, as applicable.

     Concurrently with the execution of the lease, the Company delivered to the landlord, as collateral for the full performance by the Company of all of its obligations under the lease, and for all losses and damages the landlord may suffer as a result of any default by the Company under the lease, a letter of credit in the face amount of $500.

Guarantor Arrangements

     The Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. The term of the indemnification period is for the officer or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company had no liabilities recorded for these agreements as of March 31, 2011 and June 30, 2010.

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

     In the ordinary course of its business, the Company enters into standard indemnification provisions in its agreements with its clients. Pursuant to these provisions, the Company indemnifies its clients for losses suffered or incurred in connection with third-party claims that a Company product infringed upon any United States patent, copyright or other intellectual property rights. Where applicable, the Company generally limits such infringement indemnities to those claims directed solely to its products and not in combination with other software or products. With respect to its DSS products, the Company also generally reserves the right to resolve such claims by designing a non-infringing alternative or by obtaining a license on reasonable terms, and failing that, to terminate its relationship with the client. Subject to these limitations, the term of such indemnity provisions is generally coterminous with the corresponding agreements.

     The potential amount of future payments to defend lawsuits or settle indemnified claims under these indemnification provisions is unlimited; however, the Company believes the estimated fair value of these indemnity provisions is minimal, and accordingly, the Company had no liabilities recorded for these agreements as of March 31, 2011 and June 30, 2010.

Litigation

     On September 8, 2010, a patent infringement lawsuit was filed against the Company by LendingTree, LLC (“LendingTree”) in the United States District Court for the Western District of North Carolina, seeking a judgment that the Company has infringed a certain patent held by LendingTree, an injunctive order against the alleged infringing activities and an award for damages. On September 24, 2010, LendingTree filed a first amended complaint adding an additional defendant. If an injunction is granted, it could force the Company to stop or alter certain of its business activities, such as its lead generation in certain client verticals. While the Company intends to vigorously defend its position, neither the outcome of the litigation nor the amount and range of potential damages or exposure associated with the litigation can be assessed with certainty.

9. Stock Benefit Plans

Stock Incentive Plans

     In November 2009, the Company’s board of directors adopted the 2010 Equity Incentive Plan (the “2010 Incentive Plan”) and the Company’s stockholders approved the 2010 Incentive Plan in January 2010. The 2010 Incentive Plan became effective upon the completion of the IPO of the Company’s common stock in February 2010. Awards granted after January 2008 but before the adoption of the 2010 Incentive Plan continue to be governed by the terms of the 2008 Equity Incentive Plan (the “2008 Plan”). All outstanding stock awards granted before January 2008 continue to be governed by the terms of the Company’s amended and restated 1999 Equity Incentive Plan (the “1999 Plan”).

     The 2010 Incentive Plan provides for the grant of incentive stock options (“ISOs”), nonstatutory stock options (“NQSOs”), restricted stock, restricted stock units, stock appreciation rights, performance-based stock awards and other forms of equity compensation, as well as for the grant of performance cash awards. The Company may issue ISOs only to its employees. NQSOs and all other awards may be granted to employees, including officers, nonemployee directors and consultants.

     To date, the Company has issued only ISOs, NQSOs and restricted stock units under the 2010 Incentive Plan. ISOs and NQSOs are generally granted to employees with an exercise price equal to the market price of the Company’s common stock at the date of grant. Stock options granted to employees generally have a contractual term of seven years and vest over four years of continuous service, with 25 percent of the stock options vesting on the one-year anniversary of the date of grant and the remaining 75 percent vesting in equal monthly installments over the three year period thereafter. Restricted stock units granted to employees generally vest over five years of continuous service, with 15 percent of the restricted stock units vesting on the one-year anniversary of the date of grant, 60 percent vesting in equal quarterly installments over the following three years and the remaining 25 percent vesting in equal quarterly installments over the last year of the vesting period.

     An aggregate of 2,535,761 shares of the Company’s common stock were reserved for issuance under the 2010 Incentive Plan as of March 31, 2011, and this amount will be increased by any outstanding stock awards that expire or terminate for any reason prior to their exercise or settlement. The number of shares of the Company’s common stock reserved for issuance may be increased annually through July 1, 2019 by up to five percent of the total number of shares of the Company’s common stock outstanding on the last day of the preceding fiscal year. The maximum number of shares that may be issued under the 2010 Incentive Plan is 30,000,000. As of March 31, 2011, 2,011,650 shares were available for issuance under the 2010 Incentive Plan.

