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		77-05121
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification No.)

1051 East Hillsdale Blvd., Suite 800		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

     As of May 10, 2010, there were 45,063,081 shares of the registrant’s common stock outstanding.

 

 

QUINSTREET, INC.
INDEX

PART I. FINANCIAL INFORMATION			3
Item 1. Condensed Consolidated Financial Statements			3
Condensed Consolidated Balance Sheets at March 31, 2010 and June 30, 2009			3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2010 and 2009			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2010 and 2009			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			28
PART II. OTHER INFORMATION			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 6. Exhibits			40
SIGNATURES			41
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUINSTREET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)

		March 31,				June 30,
		2010				2009
Assets
Current assets
Cash and cash equivalents		$	175,318			$	25,182
Accounts receivable, net			47,334				33,283
Deferred tax assets			5,531				5,543
Prepaid expenses and other assets			8,322				1,228
Total current assets			236,505				65,236
Property and equipment, net			5,351				4,741
Goodwill			145,803				106,744
Other intangible assets, net			45,824				33,990
Deferred tax assets, noncurrent			—				1,525
Other assets, noncurrent			684				642
Total assets		$	434,167			$	212,878
Liabilities, Convertible Preferred Stock and Stockholders’ Equity
Current liabilities
Accounts payable		$	19,019			$	13,408
Accrued liabilities			28,011				21,794
Deferred revenue			1,257				718
Debt			18,096				12,890
Total current liabilities			66,383				48,810
Deferred revenue, noncurrent			370				820
Debt, noncurrent			84,636				44,350
Other liabilities, noncurrent			2,405				2,309
Total liabilities			153,794				96,289
Commitments and contingencies (Note 9)
Convertible preferred stock: $0.001 par value; 5,000,000 and 30,000,000 shares authorized; 0 and 21,176,533 shares issued and outstanding at March 31, 2010 and June 30, 2009, respectively; liquidation value of $0 and $69,564 at March 31, 2010 and June 30, 2009, respectively			—				43,403
Stockholders’ equity
Common stock: $0.001 par value; 100,000,000 and 45,000,000 shares authorized; 47,237,175 and 15,413,000 shares issued, and 45,059,723 and 13,315,348 shares outstanding at March 31, 2010 and June 30, 2009, respectively			47				15
Additional paid-in capital			214,331				20,634
Treasury stock, at cost (2,177,452 and 2,097,652 shares at March 31, 2010 and June 30, 2009, respectively)			(7,779	)			(7,064	)
Accumulated other comprehensive income			21				21
Retained earnings			73,753				59,580
Total stockholders’ equity			280,373				73,186
Total liabilities, convertible preferred stock and stockholders’ equity		$	434,167			$	212,878

See accompanying notes to condensed consolidated financial statements.

QUINSTREET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2010				2009				2010				2009
Net revenue		$	90,773			$	69,813			$	246,288			$	192,726
Cost of revenue (1)			66,268				46,780				177,872				135,030
Gross profit			24,505				23,033				68,416				57,696
Operating expenses: (1)
Product development			5,325				3,512				14,534				10,992
Sales and marketing			4,575				3,594				12,190				12,017
General and administrative			4,467				2,865				14,111				9,772
Operating income			10,138				13,062				27,581				24,915
Interest income			16				44				33				221
Interest expense			(1,302	)			(879	)			(2,931	)			(2,749	)
Other income (expense), net			(64	)			(16	)			221				(256	)
Income before income taxes			8,788				12,211				24,904				22,131
Provision for taxes			(3,538	)			(5,818	)			(10,731	)			(10,084	)
Net income		$	5,250			$	6,393			$	14,173			$	12,047
Net income attributable to common stockholders
Basic		$	3,714			$	2,150			$	6,371			$	3,697
Diluted		$	3,797			$	2,301			$	6,790			$	3,981
Net income per share attributable to common stockholders
Basic		$	0.12			$	0.16			$	0.33			$	0.28
Diluted		$	0.11			$	0.15			$	0.31			$	0.26
Weighted average shares used in computing net income per share attributable to common stockholders
Basic			30,795				13,297				19,156				13,287
Diluted			33,938				14,890				22,008				15,032
(1)     Cost of revenue and operating expenses include stock-based compensation expense as follows:
Cost of revenue		$	653			$	470			$	2,143			$	1,477
Product development			686				176				1,570				494
Sales and marketing			1,163				455				2,504				1,352
General and administrative			624				373				4,002				1,061

See accompanying notes to condensed consolidated financial statements.

QUINSTREET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		Nine Months Ended
		March 31,
		2010				2009
Cash flows from operating activities
Net income		$	14,173			$	12,047
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization			13,678				12,386
Provision for sales returns and doubtful accounts receivable			(234	)			1,363
Stock-based compensation			10,219				4,384
Excess tax benefits from exercise of stock options			(1,821	)			(362	)
Other non-cash adjustments, net			567				560
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable			(11,261	)			(6,463	)
Prepaid expenses and other assets			(5,251	)			386
Other assets, noncurrent			(22	)			332
Deferred tax assets			(123	)			18
Accounts payable			4,338				5,643
Accrued liabilities			5,635				(3,722	)
Deferred revenue			(57	)			(627	)
Deferred tax liabilities			134				—
Other liabilities, noncurrent			(12	)			(43	)
Net cash provided by operating activities			29,963				25,902
Cash flows from investing activities
Restricted cash			15				711
Proceeds from sales of property and equipment			52				—
Capital expenditures			(2,159	)			(1,276	)
Business acquisitions, net of notes payable and cash acquired			(52,899	)			(19,808	)
Internal software development costs			(1,009	)			(813	)
Proceeds from sales and maturities of marketable securities			—				2,302
Net cash used in investing activities			(56,000	)			(18,884	)
Cash flows from financing activities
Net proceeds from issuance of common stock			138,076				—
Proceeds from exercise of common stock options			1,550				300
Proceeds from bank debt			43,300				8,607
Principal payments on bank debt			(2,250	)			(2,750	)
Principal payments on acquisition-related notes payable			(5,609	)			(6,764	)
Excess tax benefits from exercise of stock options			1,821				362
Repurchases of common stock			(715	)			(1,369	)
Net cash provided by (used in) financing activities			176,173				(1,614	)
Effect of exchange rate changes on cash and cash equivalents			—				(20	)
Net increase in cash and cash equivalents			150,136				5,384
Cash and cash equivalents at beginning of period			25,182				24,953
Cash and cash equivalents at end of period		$	175,318			$	30,337
Supplemental disclosure of noncash investing and financing activities
Accrued stock issuance costs			1,273				—
Notes payable issued in connection with business acquisitions			10,750				5,891

