QuinStreet
Annual Report 2012

Plain-text annual report

QUINSTREET, INC FORM 10-K (Annual Report) Filed 08/23/12 for the Period Ending 06/30/12 Address Telephone CIK 950 TOWER LANE, 6TH FLOOR FOSTER CITY, CA 94404 650-578-7700 0001117297 Symbol QNST SIC Code Industry Sector Fiscal Year 7389 - Business Services, Not Elsewhere Classified Business Services Services 06/30 http://www.edgar-online.com © Copyright 2012, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use. Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K For the Fiscal Year Ended June 30, 2012 OR Commission file number: 001-34628 QuinStreet, Inc. (Exact name of registrant as specified in its charter) 950 Tower Lane, 6 Floor Foster City, California 94404 (Address of principal executive offices, including zip code) (650) 587-7700 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:1) No  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:1) No  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  No (cid:1) 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No (cid:1) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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. (Check one): Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:1) No  As of December 31, 2011, the aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing sale price of the Company’s common stock as reported by the NASDAQ Global Select Market on such date, was $270,210,124. For purposes of this disclosure, shares held by persons who hold more than 5% of the outstanding shares of common stock and shares held by executive officers and directors of the registrant have been excluded because such persons may be deemed to be affiliates. This determination of executive officer or affiliate status is not a conclusive determination for other purposes. Number of shares of common stock outstanding as of August 16, 2012: 42,760,305 Documents Incorporated by Reference: Portions of the registrant’s definitive proxy statement relating to its 2012 annual stockholders’ meeting are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (cid:1) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Delaware 77-0512121 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) Title of Each Class Name of Each Exchange on Which Registered Common Stock, par value $0.001 per share The NASDAQ Stock Market LLC (NASDAQ Global Select Market) Large accelerated filer (cid:1) Accelerated filer  Non-accelerated filer (cid:1) (Do not check if a smaller reporting company) Smaller reporting company (cid:1) th Table of Contents QUINSTREET, INC. FOR THE FISCAL YEAR ENDED JUNE 30, 2012 TABLE OF CONTENTS 1 Page PART I. Item 1. Business 2 Item 1A. Risk Factors 14 Item 1B. Unresolved Staff Comments 33 Item 2. Properties 33 Item 3. Legal Proceedings 34 Item 4. Mine Safety Disclosures 34 PART II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 35 Item 6. Selected Consolidated Financial Data 37 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 39 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 55 Item 8. Financial Statements and Supplementary Data 57 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 91 Item 9A. Controls and Procedures 91 Item 9B. Other Information 92 PART III. Item 10. Directors, Executive Officers and Corporate Governance 93 Item 11. Executive Compensation 93 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 93 Item 13. Certain Relationships and Related Transactions, and Director Independence 93 Item 14. Principal Accounting Fees and Services 93 PART IV. Item 15. Exhibits, Financial Statement Schedules 94 Signatures 98 Table of Contents PART I SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements. All statements other than statements of historical facts, including statements regarding our future financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. Terminology such as “believe,” “may,” “might,” “objective,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms or other similar expressions is intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed in Part 1, Item 1A. “Risk Factors” of this Annual Report on Form 10-K and elsewhere in this report, such as but not limited to: Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason to conform these statements to actual results or to changes in our expectations. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements and we qualify all of our forward-looking statements by these cautionary statements. Item 1. Business Our Company QuinStreet is a leader in vertical marketing and media online. We have built a strong set of capabilities to engage Internet visitors with targeted media and to connect our marketing clients with their potential customers online. We focus on serving clients in large, information-intensive industry verticals where relevant, targeted media and offerings help visitors make informed choices, find the products that match their needs, and thus become qualified customer prospects for our clients. Our current primary client verticals are the education and financial services industries. We also have a presence in the business-to-business technology, home services and healthcare industries. 2 • our immature industry and relatively new business model; • our dependence on Internet search companies to attract Internet visitors; • our dependence on a small number of large clients and our dependence on a small number of client verticals for a majority of our revenue; • changes in regulatory and legislative environment affecting our business or our clients’ businesses; • our ability to successfully manage any recent or future acquisitions; • our ability to attract and retain qualified employees and key personnel; • our ability to enhance and maintain our client and vendor relationships; • our ability to return to growth and to manage such growth effectively; • our ability to accurately forecast our operating results and appropriately plan our expenses; • our ability to develop new services and enhancements and features to meet new demands from our clients; • our ability to raise additional capital in the future, if needed; • general economic conditions in our domestic and potential future international markets; • our ability to compete in our industry; and • our ability to protect our intellectual property rights. Table of Contents We generate revenue by delivering measurable online marketing results to our clients. These results are typically in the form of qualified leads or clicks, the outcomes of customer prospects submitting requests for information on, or to be contacted regarding, client products, or their clicking on or through to specific client offers. These qualified leads or clicks are generated from our marketing activities on our websites or via third-party publishers with whom we have relationships. Clients primarily pay us for leads that they can convert into customers, typically in a call center or through other offline customer acquisition processes, or for clicks from our websites that they can convert into applications or customers on their websites. We are predominantly paid on a negotiated or market-driven “per lead” or “per click” basis. Media costs to generate qualified leads or clicks are borne by us as a cost of providing our services. Founded in 1999, we have been a pioneer in the development and application of measurable marketing on the Internet. Clients pay us for the actual opt-in actions by prospects or customers that result from our marketing activities on their behalf, versus traditional impression-based advertising and marketing models in which an advertiser pays for more general exposure to an advertisement. We have been particularly focused on developing and delivering measurable marketing results in the search engine “ecosystem”, the entry point of the Internet for most of the visitors we convert into qualified leads or clicks for our clients. We own or partner with vertical content websites that attract Internet visitors from organic search engine rankings due to the quality and relevancy of their content to search engine users. We also acquire targeted visitors for our websites through the purchase of pay-per-click, or PPC advertisements on search engines. We complement search engine companies by building websites with content and offerings that are relevant and responsive to their searchers, and by increasing the value of the PPC search advertising they sell by matching visitors with offerings and converting them into customer prospects for our clients. Market Opportunity Change in marketing strategy and approach We believe that marketing approaches are changing as budgets shift from offline, analog advertising media to digital advertising media such as Internet marketing. These changing approaches are fundamental, and require a