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

     In November 2009, the Company’s board of directors adopted the 2010 Non-Employee Directors’ Stock Award Plan (the “Directors’ Plan”) and the stockholders approved the Directors’ Plan in January 2010. The Directors’ Plan became effective upon the completion of the Company’s IPO. The Directors’ Plan provides for the automatic grant of NQSOs to non-employee directors and also provides for the discretionary grant of restricted stock units. Stock options granted to new non-employee directors vest in equal monthly installments over four years; annual grants to existing directors vest in equal monthly installments over one year.

     An aggregate of 500,000 shares of the Company’s common stock were reserved for issuance under the Directors’ Plan as of March 31, 2011. This amount may be increased annually, by the sum of 200,000 shares and the aggregate number of shares of the Company’s common stock subject to awards granted under the Directors’ Plan during the immediately preceding fiscal year. As of March 31, 2011, 380,000 shares were available for issuance under the Directors’ Plan.

Stock-Based Compensation

     The Company estimates the fair value of stock options at the date of grant using the Black-Scholes option-pricing model. Options are granted with an exercise price equal to the fair value of the common stock at the date of grant. The weighted average Black-Scholes model assumptions and the weighted average grant date fair value of employee stock options for the three and nine months ended March 31, 2011 and 2010 were as follows:

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2011				2010				2011				2010
Expected term (in years)			4.6				4.6				4.6				4.6
Expected volatility			54	%			56	%			54	%			67	%
Expected dividend yield			0.0	%			0.0	%			0.0	%			0.0	%
Risk-free interest rate			2.1	%			2.4	%			1.7	%			2.4	%
Grant date fair value		$	10.48			$	9.18			$	7.81			$	9.52

     The fair value of restricted stock units is determined based on the closing price of the Company’s common stock on the grant date.

     Compensation expense is amortized net of estimated forfeitures on a straight-line basis over the requisite service period of the stock-based compensation awards.

10. Stockholders’ Equity

     The following table sets forth the components of comprehensive income for the three and nine months ended March 31, 2011 and 2010:

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2011				2010				2011				2010
Net income		$	6,339			$	5,250			$	20,768			$	14,173
Other comprehensive income (loss)
Unrealized loss on investments			(6	)			—				(19	)			—
Foreign currency translation adjustment			7				8				(17	)			—
Comprehensive income		$	6,340			$	5,258			$	20,732			$	14,173

11. Segment Information

     Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its chief executive officer. The Company’s chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about operating segments, including net sales and operating income before depreciation, amortization and stock-based compensation expense.

QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(In thousands, except share and per share data)
(Unaudited)

     The Company determined its operating segments to be DMS, which derives revenue from fees earned through the delivery of qualified leads, clicks and, to a lesser extent, impressions, and DSS, which derives revenue from the sale of direct selling services through a hosted solution. The Company’s reportable operating segments consist of DMS and DSS. The accounting policies of the two reportable operating segments are the same as those described in Note 2.

     The Company evaluates the performance of its operating segments based on net sales and operating income before depreciation, amortization and stock-based compensation expense.

     The Company does not allocate most of its assets, as well as its depreciation and amortization expense, stock-based compensation expense, interest income, interest expense and income tax expense by segment. Accordingly, the Company does not report such information.

     Summarized information by segment was as follows:

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2011				2010				2011				2010
Net revenue by segment:
DMS		$	107,344			$	90,511			$	307,878			$	244,841
DSS			361				262				1,025				1,447
Total net revenue			107,705				90,773				308,903				246,288
Segment operating income before depreciation, amortization, and stock-based compensation expense:
DMS			22,987				18,266				68,898				50,672
DSS			231				73				634				806
Total segment operating income before depreciation, amortization, and stock-based compensation expense			23,218				18,339				69,532				51,478
Depreciation and amortization			(7,632	)			(5,075	)			(20,252	)			(13,678	)
Stock-based compensation expense			(3,507	)			(3,126	)			(10,853	)			(10,219	)
Total operating income		$	12,079			$	10,138			$	38,427			$	27,581

The following tables set forth net revenue and long-lived assets by geographic area:

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2011				2010				2011				2010
Net revenue:
United States		$	107,390			$	90,452			$	307,883			$	245,310
International			315				321				1,020				978
Total net revenue		$	107,705			$	90,773			$	308,903			$	246,288

		March 31,				June 30,
		2011				2010
Long-lived assets:
United States		$	8,965			$	5,193
International			230				226
Total long-lived assets		$	9,195			$	5,419

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     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, 2010, as filed with the Securities and Exchange Commission (“SEC”) on September 13, 2010.