See accompanying notes to condensed consolidated financial statements.

QUINSTREET, INC.

(Unaudited)

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

     QuinStreet, Inc. (the “Company”) is an online media and marketing 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, Massachusetts, Nevada, New York, North Carolina, Oklahoma, Oregon, India and the United Kingdom.

Initial Public Offering

     In connection with the Company’s reincorporation in Delaware in December 2009, the Company increased its authorized number of shares of common and preferred stock to 50,500,000 and 35,500,000, respectively, and established the par value of each share of common and preferred stock to be $0.001. The previously outstanding 5,367,756 shares of Series A convertible preferred stock were converted on a two-for-one basis into 10,735,512 shares of Series A convertible preferred stock of the reincorporated company. Conversion, dividend and liquidation rights of Series A convertible preferred stock were adjusted consistent with the conversion. Common stock and additional paid-in capital amounts in these financial statements have been adjusted to reflect the par value of common stock.

     In February 2010, the Company completed an initial public offering (“IPO”) of its common stock in which it sold and issued 10,000,000 shares of common stock at an issue price of $15.00 per share. A total of $150,000 in gross proceeds were raised from the IPO or $136,803 in net proceeds after deducting underwriting discounts and commissions of $10,500 and other offering costs of $2,697. As of March 31, 2010, $1,273 of offering costs remained unpaid and these costs are expected to be paid in the Company’s fourth fiscal quarter. Upon the closing of the offering, all shares of the Company’s then-outstanding convertible preferred stock automatically converted into 21,176,533 shares of common stock.

     After the completion of the IPO in February 2010, the Company amended its certificate of incorporation and increased its authorized number of shares of common stock to 100,000,000 and reduced the authorized number of shares of preferred stock to 5,000,000.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Principles of Consolidation

     The 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, 2010 and for the three and nine months ended March 31, 2010 and 2009 are unaudited. These unaudited interim 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 consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the SEC on February 11, 2010. The condensed consolidated balance sheet as of June 30, 2009 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 presentation of the Company’s condensed consolidated balance sheet at March 31, 2010, its condensed consolidated statements of operations for the three and nine months ended March 31, 2010 and 2009, and its condensed consolidated statements of cash flows for the nine months ended March 31, 2010 and 2009. The results of operations for the three and nine months ended March 31, 2010 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2010 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.

Foreign Currency Translation

     The Company’s foreign operations are subject to exchange rate fluctuations. The majority of the Company’s sales is denominated in U.S. dollars. The functional currency for the majority of the Company’s foreign subsidiaries is the U.S. dollar. For these subsidiaries, assets and liabilities denominated in foreign currency are remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities and historical exchange rates for nonmonetary assets and liabilities. Net revenue, cost of revenue and expenses are generally remeasured at average exchange rates in effect during each period. Gains and losses from foreign currency remeasurement are included in net earnings. Certain foreign subsidiaries designate the local currency as their functional currency. For those subsidiaries, the assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at average exchange rates for the period. The foreign currency translation adjustments are included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. Foreign currency transaction gains or losses are recorded in other income (expense), net.

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

Concentrations of Credit Risk

     Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with financial institutions that management believes are creditworthy. The deposits exceed federally insured amounts. To date, the Company has not experienced any losses of its deposits of cash and cash equivalents.

     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 18% of total revenue for the three months ended March 31, 2009 and 10% and 19% for the nine months ended March 31, 2010 and 2009, respectively. No client accounted for 10% or more of the net accounts receivable as of March 31, 2010 and June 30, 2009, respectively.

Revenue Recognition

     The Company derives its revenue from two sources: Direct Marketing Services (“DMS”) and Direct Selling Services (“DSS”). DMS revenue, which constituted 99% of net revenue for each of the three and nine months ended March 31, 2010 and 2009, is derived primarily from fees which are earned through the delivery of qualified leads or clicks. 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 or click is delivered to the client provided that no significant obligations remain.

     From time to time, the Company may agree to credit a client for certain leads or clicks 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 or clicks. The Company receives a fee from its clients and pays a fee to Publishers either 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 1% of net revenue for each of the three and nine months ended March 31, 2010 and 2009, 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.

Fair Value of Financial Instruments

     The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, acquisition-related notes payable, a term loan and a revolving credit facility. The fair value of the Company’s cash equivalents is determined based on quoted prices in active markets for identical assets. 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, 2010 as the interest rates on similar financing arrangements available to the Company at March 31, 2010 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 facility approximate their recorded amounts at March 31, 2010 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.

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

Internal Software Development Costs

     The Company incurs costs to develop software for internal use. The Company expenses all costs that relate to the planning and post-implementation phases of development as product development expense. Costs incurred in the development phase are capitalized and amortized over the product’s estimated useful life if the product is expected to have a useful life beyond six months. Costs associated with repair or maintenance of existing sites or the development of website content are included in cost of revenue in the accompanying statements of operations. The Company’s policy is to amortize capitalized internal software development costs on a product-by-product basis using the straight-line method over the estimated economic life of the application, which is generally two years. Amortization of internal software development costs was $340 and $331 in the three months ended March 31, 2010 and 2009, respectively, and $941 and $1,195 in the nine months ended March 31, 2010 and 2009, respectively, and is reflected in cost of revenue.