shift to fundamentally new competencies, including: From qualitative, impression-driven marketing to analytic, data-driven marketing We believe that the growth in Internet marketing is enabling a more data-driven approach to advertising. The measurability of online marketing allows marketers to collect a significant amount of detailed data on the performance of their marketing campaigns, including the effectiveness of ad format and placement and user responses. This data can then be analyzed and used to improve marketing campaign performance and cost-effectiveness on substantially shorter cycle times than with traditional offline media. From account management-based client relationships to results-based client relationships We believe that marketers are becoming increasingly focused on strategies that deliver specific, measurable results. For example, marketers are attempting to better understand how their marketing spending produces measurable objectives such as meeting their target marketing cost per new customer. As marketers adopt more results-based approaches, the basis of client relationships with their marketing services providers is shifting from being more account management-based to being more results-oriented. From marketing messages pushed on audiences to marketing messages pulled by self-directed audiences Traditional marketing messages such as television and radio advertisements are broadcast to a broad audience. The Internet is enabling more self-directed and targeted marketing. For example, when Internet visitors click on PPC search advertisements, they are expressing an interest in and proactively engaging with information about a product or service related to that advertisement. The growth of self-directed marketing, primarily through 3 Table of Contents online channels, allows marketers to present more targeted and potentially more relevant marketing messages to potential customers who have taken the first step in the buying process, which can in turn increase the effectiveness of marketers’ spending. From marketing spending focused on large media buys to marketing spending optimized for fragmented media We believe that media is becoming increasingly fragmented and that marketing strategies are changing to adapt to this trend. There are millions of Internet websites, tens of thousands of which have significant numbers of visitors. While this fragmentation can create challenges for marketers, it also allows for improved audience segmentation and the delivery of highly targeted marketing messages, but new technologies and approaches are necessary to effectively manage marketing given the increasing complexity resulting from more media fragmentation. Increasing complexity of online marketing Online marketing is a dynamic and increasingly complex advertising medium. There are numerous online channels for marketers to reach potential customers, including search engines, Internet portals, vertical content websites, affiliate networks, display and contextual ad networks, email, video advertising, and social media. We refer to these and other marketing channels as media. Each of these channels may involve multiple ad formats and different pricing models, amplifying the complexity of online marketing. We believe that this complexity increases the demand for our vertical marketing and media services due to our capabilities and to our experience managing and optimizing online marketing programs across multiple channels. Also marketers and agencies often lack our ability to aggregate offerings from multiple clients in the same industry vertical, an approach that allows us to cover a wide selection of visitor segments and provide more potential matches to Internet visitor needs. This approach can allow us to convert more Internet visitors into qualified leads or clicks from targeted media sources, giving us an advantage when buying or monetizing that media. Our Business Model We deliver cost-effective marketing results to our clients, predictably and scalably, 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 in our agreements. We bear the costs of media, thus our programs must deliver a value to our clients and a media yield, or margin on our media costs, that provides a sound financial outcome for us. Our general process is: Media cost, or the cost to attract targeted Internet visitors, is the largest cost input to producing the measurable marketing results we deliver to clients. Balancing our clients’ cost and conversion objectives, or the rate at which the leads or clicks that we deliver to them convert into customers, with our media costs and yield objectives, represents the primary challenge in our business model. We have been able to effectively balance these competing demands by focusing on our media sources and capabilities, conversion optimization, and our mix of offerings and client coverage. We also seek to mitigate media cost risk by working with third-party 4 • 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. Table of Contents website publishers predominantly on a revenue-share basis; media purchased on a non-revenue-share basis has represented a minority of our media costs and of the Internet visitors we convert into qualified leads or clicks for clients. Media and Internet visitor mix We are a client-driven organization. We seek to be one of the largest providers of measurable marketing results on the Internet in the client industry verticals we serve by meeting the needs of clients for results, reliability and volume. Meeting those client needs requires that we maintain a diversified and flexible mix of Internet visitor sources due to the dynamic nature of online media. Our media mix changes with changes in Internet visitor usage patterns. We adapt to those changes on an ongoing basis, and also proactively adjust our mix of vertical media sources to respond to client or vertical-specific circumstances and to achieve our financial objectives. Generally, our Internet visitor sources include: Conversion optimization Once we acquire targeted Internet visitors from any of our numerous online media sources, we seek to convert that media into qualified leads or clicks at a rate that balances client results with our media costs or yield objectives. We start by defining the segments and interests of Internet visitors in our client verticals, and by providing them with the information and product offerings on our websites and in our marketing programs that best meet their needs. Achieving acceptable client results and media yield then requires ongoing testing, measuring, analysis, feedback, and adaptation of the key components of our Internet marketing programs. These components include the marketing or advertising messaging, content mix, visitor navigation path, mix and coverage of client offerings presented, and point-of-sale conversion messaging — the content that is presented to an Internet visitor immediately prior to converting that individual into a lead or click for our clients. This data complexity is managed by us with technology, data reporting, marketing processes, and personnel. We believe that our scale and more than ten-year track record give us an advantage, as managing this complexity often implies a steep experience-based learning curve. Offerings and client coverage The Internet is a self-directed medium. Internet visitors choose the websites they visit and their online navigation paths, and always have the option of clicking away to a different website or web page. Having offerings or clients that match the interests or needs of website visitors is key to providing results and adequate media yield. Our vertical focus allows us to continuously revise and improve this matching process, to better understand the various segments of visitors and client offerings available to be matched, and to ensure that we enable Internet visitors to find what they seek. 5 • websites owned and operated by us, with content and offerings that are relevant to our clients’ target customers; • visitors acquired from PPC advertisements purchased on major search engines and sent to our websites; • revenue sharing agreements with third-party publishers with whom we have a relationship and whose content is relevant to our clients’ target customers; • email lists owned by third parties and warranted to us by their owners to comply with the CAN-SPAM Act; • email lists owned by us, and generated on an opt-in basis from Internet visitors to our websites; and • display ads run through online advertising networks or directly with major websites or portals. Table of Contents Our Competitive Advantages Vertical focus and expertise We focus our efforts on large, attractive client market verticals, and on building our depth of media and coverage of clients and client offerings within