     This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or 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,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on 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, 2010, as filed with the SEC on September 13, 2010. 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

     Quinstreet is a leader in vertical marketing and media online. We have built a strong set of capabilities to engage Internet visitors with targeted media and to connect our marketing clients with their potential customers online. We focus on serving clients in large, information-intensive industry verticals where relevant, targeted media and offerings help visitors make informed choices, find the products that match their needs, and thus become qualified customer prospects for our clients.

     We deliver cost-effective marketing results to our clients most typically in the form of a qualified lead or inquiry, or in the form of a click. These leads or clicks 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 leads or clicks as defined by our agreements with them. Because we bear the costs of media, our programs must deliver value to our clients and provide for a media yield, or our ability to generate an acceptable margin on our media costs, that provides a sound financial outcome for us. Our general process is:

	•		We own or access targeted media;
	•		We run advertisements or other forms of marketing messages and programs in that media to create visitor responses or clicks through to client offerings;
	•		We match these responses or clicks to client offerings that meet visitor interests or needs, converting visitors into qualified leads or clicks; and
	•		We optimize client matches and media yield such that we achieve desired results for clients and 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 profits, but rather to achieve target levels of profitability while investing in various growth initiatives, as we believe we are in the early stages of a large, long-term market.

     Our Direct Marketing Services, or DMS, business accounted for 99.7% of our net revenue in both the three and nine months ended March 31, 2011, and 99.7% and 99.4% of our net revenue in the three and nine months ended March 31, 2010, respectively. Our DMS business derives net revenue from fees earned through the delivery of qualified leads and clicks and, to a lesser extent, from fees for display advertisements, or impressions. Through a vertical focus, targeted media presence and our technology platform, we are able to deliver targeted, measurable marketing results to our clients.

     Our two largest client verticals are financial services and education. Our financial services client vertical represented 45% and 46% of net revenue in the three and nine months ended March 31, 2011, respectively, and 46% and 43% of net revenue in the three and nine months ended March 31, 2010, respectively. Our education client vertical represented 45% and 43% of net revenue in the three and nine months ended March 31, 2011, respectively, and 42% and 47% of net revenue in the three and nine months ended March 31, 2010, respectively. Other DMS client verticals, consisting primarily of home services, business-to-business, or B2B, and medical, represented 10% and 11% of net revenue in the three and nine months ended March 31, 2011, respectively, and 12% and 9% of net revenue in the three and nine months ended March 31, 2010, respectively.

     In addition, we derived 0.3% of our net revenue in both the three and nine months ended March 31, 2011, and 0.3% and 0.6% of our net revenue in the three and nine months ended March 31, 2010, respectively, from the provision of a hosted solution and related services for clients in the direct selling industry, also referred to as our Direct Selling Services, or DSS, business.

     We generated substantially all of our revenue from sales to clients in the United States.

     One of our largest clients retained an advertising agency and reduced its purchases of leads from us beginning November 2009. This client accounted for 10% of our net revenue in the nine months ended March 31, 2010. In the three and nine months ended March 31, 2011 and three months ended March 31, 2010, this client comprised less than 10% of our net revenue.

Trends Affecting our Business

Client Verticals

     To date, we have generated the majority of our revenue from clients in our financial services and education client verticals. We expect that a majority of our revenue in the near term will be generated from clients in our financial services and education client verticals. Marketing budgets for clients in our education client vertical are affected by a number of factors, including the availability of student financial aid, the regulation of for-profit educational institutions and economic conditions. In addition, the education and financial services industries are highly regulated and changes in regulations or government actions may affect our clients’ businesses and marketing practices.