Stock-Based Compensation

     The Company records stock-based compensation expense for employee stock options granted or modified on or after July 1, 2006 based on estimated fair values for these stock options. The Company continues to account for stock options granted to employees prior to July 1, 2006 based on the intrinsic value of those stock options.

     Fair values of share-based payment awards are determined on the date of grant using an option-pricing model. The Company has selected the Black-Scholes option pricing model to estimate the fair value of its stock options awards to employees. 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 shares for options granted prior to the Company’s 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 and the employees’ actual and projected stock option exercise and pre-vesting employment termination behaviors.

     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, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

     See Note 10 for further information.

Comprehensive Income

     Comprehensive income consists of two components, net income and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains, and losses that under GAAP are recorded as an element of stockholders’ equity but are excluded from net income. The Company’s other comprehensive income (loss) consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency and unrealized gains and losses on marketable securities categorized as available-for-sale. Total accumulated other comprehensive income (loss) is displayed as a separate component of stockholders’ equity.

     As of March 31, 2010 and June 30, 2009, marketable securities were not in unrealized gain or loss positions.

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 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.

Recent Accounting Pronouncements

     In December 2007, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard that changes the accounting for business combinations, including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition-related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. The new standard applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and to changes in valuation allowances for deferred tax assets and acquired income tax uncertainties arising from past business combinations. The adoption of the new standard on July 1, 2009 did not have a material effect on the Company’s condensed consolidated financial statements.

     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 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 will be effective for the Company in the first quarter of fiscal year 2011. Early adoption is permitted. The Company does not anticipate that the adoption of these standards will have a material effect on its condensed consolidated financial statements.

     In January 2010, the FASB issued a new fair value accounting standard update. This update requires additional disclosures about (i) the different classes of assets and liabilities measured at fair value, (ii) the valuation techniques and inputs used, (iii) the activity in Level 3 fair value measurements, and (iv) the transfers between Levels 1, 2, and 3. This update is effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of the new standard in the third quarter of fiscal 2010 did not have a material effect on the Company’s condensed consolidated financial statements.

     In February 2010, the FASB amended its accounting guidance for the accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued. In particular, the new amendment sets forth that a registrant is no longer required to disclose the date through which it has evaluated subsequent events. The amended guidance is effective immediately and was adopted by the Company in the third quarter of fiscal 2010.

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

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.

     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 common shares outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current year-to-date earnings that the preferred stockholders would have been entitled to receive pursuant to their dividend rights had all of the year-to-date earnings been distributed. Diluted net income per share is computed by using the weighted-average number of common shares outstanding, including potential dilutive shares of common stock assuming the dilutive effect of outstanding stock options 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 March 31,								Nine Months Ended March 31,
		2010				2009				2010				2009
		(In thousands, except per share data)
Numerator:
Basic:
Net income		$	5,250			$	6,393			$	14,173			$	12,047
8% non-cumulative dividends on convertible preferred stock			(373	)			(819	)			(2,018	)			(2,457	)
Undistributed earnings allocated to convertible preferred stock			(1,163	)			(3,424	)			(5,784	)			(5,893	)
Net income attributable to common stockholders — basic		$	3,714			$	2,150			$	6,371			$	3,697
Diluted:
Net income attributable to common stockholders — basic		$	3,714			$	2,150			$	6,371			$	3,697
Undistributed earnings re-allocated to common stock			83				151				419				284
Net income attributable to common stockholders — diluted		$	3,797			$	2,301			$	6,790			$	3,981
Denominator:
Basic:
Weighted average shares of common stock used in computing basic net income per share			30,795				13,297				19,156				13,287
Diluted:
Weighted average shares of common stock used in computing basic net income per share			30,795				13,297				19,156				13,287
Add weighted average effect of dilutive securities:
Stock options			3,143				1,593				2,852				1,745
Weighted average shares of common stock used in computing diluted net income per share			33,938				14,890				22,008				15,032
Net income per common share:
Basic		$	0.12			$	0.16			$	0.33			$	0.28
Diluted		$	0.11			$	0.15			$	0.31			$	0.26

     Weighted average shares from options in the amount of 2,494,823 and 4,650,359 for the three months ended March 31, 2010 and 2009, respectively, and 2,801,310 and 4,384,760 for the nine months ended March 31, 2010 and 2009, respectively, were excluded from the dilutive shares outstanding because their effect was anti-dilutive.

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

4. FAIR VALUE MEASUREMENTS

     Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., 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:

Level 1 —

Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 —

Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

Level 3 —

Inputs are unobservable inputs based on the Company’s assumptions.

     As of March 31, 2010 and June 30, 2009, the Company did not hold marketable securities other than money market funds. Money market funds are classified as cash equivalents on the balance sheet and are categorized as follows in the fair value hierarchy as of March 31, 2010 and June 30, 2009.