them. We have been a pioneer in developing vertical marketing and media on the Internet, and in providing measureable marketing results to clients. We focus on clients who are moving their marketing spending to measurable online formats and on information-intensive client verticals with large underlying market opportunities and high product or customer lifetime values. This focus allows us to utilize targeted media, in-depth industry and client knowledge, and customer segmentation and breadth of client offerings, or coverage, to deliver results for our clients and greater media yield. Measurable marketing experience and expertise We have substantial experience at designing and deploying marketing programs that allow Internet visitors to find the information or product offerings they seek, and that can deliver economically attractive, measurable results to our clients, cost-effectively for us. Such results require frequent testing and balancing of numerous variables, including Internet visitor sources, mix of content and of client and product offerings, visitor navigation paths, prospect qualification, and advertising creative design, among others. The complexity of executing these marketing campaigns is challenging. Due to our scale and more than ten-year track record, we have successfully executed thousands of Internet marketing programs, and we have gained significant experience managing and optimizing this complexity to meet our clients’ volume, quality and cost objectives. Targeted media Targeted media attracts Internet visitors who are relatively narrowly focused demographically or in their interests. Targeted media can deliver better measurable marketing results for our clients, at lower media costs for us, due to higher rates of conversion of Internet visitors into leads or clicks for targeted offerings and, often, due to less competition from display advertisers. We have significant experience at creating, identifying, monetizing, and managing targeted media on the Internet. Many of the targeted media sources for our marketing programs are proprietary or more defensible because of our direct ownership of websites in our client verticals, our acquisition of targeted Internet visitors directly from search engines to our websites, and our exclusive or long-term relationships with media properties or sources owned by others. Examples of websites that we own and operate include WorldWideLearn.com and Schools.com in our education client vertical; CardRatings.com, MoneyRates.com, CarInsurance.com, Insurance.com and Insure.com in our financial services client vertical; Internet.com in our business-to-business technology client vertical; AllAboutLawns.com and OldHouseWeb.com in our home services client vertical; and ElderCarelink.com in our healthcare client vertical. Proprietary technology We have developed a core technology platform and a common set of applications for managing and optimizing measurable marketing programs across multiple client verticals at scale. The primary objectives and effects of our technologies are to achieve higher media yield, deliver better results for our clients, and more efficiently and effectively manage our scale and complexity. We continuously strive to develop technologies that allow us to better match Internet visitors in our client verticals to the information, clients or product offerings they seek at scale. In so doing, our technologies can allow us to simultaneously improve visitor satisfaction, increase our media yield, and achieve higher rates of conversions of leads or clicks for our clients — a virtuous cycle of increased value for Internet visitors and our clients and competitive advantage for us. Some of the key applications in our technology platform are: 6 • an ad server for tracking the placement and performance of content, creative messaging, and offerings on our websites and on those of publishers with whom we work; • database-driven applications for dynamically matching content, offers or brands to Internet visitors’ expressed needs or interests; Table of Contents Approximately one-third of our employees are engineers, focused on building, maintaining and operating our technology platform. Client relationships We believe we are a reliable source of measurably effective marketing results for our clients. We endeavor to work collaboratively and in a data-driven way with clients to improve our results for them. We believe our high client retention and historic per client growth rates are due to: We believe that our high client retention rates, combined with our depth and breadth of online media in our primary client verticals, indicate that we are becoming an important marketing channel partner for our clients to reach their prospective customers. Client-driven online marketing approach We focus on providing measurable Internet marketing and media services to our clients in a way that protects and enhances their brands and their relationships with prospective customers. The Internet marketing programs we execute are designed to adhere to strict client branding and regulatory guidelines, and are designed to match our clients’ brands and offers with expressed customer interest. We have contractual arrangements with third-party website publishers to ensure that they follow our clients’ brand guidelines, and we utilize our proprietary technologies and trained personnel to help ensure compliance. In addition, we believe that providing relevant, helpful content and client offers that match an Internet visitor’s self-selected interest in a product or service, such as requesting information about an education program or financial product, makes that visitor more likely to convert into a customer for our clients. We do not engage in online marketing practices such as spyware or deceptive promotions as we believe that these do not provide value to Internet visitors and can undermine our clients’ brands. A small minority of our Internet visitors reach our websites or client offerings through advertisements in emails. We employ practices to ensure that we comply with the CAN-SPAM Act governing unsolicited commercial email. Acquisition strategy and success We have successfully acquired vertical online marketing and media companies, including vertical website businesses, marketing services companies, and technologies. We believe we can integrate and generate value from acquisitions due to our scale, breadth of capabilities, and common technology platform. 7 • a platform for measuring and managing the performance of tens of thousands of PPC search engine advertising campaigns; • dashboards or reporting tools for displaying operating and financial metrics for thousands of ongoing marketing campaigns; and, • a compliance tool capable of cataloging and filtering content from the thousands of websites on which our marketing programs appear to ensure adherence to client branding guidelines and to regulatory requirements. • our close, often direct, relationships with most of our large clients; • our ability to deliver measurable and attractive return on investment, or ROI, on clients’ marketing spending; • our ownership of, or exclusive access to large amounts of, targeted media inventory and associated Internet visitors in the client verticals on which we focus; and • our ability to consistently and reliably deliver large quantities of qualified leads or clicks. • Our ability to monetize Internet media, coupled with client demand for our services, provides us with a particular advantage in acquiring targeted online media properties in the client verticals on which we focus. Table of Contents Scale We are one of the largest Internet vertical marketing and media companies in the world. Our scale allows us to better meet the needs of large clients for reliability, volume and quality of service. It allows us to invest more in technologies that improve media yield, client results and our operating efficiency. We are also able to invest more in other forms of research and development, including determining and developing new types of vertical media, new approaches to engaging website visitors, and new segments of Internet visitors and client budgets, all of which can lead to advantages in media costs, effectiveness in delivering client results, and then to more growth and greater scale. Our Strategy Our goal is to be one of the largest and most successful marketing and media companies on the Internet, and eventually in other digitized media forms. We believe that we are in the early stages of a very large and long-term business opportunity. Our strategy for pursuing this opportunity includes the following key components: Our Culture Our values are the foundation of our successful business culture. They represent the standards we strive to achieve and the