Acquisitions

Acquisitions in Fiscal Year 2011

     In November 2010, we acquired 100% of the outstanding shares of Car Insurance.com, Inc., or CarInsurance.com, a Florida-based online insurance business, and certain of its affiliated companies, in exchange for $49.7 million in cash, for its capacity to generate online visitors in the financial services market. In July 2010, we acquired the website business Insurance.com from Insurance.com Group, Inc., an Ohio-based online insurance business, in exchange for $33.0 million in cash and the issuance of a $2.6 million non-interest-bearing, unsecured promissory note, for its capacity to generate online visitors in the financial services market. During the nine months ended March 31, 2011, in addition to the acquisitions of CarInsurance.com and Insurance.com, we acquired 12 other online publishing businesses.

Acquisitions in Fiscal Year 2010

     In November 2009, we acquired the website business Internet.com, a division of WebMediaBrands, Inc., a New York-based Internet media company, in exchange for $15.9 million in cash and the issuance of a $1.7 million non-interest-bearing, unsecured promissory note, to broaden our media access and client base in the B2B market. In October 2009, we acquired the website business Insure.com from Life Quotes, Inc., an Illinois-based online insurance quote service and brokerage business, in exchange for $15.0 million in cash and the issuance of a $1.0 million non-interest-bearing, unsecured promissory note, for its capacity to generate online

visitors in the financial services market. During fiscal year 2010, in addition to the acquisitions of Internet.com and Insure.com, we acquired 31 other online publishing businesses.

     Our acquisition strategy may result in significant fluctuations in our available working capital from period to period and over the years. We may use cash, stock or promissory notes to acquire various businesses or technologies, and we cannot accurately predict the timing of those acquisitions or the impact on our cash flows and balance sheet. Large acquisitions or multiple acquisitions within a particular period may significantly affect our financial results for that period. We may utilize debt financing to make acquisitions, which could give rise to higher interest expense and more restrictive operating covenants. We may also utilize our stock as consideration, which could result in substantial dilution.

Development and Acquisition of Targeted Media

     One of the primary challenges of our business is finding or creating media that is targeted enough to attract prospects economically for our clients and at costs that work for our business model. In order to continue to grow our business, we must be able to continue to find or develop quality targeted media on a cost-effective basis. Our inability to find or develop quality targeted media could impair our growth or adversely affect our financial performance.

Seasonality

     Our results are subject to significant fluctuation as a result of seasonality. In particular, our quarters ending December 31 (our second fiscal quarter) typically demonstrate seasonal weakness. In our second fiscal quarters, there is lower availability of lead supply from some forms of media during the holiday period on a cost effective basis and some of our clients request fewer leads due to holiday staffing. In our quarters ending March 31 (our third fiscal quarter), this trend generally reverses with better lead availability and often new budgets at the beginning of the year for our clients with fiscal years ending December 31.

Basis of Presentation

General

     We operate in two segments: DMS and DSS. For further discussion and financial information about our reporting segments, see Note 11 to our condensed consolidated financial statements.

Net Revenue

     DMS. Our DMS business generates revenue from fees earned through the delivery of qualified leads, clicks and, to a lesser extent, display advertisements, or impressions. We deliver targeted and measurable results through a vertical focus that we classify into the following client verticals: financial services, education and “other” (which includes home services, B2B and medical).

     DSS. Our DSS business generated 0.3% of net revenue in both the three and nine months ended March 31, 2011, and 0.3% and 0.6% of net revenue in the three and nine months ended March 31, 2010, respectively. We expect DSS to continue to represent an immaterial portion of our business.

Cost of Revenue

     Cost of revenue consists primarily of media costs, personnel costs, amortization of acquisition-related intangible assets, depreciation expense and amortization of internal software development costs relating to revenue-producing technologies. Media costs consist primarily of fees paid to website publishers that are directly related to a revenue-generating event and pay-per-click, or PPC, ad purchases from Internet search companies. We pay these Internet search companies and website publishers on a revenue-share, cost-per-lead, or CPL, cost-per-click, or CPC and cost-per-thousand-impressions, or CPM, basis. Personnel costs include salaries, stock-based compensation expense, bonuses and employee benefit costs. Personnel costs are primarily related to individuals associated with maintaining our servers and websites, our editorial staff, client management, creative team, compliance group and media purchasing analysts. Costs associated with software incurred in the development phase or obtained for internal use are capitalized and amortized in cost of revenue over the software’s estimated useful life. We anticipate that our cost of revenue will increase in absolute dollars as we continue to increase our revenue base and product offerings.