						Quoted Prices in
						Active Markets
						for Identical Assets
		Total				(Level 1)
Assets:
Money market funds		$	8,054			$	8,054
Balance at June 30, 2009		$	8,054			$	8,054
Assets:
Money market funds		$	147,078			$	147,078
Balance at March 31, 2010		$	147,078			$	147,078

5. ACQUISITIONS

Acquisition of Internet.com

     On November 30, 2009, the Company acquired the website business of Internet.com, a division of WebMediaBrands, Inc., in exchange for $16,000 in cash paid upon closing of the acquisition and the issuance of a $2,000 non-interest-bearing promissory note payable in one installment. 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		$	16,000
Fair value of debt (net of $46 of imputed interest)			1,954
		$	17,954

     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 values 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:

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

		Estimated				Estimated
		Fair Value				Useful Life
Tangible assets acquired		$	2,663
Liabilities assumed			(634	)
Customer relationships			1,900			7 years
Website/trade/domain names			2,500			5 years
Content			4,300			4 years
Noncompete agreements			200			2 years
Goodwill			7,025			Indefinite
		$	17,954

Acquisition of Insure.com

     On October 8, 2009, the Company acquired the website business Insure.com, 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 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:

		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 values 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
Noncompete agreements		$	900			3 years
Website/trade/domain names			1,250			8 years
Content			3,900			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 promissory notes payable in five installments over the next 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 values 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:

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

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

Acquisition of U.S. Citizens for Fair Credit Card Terms, Inc. (“CardRatings”)

     On August 5, 2008, the Company acquired 100% of the outstanding shares of CardRatings, an Arkansas-based online marketing company, in exchange for $10,000 in cash paid upon closing of the acquisition and the issuance of $5,000 in non-interest-bearing promissory notes payable in five installments over the next five years, secured by the assets acquired. The Company paid $372 in working capital adjustment following the closing of the acquisition. The results of CardRatings’ acquired operations have been included in the consolidated financial statements since the acquisition date. The Company acquired CardRatings for its capacity to generate online visitors in the financial services market. The total purchase price recorded was as follows:

		Amount
Cash		$	10,372
Fair value of debt (net of $722 of imputed interest)			4,278
Acquisition-related costs			20
		$	14,670

     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 values was recorded as goodwill. The goodwill is entirely 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		$	834
Liabilities assumed			(206	)
Advertiser relationships			2,325			7 years
Website/trade/domain names			776			5 years
Noncompete agreements			124			3 years
Content			140			2 years
Goodwill			10,677			Indefinite
		$	14,670

Other Acquisitions

     During the nine months ended March 31, 2010, in addition to the acquisition of HSH, Insure.com and Internet.com, the Company acquired operations from 22 other online publishing businesses in exchange for $14,598 in cash paid upon closing of the acquisitions and $4,356 payable in the form of non-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		$	14,598
Fair value of debt (net of $295 in imputed interest)			4,061
		$	18,659

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

     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 and liabilities assumed, if any. The excess of the purchase price over the aggregate fair values of the identifiable intangible assets was recorded as goodwill. Goodwill deductible for tax purposes is $13,014. The following table summarizes the preliminary allocation of the purchase prices of these other acquisitions during the nine months ended March 31, 2010 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		$	1
Content			2,526			1-6 years
Customer / publisher relationships			687			1-7 years
Website/trade/domain names			1,101			5 years
Noncompete agreements			141			2-3 years
Acquired technology			199			3 years
Goodwill			14,004			Indefinite
		$	18,659

     During fiscal year 2009, in addition to the acquisition of CardRatings, the Company acquired operations from 33 other online publishing businesses in exchange for $14,606 in cash paid upon closing of the acquisitions and $4,268 payable primarily in the form of non-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		$	14,606
Fair value of debt (net of $395 of imputed interest)			3,873
Acquisition-related costs			134
		$	18,613

     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 and liabilities assumed, if any. No tangible assets were acquired. The excess of the purchase price over the aggregate fair values of the identifiable intangible assets was recorded as goodwill. The goodwill is entirely deductible for tax purposes. The following table summarizes the allocation of the purchase prices of these other fiscal year 2009 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
Liabilities assumed		$	(22	)
Content			2,538			1-6 years
Customer/publisher relationships			1,952			1-7 years
Website/trade/domain names			2,418			5 years
Noncompete agreements			236			5 years
Acquired technology			392			3 years
Goodwill			11,099			Indefinite
		$	18,613

Pro Forma Financial Information

     The unaudited 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 2009. 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 each period presented. The unaudited 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 each period presented.

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

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2010				2009				2010				2009
Total revenue		$	91,518			$	75,003			$	254,277			$	208,825
Net income			5,220				4,459				15,219				9,903
Basic net income per share		$	0.12			$	0.11			$	0.36			$	0.22
Diluted net income per share		$	0.11			$	0.10			$	0.34			$	0.21

6. INTANGIBLE ASSETS, NET

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

		March 31, 2010												June 30, 2009
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
Customer/publisher relationships		$	26,669			$	(9,472	)		$	17,197			$	22,982			$	(6,299	)		$	16,683
Content			30,271				(15,039	)			15,232				18,145				(10,546	)			7,599
Website/trade/domain names			14,838				(4,400	)			10,438				9,187				(2,988	)			6,199
Acquired technology and other			11,474				(8,517	)			2,957				10,034				(6,525	)			3,509
		$	83,252			$	(37,428	)		$	45,824			$	60,348			$	(26,358	)		$	33,990

     Amortization of intangible assets was $4,110 and $3,189 in the three months ended March 31, 2010 and 2009, respectively, and $11,070 and $9,584 in the nine months ended March 31, 2010 and 2009, respectively.

     Amortization expense for the Company’s acquisition-related intangible assets as of March 31, 2010 for each of the next five years and thereafter is as follows:

Year Ending June 30,
2010 (remaining three months)		$	5,502
2011			13,122
2012			10,594
2013			7,897
2014			3,795
2015			2,578
Thereafter			2,336
		$	45,824

7. GOODWILL

     The changes in the carrying amount of goodwill for the nine months ended March 31, 2010 were as follows:

		DMS				DSS				Total
Balance at June 30, 2009		$	105,513			$	1,231			$	106,744
Additions			39,059				—				39,059
Balance at March 31, 2010		$	144,572			$	1,231			$	145,803

     In the nine months ended March 31, 2010, 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.