organization we continuously seek to become. These have been our guiding principles since our founding in 1999. Our values are: 8 • Our capabilities in online media can allow us to generate a greater volume of leads or clicks, and therefore create more value, than other owners of marketing services companies that have aggregated client budgets or relationships. • We can often apply technologies across our business volume to create more value than previous owners of the technology. • Focus on generating sustainable revenues by providing measurable value to our clients; • Build QuinStreet and our industry sustainably by behaving ethically in all we do and by providing quality content and website experiences to Internet visitors; • Remain vertically focused, choosing to grow through depth, expertise and coverage in our current client verticals; enter new client verticals selectively over time, organically and through acquisitions; • Build a world class organization, with best-in-class capabilities for delivering measurable marketing results to clients and high yields or returns on media costs; • Develop and evolve the best technologies and platform for managing vertical marketing and media on the Internet; focus on technologies that enhance media yield, improve client results and achieve scale efficiencies; • Build, buy and partner with vertical content websites that provide the most relevant and highest quality visitor experiences in the client and media verticals we serve; and • Be a client-driven organization; develop a broad set of media sources and capabilities to reliably meet client needs. • Performance. We lead and take ownership of results and growth. We know that results drive our success. We are bold in their pursuit. We take responsibility and a “whatever it takes” approach to getting things done, and done right. We seek input to make the best decisions possible, but we also act decisively. We ask for help rather than missing commitments or making excuses. We are committed to our personal and professional development and to that of our colleagues. Our growth grows the Company. • Open Communications. We respect our colleagues and deal with one another openly, honestly and non-hierarchically in an atmosphere of mutual trust and in pursuit of common stretch goals. We assume Table of Contents Clients In fiscal years 2012, 2011 and 2010, no client comprised more than 10% of annual net revenue and our top 20 clients accounted for 54%, 62% and 65% of net revenue, respectively. Since our service was first offered in 2001, we have developed a broad client base with many multi-year relationships. We enter into Internet marketing contracts with our clients, most of which are cancelable with little or no prior notice. In addition, these contracts do not contain penalty provisions for cancellation before the end of the contract term. 9 noble intentions. We have an obligation to dissent and may problem-solve with anyone, anywhere in the organization at any time in the pursuit of the best solutions. We are mindful of roles and of the need to keep each other informed to avoid discourtesy, chaos and unintended consequences. We avoid surprises. But, ideas and performance rule, not rank and reporting lines. We support decisions once made, and move forward. • High Standards. We hold each other and ourselves to the highest standards of performance, professionalism and personal behavior. We act with the highest of ethical standards. We deliver a strong full-time commitment to our work. We are as flexible as possible in work timing and place to maximize retention of the best people. We tolerate and forgive mistakes, and view them as opportunities to learn and grow. We do not tolerate patterns of bad behavior or poor performance. • Teamwork. We deal with one another openly, honestly and non-hierarchically in an atmosphere of mutual trust and respect and in pursuit of common stretch goals. We have an obligation to dissent in an effort to reach the best answers. We smooth the way for effective, dynamic team discussions by demonstrating care and concern for each individual in all of our interactions. We support decisions, once made. • Customer Empathy. We strive every day to better understand and anticipate the needs of all of our customers, including clients, visitors, publishers, and other business partners. We leverage these insights into better results, higher customer satisfaction and competitive advantage. • Prioritization. We work on what is most important to achieving Company objectives next. If not clear, we discuss and evaluate competing demands. We are decisive about what we will not do. We stop working on things that no longer adequately advance the business. • Urgency. We worry constantly about making enough progress, fast enough, and that the systems, products and programs that we touch are working correctly so that we do not lose time. We know our goals and measure our progress toward them daily. • Progress. We are pioneers. We generate hypotheses and make decisions based on facts and analysis, as well as intuition. We know that there will be failures in the pursuit of rapid progress. We learn from failures on short cycle times and iterate our way to success. • Agility. We prize creativity and flexibility. We innovate constantly. We embrace new ideas and approaches as opportunities to improve our performance or work environment. We adapt often and quickly to changing client, market and competitive dynamics. We resist pride of authorship; it limits progress. We actively benchmark and work to understand and employ internal and external best practices and successes. • Recognition. We are a meritocracy. Advancement and recognition are earned through contribution and performance, including helping others to achieve and nurturing the best Company culture. We celebrate each other’s victories and efforts. We abhor office politics and never take an action just to advance self-interest or self-promotion. • Fun. We believe that work, done well, can and should be fun. We strive to create an upbeat, supportive environment and try not to take ourselves too seriously. We do not have time for negativism, pessimism or nay saying. Table of Contents Sales and Marketing We have an internal sales team that consists of employees focused on signing new clients and account managers who maintain and seek to increase our business with existing clients. Our sales people and account managers are each focused on a particular client vertical so that they develop an expertise in the marketing needs of our clients in that particular vertical. Our marketing programs include attendance at trade shows and conferences and limited advertising. Technology and Infrastructure We have developed a suite of technologies to manage, improve and measure the results of the marketing programs we offer our clients. We use a combination of proprietary and third-party software as well as hardware from established technology vendors. We use specialized software for client management, building and managing websites, acquiring and managing media, managing our third-party publishers, and the matching of Internet visitors to our marketing clients. We have invested significantly in these technologies and plan to continue to do so to meet the demands of our clients and Internet visitors, to increase the scalability of our operations, and enhance management information systems and analytics in our operations. Our development teams work closely with our marketing and operating teams to develop applications and systems that can be used across our business. In fiscal years 2012, 2011 and 2010, we spent $21.1 million, $24.2 million and $19.7 million, respectively, on product development. Our primary data center is at a third-party co-location center in San Francisco, California. All of the critical components of the system are redundant and we have a backup data center in Las Vegas, Nevada. We have implemented these backup systems and redundancies to minimize the risk associated with earthquakes, fire, power loss, telecommunications failure, and other events beyond our control. Intellectual Property We rely on a combination of trade secret, trademark and copyright laws in the United States and other jurisdictions together with confidentiality agreements and technical measures to protect the confidentiality of our proprietary rights. We also currently have two patent applications pending in the United States and no issued patents. To protect our trade secrets, we control access to our proprietary systems and technology and enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties. QuinStreet is a registered trademark in the United States and other jurisdictions. We also have registered and unregistered trademarks for the names of many of our websites and we own the domain registrations for our many website domains. Our Competitors Our primary competition falls into two categories: advertising and direct marketing services agencies, and online marketing and media companies. We compete for business on the basis of a number of factors including return on marketing expenditures, price, access to targeted media, ability to deliver large volumes or precise types of customer prospects, and reliability. Advertising and direct marketing services agencies Online and offline advertising and direct marketing services agencies control the majority of the large client marketing spending for which we primarily compete. So, while they are sometimes our competitors, agencies are also often our clients. We compete with agencies to attract marketing budget or spending from offline forms to the Internet or, once designated to be spent online, to be spent with us versus the agency or by the agency with others. When spending online, agencies spend with QuinStreet and with portals, other websites and ad networks. 