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, rent and allocated costs. Personnel costs for each category of operating expenses generally include salaries, stock-based compensation expense, bonuses, commissions and employee benefit costs.

     Product Development. Product development expenses consist primarily of personnel costs and professional services fees associated with the development and maintenance of our technology platforms, development and launching of our websites, product-based quality assurance and testing. We believe that continued investment in technology is critical to attaining our strategic objectives and, as a result, we expect product development expenses to increase in absolute dollars in the future.

     Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs and, to a lesser extent, allocated overhead costs, professional services fees, travel costs, advertising and marketing materials. We expect sales and marketing expenses to increase in absolute dollars as we hire additional personnel in sales and marketing to support our increasing revenue base and product offerings.

     General and Administrative. General and administrative expenses consist primarily of personnel costs of our executive, finance, legal, corporate and business development, employee benefits and compliance, technical support and other administrative personnel, as well as accounting and legal professional services fees and other corporate expenses. We expect general and administrative expenses to increase in absolute dollars in future periods as we continue to invest in corporate infrastructure and incur additional expenses associated with being a public company, including increased legal and accounting costs, higher insurance premiums, investor relations costs and compliance costs associated with Section 404 of the Sarbanes-Oxley Act of 2002.

Interest and Other Income (Expense), Net

     Interest and other income (expense), net, consists primarily of interest expense and interest income. Interest expense is related to our credit facility and promissory notes issued in connection with our acquisitions and includes imputed interest. The outstanding balance of our credit facility and acquisition-related promissory notes was $98.1 million and $14.8 million, respectively, as of March 31, 2011. Borrowings under our credit facility and related interest expense could increase as we continue to implement our acquisition strategy. Interest income represents interest received on our cash and cash equivalents, which may decrease depending on market interest rates and the amount of our invested cash and cash equivalents.

     Other income (expense), net, includes foreign currency exchange gains and losses and other non-operating items.

Income Tax Expense

     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 accepting accounting principles, or GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures.

     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. There have been no material changes to our critical accounting policies, estimates and judgments subsequent to June 30, 2010.

	•		Revenue recognition;
	•		Stock-based compensation;
	•		Goodwill;

	•		Long-lived assets; and
	•		Income taxes.

     For further information on our critical and other significant accounting policies, see Note 2 to our condensed consolidated financial statements and our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 as filed with the SEC on September 13, 2010.

Recently Issued Accounting Standards

     See Note 2 to our condensed consolidated financial statements.

Results of Operations

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

		Three Months Ended March 31,																Nine Months Ended March 31,
		2011								2010								2011								2010
														(in thousands)
Net revenue		$	107,705				100.0	%		$	90,773				100.0	%		$	308,903				100.0	%		$	246,288				100.0	%
Cost of revenue (1)			78,578				73.0				66,268				73.0				222,869				72.1				177,872				72.2
Gross profit			29,127				27.0				24,505				27.0				86,034				27.9				68,416				27.8
Operating expenses: (1)
Product development			6,836				6.3				5,325				5.9				18,320				6.0				14,534				5.9
Sales and marketing			4,687				4.4				4,575				5.0				14,097				4.6				12,190				5.0
General and administrative			5,525				5.1				4,467				4.9				15,190				4.9				14,111				5.7
Operating income			12,079				11.2				10,138				11.2				38,427				12.4				27,581				11.2
Interest income			25				0.0				16				0.0				139				0.0				33				0.0
Interest expense			(1,091	)			(1.0	)			(1,302	)			(1.4	)			(3,108	)			(1.0	)			(2,931	)			(1.2	)
Other income (expense), net			66				0.1				(64	)			(0.1	)			151				0.1				221				0.1
Income before income taxes			11,079				10.3				8,788				9.7				35,609				11.5				24,904				10.1
Provision for taxes			(4,740	)			(4.4	)			(3,538	)			(3.9	)			(14,841	)			(4.8	)			(10,731	)			(4.3	)
Net income		$	6,339				5.9	%		$	5,250				5.8	%		$	20,768				6.7	%		$	14,173				5.8	%