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

8. DEBT

Promissory Notes

     During the nine months ended March 31, 2010 and fiscal year 2009, the Company issued total promissory notes for the acquisition of businesses of $10,750 and $8,151, respectively, net of imputed interest amounts of $606 and $1,117, respectively. The majority of the promissory notes are non-interest-bearing. 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 notes payable of $15 and $265 for the three months ended March 31, 2010 and 2009, respectively, and $217 and $541 for the nine months ended March 31, 2010 and 2009, respectively. Certain of the promissory notes are secured by the assets acquired in respect to which the notes were issued.

Term Loan and Revolving Credit Facility

     In September 2008, the Company replaced its existing revolving credit facility of $60,000 with a credit facility totaling $100,000. The new facility consisted of a $30,000 five-year term loan and a $70,000 revolving credit line.

     In November 2009, the Company entered into an amendment of its existing credit facility pursuant to which the Company’s lenders agreed to increase the maximum amount available under the Company’s revolving credit line from $70,000 to $100,000.

     In January 2010, the Company replaced its existing credit facility with a new credit facility with total borrowing capacity of $175,000. The new credit facility consists 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 optional increase of $50,000.

     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. The revolving credit line also requires a quarterly facility fee of 0.375% of the revolving credit line. The credit facility expires in January 2014. The loan and revolving credit line 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.

     The credit facility also requires the Company to comply with other nonfinancial covenants. The Company was in compliance with the financial ratios as of March 31, 2010 and June 30, 2009.

     Upfront arrangement fees incurred in connection with credit facilities are deferred and amortized over the remaining term of the arrangement.

     As of March 31, 2010 and June 30, 2009, $35,000 and $28,500 was outstanding under the term loan and $41,754 and $6,257 was outstanding under the revolving credit line, respectively.

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

Debt Maturities

     The maturities of debt as of March 31, 2010 were as follows:

						Term loan and
						revolving
		Notes				credit
Year Ending June 30,		Payable				line
2010 (remaining three months)		$	2,400			$	850
2011			14,419				3,963
2012			6,204				7,000
2013			2,834				12,688
2014			2,273				52,253
2015			500				—
			28,630				76,754
Less: imputed interest and unamortized discounts			(1,288	)			(1,364	)
Less: current portion			(14,955	)			(3,141	)
Noncurrent portion of debt		$	12,387			$	72,249

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. The letter of credit automatically renews annually in September without amendment unless cancelled by the financial institution within 30 days of the annual expiration date.

     The Company has a $223 letter of credit agreement with a financial institution that is used as collateral for the Company’s existing corporate headquarters’ operating lease. The letter of credit automatically renews annually without amendment unless cancelled by the financial institution within 30 days of the annual expiration date.

     The Company has a $500 letter of credit agreement with a financial institution that is used as collateral for the Company’s new corporate headquarters’ operating lease. The letter of credit automatically renews annually without amendment unless cancelled by the financial institution within 30 days of the annual expiration date.

9. 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 months ended March 31, 2010 and 2009 was $787 and $662, respectively, and $2,457 and $1,886 for the nine months ended March 31, 2010 and 2009, 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 all noncancelable operating leases as of March 31, 2010 were as follows:

		Operating
Year Ending June 30,		Leases
2010 (remaining three months)		$	783
2011			1,459
2012			1,146
2013			2,073
2014			2,332
2015			2,379
Thereafter			8,269
		$	18,441

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

     The existing lease for the Company’s corporate headquarters located at 1051 Hillsdale Boulevard, Foster City, California expires 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 begins on November 1, 2010 and expires on the last day of the 96th full calendar month commencing on or after November 1, 2010. The monthly base rent will be 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, 2010 and June 30, 2009, respectively

     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, 2010 and June 30, 2009, respectively.

     During fiscal year 2009, the Company settled an indemnity obligation with respect to one ongoing litigation matter. See discussion below for further details.

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

Litigation

     In August 2005, the Company was notified by one of its DSS segment clients that epicRealm Licensing, LLC (“epicRealm LLC”), a non-operating patent holding company, had filed a lawsuit against such client in the United States District Court for the Eastern District of Texas alleging that certain web-based services provided by the Company and others to such client infringed patents held by epicRealm LLC.

     In August 2006, the Company filed suit against epicRealm Licensing LP (“epicRealm LP”) in the United States District Court for the District of Delaware seeking to invalidate certain patents owned by epicRealm LP. In April 2007, epicRealm LP filed counterclaims against the Company alleging patent infringement. Parallel Networks, LLC was later substituted for epicRealm LP as the patent holder and party-in-interest.

     In April 2009, the Company entered into a settlement and license agreement (“Agreement”) with Parallel Networks pertaining to the patents in question (“Licensed Patents”). Under the terms of the Agreement, Parallel Networks granted the Company a perpetual, royalty-free, non-sublicensable and generally non-transferable, worldwide right and license under the Licensed Patents: (i) to use any product technology or service covered by or which embodies any one or more claims of the Licensed Patents (as defined in the Agreement); and (ii) to practice any method covered by any one or more claims of the Licensed Patents in connection with the activities in clause (i). Additionally, Parallel Networks covenants not to sue the Company.

     The Company paid Parallel Networks a one-time, non-refundable fee of $850. The Company recognized an intangible asset of $226 related to the estimated fair value of the license and expensed the remaining $624 as a settlement expense.

10. EQUITY BENEFIT 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. 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, nonstatutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance-based stock awards and other forms of equity compensation. In addition, the 2010 Incentive Plan provides for the grant of performance cash awards. The Company may issue incentive stock options (“ISOs”) only to its employees. Non-qualified stock options (“NQSOs”) and all other awards may be granted to employees, including officers, nonemployee directors and consultants. 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, as determined by the Company’s board of directors. 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 36-month period thereafter.

     The aggregate number of shares of the Company’s common stock initially reserved for issuance under the 2010 Incentive Plan was 282,277 and 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 from July 1, 2010 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.