10 Table of Contents Online marketing and media companies We compete with other Internet marketing and media companies, in many forms, for online marketing budgets. Most of these competitors compete with us in one vertical. Examples include BankRate in the financial services client vertical and Halyard Education Partners in the education client vertical. Some of our competition also comes from agencies or clients spending directly with larger websites or portals, including Google, Yahoo! and Microsoft. Government Regulation Advertising and promotional information presented to visitors on our websites and our other marketing activities are subject to federal and state consumer protection laws that regulate unfair and deceptive practices. There are a variety of state and federal restrictions on the marketing activities conducted by telephone, the mail or by email, or over the internet, including the Telemarketing Sales Rule, state telemarketing laws, federal and state privacy laws, the CAN-SPAM Act, and the Federal Trade Commission Act and its accompanying regulations and guidelines. In addition, some of our clients operate in regulated industries, particularly in our financial services, education and medical verticals. In our education client vertical, our clients are subject to the U.S. Higher Education Act, which, among other things, prohibits incentive compensation in recruiting students. The Department of Education issued regulations on incentive compensation, among other matters, repealed all safe harbors regarding incentive compensation which existed under the prior regulations, including the safe harbor for Internet-based recruiting and admissions activities. The regulations state that payment for contact information or consumer “clicks” do not constitute incentive compensation for purposes of the Higher Education Act provided that there is no commission, bonus or other incentive payment based directly or indirectly upon success in securing enrollments. Notwithstanding the foregoing, these regulations could impact how we are paid for leads by clients in our education client vertical and could also impact our education clients and their marketing practices. In addition, the same regulations impose strict liability on educational institutions for misrepresentations made by entities, like us, who contract with the institutions to provide marketing services. As a result, our clients have demanded and we have agreed to be subject to increased limitations of liability in our contracts as well as indemnification for actions by our third-party publishers. Other regulations, such as the regulations on “gainful employment,” restrict Federal financial aid to students in programs where certain debt-to-income ratios and loan default rates are not satisfied, could limit our clients’ businesses and, therefore, ours. In our financial services vertical, the U.S. Real Estate Settlement Procedures Act, or RESPA, regulates the payments that may be made to mortgage brokers. While we do not engage in the activities of a traditional mortgage broker, we are licensed as a mortgage broker in 23 states for our online marketing activities. Our insurance business is also highly regulated and we are a licensed insurance agent in all fifty states. In our medical client vertical, our medical device and supplies clients are subject to state and federal anti-kickback statutes that prohibit payment for referrals. While we believe our matching of prospective customers with our clients and the manner in which we are paid for these activities complies with these and other applicable regulations, these rules and regulations in many cases were not developed with online marketing in mind and their applicability is not always clear. The rules and regulations are complex and may be subject to different interpretations by courts or other governmental authorities. We might unintentionally violate such laws, such laws may be modified and new laws may be enacted in the future. Any such developments (or developments stemming from enactment or modification of other laws) or the failure to anticipate accurately the application or interpretation of these laws could create liability to us and result in adverse publicity. 11 Table of Contents Employees As of June 30, 2012, we had 673 employees, which consisted of 207 employees in product development and engineering, 62 in sales and marketing, 50 in general and administration and 354 in operations. None of our employees is represented by a labor union. Available Information We file reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any other filings required by the SEC. We make available free of charge on our website via the investor relations page on www.quinstreet.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. We also webcast our earnings calls and certain events we host with members of the investment community on our investor relations page. The content of our website is not intended to be incorporated by reference into this report or in any other report or document we file and any reference to this website is intended to be an inactive textual reference only. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Executive Officers of the Registrant The name of and certain information regarding each of our current executive officers as of June 30, 2012 are set forth below. Douglas Valenti has served as our Chief Executive Officer and member of our board of directors since July 1999 and as our Chairman and Chief Executive Officer since March 2004. Prior to QuinStreet, Mr. Valenti served as a partner at Rosewood Capital, a venture capital firm, for five years; at McKinsey & Company as a strategy consultant and engagement manager for three years; at Procter & Gamble in various management roles for three years; and for the U.S. Navy as a nuclear submarine officer for five years. He holds a Bachelors degree in Industrial Engineering from the Georgia Institute of Technology, where he graduated with highest honors and was named the Georgia Tech Outstanding Senior in 1982, and an M.B.A. from the Stanford Graduate School of Business, where he was an Arjay Miller Scholar. Bronwyn Syiek has served as our President since May 2012 and member of our board of directors since January 2011, as our President and Chief Operating Officer from February 2007 to May 2012, as our Chief Operating Officer from April 2004 to February 2007, as Senior Vice President from September 2000 to April 2004, as Vice President from her start date in March 2000 to September 2000 and as a consultant to us from July 1999 to March 2000. Prior to joining us, Ms. Syiek served as Director of Business Development and member of the Executive Committee at De La Rue Plc, a banknote printing and security product company, for three years. 12 Name Age Position Douglas Valenti 52 Chief Executive Officer and Chairman Bronwyn Syiek 48 President and Director Kenneth Hahn 45 Chief Financial Officer and Chief Operating Officer Scott Mackley 39 Executive Vice President Nina Bhanap 39 Chief Technology Officer Kenneth Siegel 54 General Counsel and Senior Vice President Table of Contents She previously served as a strategy consultant and engagement manager at McKinsey & Company for four years and held various investment management and banking positions with Lloyds Bank and Charterhouse Bank. She holds an M.A. in Natural Sciences from Cambridge University in the United Kingdom. Kenneth Hahn has served as our Chief Financial Officer and Chief Operating Officer since May 2012 and Chief Financial Officer since September 2006. Prior to joining us, Mr. Hahn served as Chief Financial Officer of Borland Software Corporation, a public software company, from September 2002 to July 2006. Previously, Mr. Hahn served in various roles, including Chief Financial Officer, of Extensity, Inc., a public software company, for five years; as a strategy consultant at the Boston Consulting Group for three years; and as an audit manager at Price Waterhouse, a public accounting firm, for five years. He holds a B.A. in Business from California State University Fullerton, summa cum laude, and an M.B.A. from the Stanford Graduate School of Business, where he was an Arjay Miller Scholar. Mr. Hahn is also a Certified Public Accountant (inactive), licensed in the state of California. Scott Mackley has served as our Executive Vice President since February 2007, as Senior Vice President from December 2004 to February 2007, as Vice President from June 2003 to December 2004, as Senior Director from February 2002 to June 2003, as Director from October 2000 to February 2002 and as Senior Manager, Network Management from May 2000 to October 2000. Prior to joining us, Mr. Mackley served at Salomon Brothers and Salomon Smith Barney, in various roles in their Equity Trading unit and Investment Banking and Equity Capital Markets divisions over four years. He holds a B.A. in Economics from Washington and Lee University. Nina Bhanap has served as our Chief Technology Officer since July 2009, as our Senior Vice President of Engineering from November 2006 to July 2009, as Vice President of Product Development from January 2004 to November 2006, as Senior Director from January 2003 to January 2004 and as Director of Product Management from October 2001 to January 2003. Prior to joining us, Ms. Bhanap served as Head of Fixed Income Sales Technology for Europe at Morgan Stanley for five years and as a senior associate at Booz Allen Hamilton for one year. She holds a B.S. in Computer Science with Honors from Imperial College, University of London, and an M.B.A. from the London Business School. Kenneth M. Siegel has served as our Senior Vice President and General Counsel since February 2012. Prior to joining us, Mr. Siegel served as Senior Vice President, General Counsel and Secretary at SafeNet, a computer and network security company, for two years; as Vice President and General Counsel of Verigy Ltd., a provider of advanced test systems and solutions for the semiconductor industry, for four years; as Senior Vice President and General Counsel of Agile Software Corporation, a provider of product lifecycle management software solutions that was later acquired by Oracle, for four years; as Senior Vice President of Efficient Networks, Inc., a publicly traded broadband telecommunications equipment company that was acquired by Siemens AG, for two years, and as general counsel for one year. Previously, Mr. Siegel was an attorney with Wilson Sonsini Goodrich & Rosati, a corporate law firm, for thirteen years. Mr. Siegel holds a B.A. in International Policy Studies from the Monterey Institute of International Studies and a J.D. from the University of California Hastings College of the Law. 13 Table of Contents Item 1A . Risk Factors Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information in this report on Form 10-K. If any of such risks actually occur, our business, operating results or financial condition could be adversely affected. In those cases, the trading price of our common stock could decline and you may lose all or part of your investment. Risks Related to Our Business and Industry We operate in an immature industry and have a relatively new business model, which makes it difficult to evaluate our business and prospects. We derive nearly all of our revenue from the sale of online marketing and media services, which is an immature industry that has undergone rapid and dramatic changes in its short history. The industry in which we operate is characterized by rapidly-changing Internet media, evolving industry standards, and changing user and client demands. Our business model is also evolving and is distinct from many other companies in our industry, and it may not be successful. As a result of these factors, the future revenue and income potential of our business is uncertain and we may not be able to return to our previous growth rates. Any evaluation of our business and our prospects must be considered in light of these factors and the risks and uncertainties often encountered by companies in an immature industry with an evolving business model such as ours. Some of these risks and uncertainties relate to our ability to: If we are unable to address these risks, our business, results of operations and prospects could suffer. We are dependent on two market verticals for a majority of our revenue. Negative changes in the economic condition, market dynamics or regulatory environment in these verticals has caused and may continue to cause our revenue to decline and our business and growth to suffer. To date, we have generated a majority of our revenue from clients in our education and financial services client verticals. We expect that a majority of our revenue in the near term will continue to be generated from 14 • maintain and expand client relationships; • respond to adverse and changing regulations in our verticals, particularly our education vertical; • sustain and grow relationships with third-party website publishers and other sources of web visitors; • sustain and increase the number of visitors to our websites; • manage our operations and implement and improve our operational, financial and management controls; • overcome challenges presented by adverse global economic conditions as they impact spending in our client verticals; • raise capital at attractive costs, or at all; • acquire and integrate websites and other businesses; • successfully expand our footprint in our existing client verticals and enter new client verticals; • respond effectively to competition and potential negative effects of competition on profit margins; • attract and retain qualified management, employees and independent service providers; • successfully introduce new processes and technologies and upgrade our existing technologies and services; • protect our proprietary technology and intellectual property rights; and • respond to government regulations relating to the Internet, marketing in our client verticals, personal data protection, email, software technologies and other aspects of our business. Table of Contents clients in our education and financial services client verticals. Changes in the market conditions or the regulatory environment in these two highly-regulated client verticals have negatively impacted and may continue to negatively impact our clients’ businesses, marketing practices and budgets and, therefore, adversely affect our financial results. There is significant activity and uncertainty in the regulatory and legislative environment in the for-profit education sector. Regulatory and legislative changes have negatively affected and could continue to negatively affect our clients’ businesses, marketing practices and budgets and could impact demand, pricing or form of our services, any or all of which could have a material adverse impact on our financial results. We generate nearly half of our revenue from our education client vertical and nearly all of that revenue is generated from for-profit educational institutions. There is intense governmental interest in and scrutiny of the for-profit education industry and a high degree of focus on marketing practices in the industry. The Department of Education has promulgated regulations that have adversely impacted and could continue to adversely impact us and our education clients. The intense focus on the for-profit education industry could result in further regulatory or legislative action. We cannot predict whether this will happen or what the impact could be on our financial results. The Higher Education Act, administered by the U.S. Department of Education, provides that to be eligible to participate in Federal student financial aid programs, an educational institution must enter into a program participation agreement with the Secretary of the Department of Education. The agreement includes a number of conditions with which an institution must comply to be granted initial and continuing eligibility to participate. Among those conditions is a prohibition on institutions providing to any individual or entity engaged in recruiting or admission activities any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments. The Department of Education issued regulations on incentive compensation and other matters which became effective July 1, 2011. The Department’s regulations repeal all safe harbors regarding incentive compensation which existed under the prior regulations, including the safe harbor for Internet-based recruiting and admissions activities. The