     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 nonstatutory stock options to purchase shares of the Company’s common stock to non-employee directors and also provides for the discretionary grant of restricted stock units.

     An aggregate of 300,000 shares of the Company’s common stock are reserved for issuance under the Directors’ Plan. 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.

     The Company estimates the fair value of stock option awards 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 as of the date of grant. Compensation expense is amortized net of estimated forfeitures on a straight-line basis over the requisite service period of the options, which is generally four years.

     The weighted average Black-Scholes model assumptions for the three and nine months ended March 31, 2009 and 2010 were as follows:

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2010				2009				2010				2009
Risk-free interest rate			2.43	%			1.76	%			2.39	%			2.81	%
Expected term (years)			4.6				4.6				4.6				4.6
Expected volatility			56	%			70	%			67	%			62	%
Expected dividend yield			0	%			0	%			0	%			0	%

     The weighted average grant date fair value of employee stock options granted was $9.18 and $5.08 during the three months ended March 31, 2010 and 2009, respectively, and $9.52 and $5.28 during the nine months ended March 31, 2010 and 2009, respectively.

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

11. STOCKHOLDERS’ EQUITY

     In February 2010, the Company completed its IPO, whereby it sold 10,000,000 shares of common stock for a price of $15.00 per share. The Company received $136,803 net of offering costs. Approximately $13,197 in offering costs were incurred and have been deducted from additional paid-in capital.

     Prior to the closing of the IPO, the Company had outstanding three series of convertible preferred stock. On February 11, 2010, in conjunction with the closing of the IPO, all of the Company’s 21,176,533 outstanding preferred shares automatically converted on a one-for-one basis into 21,176,533 shares of common stock. At March 31, 2010, the Company had no preferred shares outstanding.

     In the nine months ended March 31, 2010, the Company repurchased 79,800 shares of its outstanding common stock at a total cost of $715 and an average cost of $8.96 per share.

     The following table sets forth the components of comprehensive income for the three and nine months ended March 31, 2010 and 2009:

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2010				2009				2010				2009
Net income		$	5,250			$	6,393			$	14,173			$	12,047
Other comprehensive income (loss)
Foreign currency translation adjustment			8				(26	)			—				14
Comprehensive income		$	5,258			$	6,367			$	14,173			$	12,061

12. 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.

     The Company determined its operating segments to be DMS, which derives substantially all of its revenue from fees earned through the delivery of qualified leads and clicks, and DSS, which derives substantially all of its 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.

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

     Summarized information by segment was as follows:

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2010				2009				2010				2009
Net revenue by segment:
DMS		$	90,511			$	68,925			$	244,841			$	190,208
DSS			262				888				1,447				2,518
Total net revenue			90,773				69,813				246,288				192,726
Segment operating income before depreciation, amortization, and stock-based compensation expense:
DMS			18,266				18,085				50,672				40,425
DSS			73				486				806				1,260
Total segment operating income before depreciation, amortization, and stock-based compensation expense			18,339				18,571				51,478				41,685
Depreciation and amortization			5,075				4,035				13,678				12,386
Stock-based compensation expense			3,126				1,474				10,219				4,384
Operating income		$	10,138			$	13,062			$	27,581			$	24,915

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

		Three Months Ended								Nine Months Ended
		March 31,								March 31,
		2010				2009				2010				2009
Net revenue:
North America		$	90,764			$	69,769			$	245,754			$	192,498
Europe			9				44				534				228
Total net revenue		$	90,773			$	69,813			$	246,288			$	192,726

		March 31,				June 30,
		2010				2009
Assets:
North America		$	433,074			$	211,337
Europe			488				927
Asia/Pacific			605				614
Total assets		$	434,167			$	212,878
Long-lived assets:
North America		$	5,176			$	4,485
Europe			—				35
Asia/Pacific			175				221
Total long-lived assets		$	5,351			$	4,741

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 prospectus filed pursuant to Rule 424(b) under the Securities Act with the SEC on February 11, 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 below, and those discussed in the section titled “Risk Factors” included in our prospectus filed pursuant to Rule 424(b) under the Securities Act with the Securities and Exchange Commission on February 11, 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 on the Internet. 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 click. These leads or clicks can then convert into a customer or sale for the client at a rate that results in an acceptable marketing cost to them. We get paid by clients primarily 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 a 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 or brands 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% of our net revenue in each of the first three and nine months of fiscal year 2010 and 2009. Our DMS business derives substantially all of its net revenue from fees earned through the delivery of qualified leads and clicks to our clients. 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 education client vertical represented 42% and 55% of net revenue in the three months ended March 31, 2010 and 2009, respectively, and 47% and 58% of net revenue in the nine months ended March 31, 2010 and 2009, respectively. Our financial services client vertical represented 46% and 35% of net revenue in the three months ended March 31, 2010 and 2009, respectively, and 43% and 30% of net revenue in the nine months ended March 31, 2010 and 2009, respectively. Other DMS verticals, consisting primarily of home services, business-to-business, or B2B, and medical, represented 12% and 10% of net revenue in the three months ended March 31, 2010 and 2009, respectively, and 10% and 12% of net revenue in the nine months ended March 31, 2010 and 2009, respectively.

     In addition, we derived 1% of our net revenue in each of the three and nine months ended March 31, 2010 and 2009, 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.

     We face an additional challenge with regard to a significant client, which accounted for 18% of our net revenue in the three months ended March 31, 2009, and 10% and 19% in the nine months ended March 31, 2010 and 2009, respectively. This client has recently retained an advertising agency and has reduced its purchases of leads from us. We have been addressing this challenge by working with this client and the agency to understand their evolving needs and strategies and understand how we can best serve them going forward. In addition, we have been expanding our business with other clients in our education client vertical. We are also expanding our client base in education to replace visitor matches previously delivered to this client.