elimination of the safe harbors has created uncertainty for us and our education clients and impacts the way in which we are paid by our clients and, accordingly, has reduced the amount of revenue we generate from the education client vertical. Moreover, given the regulatory uncertainty affecting our education client base, we believe that overall external market spending by such companies has declined in recent periods, and there can be no assurance as to when or if such spending will return to prior levels. In addition, the same regulations impose strict liability on educational institutions for misrepresentations made by entities, like us, who contract with the institutions to provide marketing services. As a result, some of our clients have demanded and we have agreed in some cases to increased assumptions of risk in our contracts as well as indemnification for actions by us and our third-party publishers. As a result of this increased contractual exposure with some clients, we could become subject to costly litigation and be required to pay substantial damages or indemnification claims. We could also experience damage to our reputation for our violation of any applicable regulation and the unauthorized or unlawful acts of third-party website publishers. Other regulations could also negatively impact our for-profit education clients. For example, the regulations on “gainful employment” that restrict or eliminate federal financial aid to students in programs where certain debt-to-income ratios and loan default rates are not satisfied could result in the elimination or reduction in some of our clients’ programs. Over the past year, enrollments have dropped significantly at some of our clients, caused in part by changes being made in anticipation of the implementation of this regulation. In addition, some of our large for-profit education clients have indicated that in coming years they may violate the “90/10 rule,” whereby for-profit institutions must receive at least 10 percent of their revenue from sources other than federal student financial aid. If a for-profit institution fails to comply with the rule for two consecutive fiscal years, it may lose its eligibility to receive student-aid funds for at least two years. These and other regulations or a failure of our clients to comply with such regulations, could adversely affect our clients’ businesses and, as a result, affect or materially reduce the amount of revenue we generate from those clients. 15 Table of Contents Moreover, some of our education clients have had and may in the future have issues regarding their academic accreditation, which could adversely affect their ability to offer certain degree programs. If any of our significant education clients lose their accreditation, they are likely to reduce and may even eliminate their external marketing spending, which could adversely affect our financial results. Our for-profit education clients have been significantly affected by the adoption of and uncertainty surrounding the new regulations over the past several years. The regulations have affected and are expected to continue to affect our clients’ businesses and marketing practices, including an overall decrease in our clients’ external marketing expenditures and a related decrease in our revenues from this client vertical. The effect of these regulations may continue to result in fluctuations in the volume and mix of our business with these clients. We depend on third-party website publishers for a significant portion of our visitors, and any decline in the supply of media available through these websites or increase in the price of this media could cause our revenue to decline or our cost to reach visitors to increase. A significant portion of our revenue is attributable to visitor traffic originating from arrangements that we have with third-party publishers. In many instances, website publishers can change the media inventory they make available to us at any time and, therefore, impact our revenue. In addition, website publishers may place significant restrictions on our offerings. These restrictions may prohibit advertisements from specific clients or specific industries, or restrict the use of certain creative content or formats. If a website publisher decides not to make media inventory available to us, or decides to demand a higher revenue share or places significant restrictions on the use of such inventory, we may not be able to find advertising inventory from other websites that satisfy our requirements in a timely and cost-effective manner. In addition, the number of competing online marketing service providers and advertisers that acquire inventory from websites continues to increase. Consolidation of Internet advertising networks and website publishers could eventually lead to a concentration of desirable inventory on websites or networks owned by a small number of individuals or entities, which could limit the supply of inventory available to us or increase the price of inventory to us. For example, throughout fiscal year 2012, our revenue has declined in our financial services client vertical primarily due to volume declines caused by losses of traffic from third-party publishers, which resulted from acquisitions of media sources by competitors, changes in a search engine’s algorithms which reduced or eliminated traffic from some third-party publishers, and increased competition for quality media. We cannot assure you that we will be able to acquire advertising inventory that meets our clients’ performance, price and quality requirements, in which case our revenue could decline or our operating costs could increase. Our operating results have fluctuated in the past and may do so in the future, which makes our results of operations difficult to predict and could cause our operating results to fall short of analysts’ and investors’ expectations. Historically, our prior quarterly and annual operating results have fluctuated due to changes in our business, our industry and the general economic climate. Similarly, our future operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. We expect our results to continue to fluctuate for the foreseeable future. Our fluctuating results could cause our performance to be below the expectations of securities analysts and investors, causing the price of our common stock to fall. Because our business is changing and evolving, our historical operating results may not be useful to you in predicting our future operating results. Factors that may increase the volatility of our operating results include the following: 16 • changes in demand and pricing for our services; • changes in our pricing policies, the pricing policies of our competitors, or the pricing of Internet advertising or media; • the addition of new clients or the loss of existing clients; Table of Contents We depend upon Internet search companies to attract a significant portion of the visitors to our websites, and any change in the search companies’ search algorithms or perception of us or our industry could result in our websites being listed less prominently in either paid or algorithmic search result listings, in which case the number of visitors to our websites and our revenue could decline. We depend in significant part on various Internet search companies, such as Google, Microsoft and Yahoo!, and other search websites to direct a significant number of visitors to our websites so that we can provide our online marketing services to our clients. Search websites typically provide two types of search results, algorithmic and paid listings. Algorithmic, or organic, listings are determined and displayed solely by a set of formulas designed by search companies. Paid listings can be purchased and then are displayed if particular words are included in a user’s Internet search. Placement in paid listings is generally not determined solely on the bid price, but also takes into account the search engines’ assessment of the quality of the website featured in the paid listing and other factors. We rely on both algorithmic and paid search results, as well as advertising on other websites, to direct a substantial share of the visitors to our websites. Our ability to maintain the number of visitors to our websites from search websites and other websites is not entirely within our control. For example, Internet search websites frequently revise their algorithms in an attempt to optimize their search result listings or to maintain their internal standards and strategies. Changes in the algorithms could cause our websites to receive less favorable placements, which could reduce the number of users who visit our websites. We have experienced fluctuations in the search result rankings for a number of our websites. Some of