Trends Affecting our Business

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 the 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 often request fewer leads due to holiday staffing. For example, in the quarters ended December 31, 2009 and 2008 net revenue from our education clients declined 10% and 13%, respectively, from the previous quarter. 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 financial years ending December 31.

Acquisitions

     Beginning in fiscal year 2008, we increased our level of strategic acquisition activity to expand our existing verticals and diversify our business among these verticals by substantially increasing our spending on acquisitions of businesses and technologies. For example, in February 2008, we acquired ReliableRemodeler.com, Inc., or ReliableRemodeler, an Oregon-based company specializing in online home renovation and contractor referrals for $17.5 million in cash and $8.0 million in non-interest-bearing, unsecured promissory notes, in an effort to increase our presence within our home services vertical. In April 2008, we acquired Cyberspace Communication Corporation, an Oklahoma-based online marketing company doing business as SureHits, for $27.5 million in cash and $18.0 million in potential earn-out payments, in an effort to increase our presence within the financial services vertical. During fiscal years 2008 and 2009, in addition to the acquisitions mentioned above, we acquired an aggregate of 21 and 34 online publishing businesses, respectively.

     In September 2009, we acquired Payler Corp. D/B/A HSH Associates Financial Publishers, or HSH, for $6.0 million in cash and a $4.0 million non-interest-bearing, unsecured promissory note. In October 2009, we acquired the website business Insure.com from Life Quotes, Inc., or Insure.com, for $15.0 million in cash and a $1.0 million non-interest- bearing, unsecured promissory note. In November 2009, we acquired the website assets of the Internet.com division of WebMediaBrands, Inc., or Internet.com, for $16.0 million in cash and a $2.0 million non-interest-bearing, unsecured promissory note. During the nine months ended March 31, 2010, in addition to the acquisitions of HSH, Insure.com and Internet.com, we acquired an aggregate of 22 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.

Client Verticals

     To date, we have generated the majority of our revenue from clients in our education client vertical. We expect that a majority of our revenue in fiscal year 2010 will be generated from clients in our education and financial services client verticals. Marketing budgets for clients in our education vertical are affected by a number of factors, including the availability of student financial aid, the regulation of for-profit financial institutions and economic conditions. Over the past year, some segments of the financial services industry, particularly mortgages, credit cards and deposits, have seen declines in marketing budgets given the difficult market conditions. In addition, the education and financial services industries are highly regulated. Changes in regulations or government actions may negatively affect our clients’ businesses and marketing practices and therefore, adversely affect our financial results.

Development and Acquisition of Vertical 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 vertical media on a cost-effective basis. Our inability to find or develop vertical media could impair our growth or adversely affect our financial performance.

Basis of Presentation

General

     We operate in two segments: DMS and DSS. For further discussion or financial information about our reporting segments, see Note 12 to our condensed consolidated financial statements.

Net Revenue

     DMS. We derive substantially all of our revenue from fees earned through the delivery of qualified leads or paid clicks. We deliver targeted and measurable results through a vertical focus that we classify into the following client verticals: education, financial services and “other” (which includes home services, B2B and medical).

     DSS. We derived approximately 1% of net revenue from our DSS business in each of the three and nine months ended March 31, 2010 and 2009, 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 on revenue-producing technologies. Media costs consist primarily of fees paid to website publishers that are directly related to a revenue-generating event and 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, bonuses, stock-based compensation expense and employee benefit costs. Compensation expense is 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 product’s estimated useful life. We anticipate that our cost of revenue will increase in absolute dollars.

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 fees, rent and allocated costs. Personnel costs for each category of operating expenses generally include salaries, bonuses and commissions, stock-based compensation expense 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 technology development and enhancement expenses to increase in absolute dollars in future periods.

     Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs and, to a lesser extent, allocated overhead, professional services, advertising, travel 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, 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, investor relations costs, higher insurance premiums 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 income and interest expense. 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 $76.8 million and $28.6 million, respectively, as of March 31, 2010. 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 we expect will increase in the near term as a result of the investment of the net proceeds from the IPO.

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 current U.S. income tax.

     As of March 31, 2010, we did not have net operating loss carryforwards for federal income tax purposes and had approximately $2.8 million in California state net operating loss carryforwards that begin to expire in March 2011 and that we expect to utilize in an amended return. The California net operating loss carryforwards will not offset future taxable income, but may instead result in a refund of historical taxes paid.

     As of March 31, 2010, we had net deferred tax assets of $5.5 million. Our net deferred tax assets consist primarily of accruals, reserves and stock-based compensation expense not currently deductible for tax purposes. We assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist. Any adjustment to the deferred tax asset valuation allowance would be recorded in the income statement of the periods that the adjustment is determined to be required.

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, costs and 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.

     We believe that the following critical accounting policies involve our more significant judgments, assumptions and estimates:

	•		Revenue recognition;
	•		Goodwill;
	•		Long-lived assets;
	•		Internal software development costs;
	•		Stock-based compensation; 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 prospectus filed pursuant to Rule 424(b) under the Securities Act with the SEC on February 11, 2010.

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,
					2010							2009								2010									2009
		(In thousands)
Net revenue		$	90,773				100.0	%		$	69,813				100.0	%		$	246,288				100.0	%		$	192,726				100.0	%
Cost of revenue (1)			66,268				73.0				46,780				67.0				177,872				72.2				135,030				70.1
Gross profit			24,505				27.0				23,033				33.0				68,416				27.8				57,696				29.9
Operating expenses (1):
Product development			5,325				5.9				3,512				5.0				14,534				5.9				10,992				5.7
Sales and marketing			4,575				5.0				3,594				5.2				12,190				5.0				12,017				6.2
General and administrative			4,467				4.9				2,865				4.1				14,111				5.7				9,772				5.1
Operating income			10,138				11.2				13,062				18.7				27,581				11.2				24,915				12.9
Interest income			16				0.0				44				0.1				33				0.0				221				0.1
Interest expense			(1,302	)			(1.4	)			(879	)			(1.3	)			(2,931	)			(1.2	)			(2,749	)			(1.4	)
Other income (expense), net			(64	)			(0.1	)			(16	)			(0.0	)			221				0.1				(256	)			(0.1	)
Income before income taxes			8,788				9.7				12,211				17.5				24,904				10.1				22,131				11.5
Provision for taxes			(3,538	)			(3.9	)			(5,818	)			(8.3	)			(10,731	)			(4.3	)			(10,084	)			(5.2	)
Net income		$	5,250				5.8	%		$	6,393				9.2	%		$	14,173				5.8	%		$	12,047				6.3	%
(1)    Cost of revenue and operating expenses include stock-based compensation expense as follows:
Cost of revenue		$	653							$	470							$	2,143							$	1,477
Product development			686								176								1,570								494
Sales and marketing			1,163								455								2,504								1,352
General and administrative			624								373								4,002								1,061

Net Revenue

		Three Months Ended								Nine Months Ended								Three-				Nine-
		March 31,								March 31,								Month				Month
		2010				2009				2010				2009				% Change				% Change
		(In thousands)
Net revenue		$	90,773			$	69,813			$	246,288			$	192,726				30	%			28	%
Cost of revenue			66,268				46,780				177,872				135,030				42	%			32	%

          Net revenue increased $21.0 million, or 30%, for the three months ended March 31, 2010, compared to the three months ended March 31, 2009. The majority of this increase was attributable to an increase in revenue from our financial services client vertical and, to a lesser extent, our other client verticals. Financial services client vertical revenue increased $17.1 million, or 70%, for the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The increase in financial services client vertical revenue was driven by lead and click volume increases at relatively steady prices. Our other client verticals’ revenue increased $4.2 million, or 64%, for the three months ended March 31, 2010, compared to the three months ended March 31, 2009. The increase in our other client vertical revenue was primarily affected by growth in our B2B client vertical revenue resulting from our acquisition of the website business of Internet.com, a division of WebMediaBrands, Inc., in November 2009 and, to a lesser extent, due to growth in our home services client vertical due to the improved economic environment. Our education client vertical revenue remained flat, declining $0.4 million, or 1%, for the three months ended March 31, 2010, compared to the corresponding 2009 period. The slight decline was driven by a decline in revenue from a significant client, almost entirely offset by revenue growth from other education clients.

          Net revenue increased $53.6 million, or 28%, for the nine months ended March 31, 2010, compared to the nine months ended March 31, 2009. The majority of this increase was attributable to an increase in revenue from our financial services client vertical and, to a lesser extent, our education and other client verticals. Financial services client vertical revenue increased $47.5 million, or 82%, for the nine months ended March 31, 2010 compared to the nine months ended March 31, 2009. The increase in financial services client vertical revenue was driven by lead and click volume increases at relatively steady prices. Our education client vertical revenue increased $3.0 million, or 3%, for the nine months ended March 31, 2010, compared to the corresponding 2009 period, due to lead volume increases. The increase in our education client vertical revenue was largely offset by a decline in revenue from a significant client. Our other client verticals’ revenue increased $3.1 million, or 13%, for the nine months ended March 31, 2010, compared to the corresponding 2009 period. The increase in revenue from our other client verticals was primarily due to the acquisition of the website business of ElderCarelink.com in April 2009 within our medical client vertical and the acquisition of the website business of Internet.com within our B2B client vertical in November 2009.

Cost of Revenue

          Cost of revenue increased $19.5 million, or 42%, for the three months ended March 31, 2010, compared to the three months ended March 31, 2009. The increase in cost of revenue was driven by a $12.8 million increase in media costs due to lead and click volume increases and, to a lesser extent, increased personnel costs of $4.2 million due to a 46% increase in average headcount and related compensation expense increases, as well as increased amortization of acquisition-related intangible assets of $0.9 million resulting from acquisitions in the previous twelve months. The increase in average headcount was affected by the acquisition of the website business of Internet.com, as well as by a reduction in workforce in the third quarter of fiscal year 2009. Gross margin, which is the difference between net revenue and cost of revenue as a percentage of net revenue, declined from 33% in the three months ended March 31, 2009 to 27% in the three months ended March 31, 2010, due to the above-mentioned increase in headcount and related compensation expense, as well as due to a higher mix of traffic from third parties.

          Cost of revenue increased $42.8 million, or 32%, for the nine months ended March 31, 2010, compared to the nine months ended March 31, 2009. The increase in cost of revenue was driven by a $31.9 million increase in media costs due to lead and click volume increases and, to a lesser extent, increased personnel costs of $6.7 million due to a 7% increase in average headcount and related compensation expense increases, as well as increased amortization of acquisition-related intangible assets of $1.5 million resulting from acquisitions in the previous twelve months. The increase in average headcount was affected by the acquisition of the website business of Internet.com, as well as by a reduction in workforce in the third quarter of fiscal year 2009. Gross margin declined from 30% in the nine months ended March 31, 2009 to 28% in the nine months ended March 31, 2010, due to a higher mix of traffic from third parties. Gross margin was further affected by the above-mentioned increase in headcount and related compensation expense.

Operating Expenses

		Three Months Ended								Nine Months Ended								Three-				Nine-
		March 31,								March 31,								Month				Month
		2010				2009				2010				2009				% Change				% Change
						(In thousands)
Product development		$	5,325			$	3,512			$	14,534			$	10,992				52	%			32	%
Sales and marketing			4,575				3,594				12,190				12,017				27	%			1	%
General and administrative			4,467				2,865				14,111				9,772				56	%			44	%
Operating expenses		$	14,367			$	9,971			$	40,835			$	32,781				44	%			25	%