our sites and paid listing campaigns have been negatively impacted by Google algorithmic changes. In addition, our business model may be deemed similar to those of our competitors and others in our industry that Internet search websites may consider to be unsuitable or unattractive. Internet search websites could deem our content to be unsuitable or below standards or less attractive or worthy than those of other or competing websites. In either such case, our websites may receive less favorable placement in algorithmic or paid listings, or both. In addition, we may make decisions that are suboptimal regarding the purchase of paid listings or our proprietary bid management technologies may contain defects or otherwise fail to achieve their intended results, either of which could also reduce the number of visitors to our websites or cause us to incur additional costs. We may also make decisions that are suboptimal regarding the placement of advertisements on other websites and pricing, which could increase our costs to attract such visitors or cause us to incur unnecessary costs. A reduction in the number of visitors to our websites could negatively affect our ability to earn revenue. If visits to our websites decrease, we may need to resort to more costly sources to replace lost visitors, and such increased expense could adversely affect our business and profitability. 17 • changes in our clients’ advertising agencies or the marketing strategies our clients or their advertising agencies employ; • changes in the regulatory environment for us or our clients; • changes in the economic prospects of our clients or the economy generally, which could alter current or prospective clients’ spending priorities, or could increase the time or costs required to complete sales with clients; • changes in the availability of Internet advertising or the cost to reach Internet visitors; • changes in the placement of our websites on search engines; • the introduction of new product or service offerings by our competitors; and • costs related to acquisitions of businesses or technologies. Table of Contents If we are unable to retain the members of our management team or attract and retain qualified management team members in the future, our business and growth could suffer. Our success and future growth depend, to a significant degree, on the continued contributions of the members of our management team. Each member of our management team is an at-will employee and may voluntarily terminate his or her employment with us at any time with minimal notice. We also may need to hire additional management team members to adequately manage our business. We may not be able to retain or identify and attract additional qualified management team members. Competition for experienced management-level personnel in our industry is intense. Qualified individuals are in high demand, particularly in the Internet marketing industry, and we may incur significant costs to attract and retain them. Members of our management team have also become, or will soon become, substantially vested in their stock option grants. We have recently experienced the loss of certain senior members of our management team, including one of our Executive Vice Presidents and our Senior Vice President of Corporate Development. If we lose the services of additional members of our management team or if we are unable to attract and retain additional qualified senior managers, our business and growth could suffer. We need to hire and retain additional qualified personnel to grow and manage our business. If we are unable to attract and retain qualified personnel, our business and growth could be seriously harmed. Our performance depends on the talents and efforts of our employees. Our future success will depend on our ability to attract, retain and motivate highly skilled personnel in all areas of our organization and, in particular, in our engineering/technology, sales and marketing, media, finance and legal/regulatory teams. We have found it difficult from time to time to locate and hire suitable personnel. If we experience similar difficulties in the future, our growth may be hindered. Qualified individuals are in high demand, particularly in the Internet marketing industry, and we may incur significant costs to attract and retain them. Many of our employees have also become, or will soon become, substantially vested in their stock option grants and may be more likely to leave us as a result. If we are unable to attract and retain the personnel we need to succeed, our business and growth could be harmed. A substantial portion of our revenue is generated from a limited number of clients and, if we lose a major client, our revenue will decrease and our business and prospects would be adversely impacted. A substantial portion of our revenue is generated from a limited number of clients. Our top three clients accounted for 20% of our net revenue for the fiscal year 2012. Our clients can generally terminate their contracts with us at any time, with limited prior notice or penalty. Our clients may also reduce their level of business with us, leading to lower revenue. In addition, reductions in business by one or more significant clients may lead to price reductions to our other clients for those products whose prices are determined in whole or in part by client bidding or competition, resulting in lower revenue. We expect that a limited number of clients will continue to account for a significant percentage of our revenue, and the loss of, or material reduction in, their marketing spending with us could decrease our revenue and harm our business. We rely on certain advertising agencies for the purchase of various advertising and marketing services on behalf of their clients. Such agencies may have or develop high-risk credit profiles which may result in credit risk to us. A portion of our client business is sourced through advertising agencies and, in many cases, we contract with these agencies and not directly with the underlying client. Contracting with these agencies, which in certain cases have or may develop high-risk credit profiles, subjects us to greater credit risk than where we contract with clients directly. This credit risk may vary depending on the nature of an agency’s aggregated client base. For the fiscal year ended June 30, 2012, we wrote off an account receivable as a bad debt of approximately $1.4 million from an advertising agency which became insolvent. There can be no assurances that we will not experience similar bad debt in the future. Any such write-offs could have a materially negative effect on our results of operation for the periods in which the write-offs occur. 18 Table of Contents If we fail to compete effectively against other online marketing and media companies and other competitors, we could lose clients and our revenue may decline. The market for online marketing is intensely competitive, and we expect this competition to continue to increase in the future both from existing competitors and, given the relatively low barriers to entry into the market, from new competitors. We compete both for clients and for limited high quality advertising inventory. We compete for clients on the basis of a number of factors, including return on marketing expenditures, price, and client service. We compete with Internet and traditional media companies for a share of clients’ overall marketing budgets, including: Competition for web traffic among websites and search engines, as well as competition with traditional media companies, could result in significant price pressure, declining margins, reductions in revenue and loss of market share. In addition, as we continue to expand the scope of our services, we may compete with a greater number of websites, clients and traditional media companies across an increasing range of different services, including in vertical markets where competitors may have advantages in expertise, brand recognition and other areas. Large Internet companies with brand recognition, such as Google, Yahoo!, and Microsoft, have significant numbers of direct sales personnel and substantial proprietary advertising inventory and web traffic that provide a significant competitive advantage and have significant impact on pricing for Internet advertising and web traffic. These companies may also develop more vertically targeted products that match consumers with products and services, such as Google’s mortgage rate and credit card comparison products, and thus compete with us more directly. The trend toward consolidation in the Internet advertising arena may also affect pricing and availability of advertising inventory and web traffic. Many of our current and potential competitors also enjoy other competitive advantages over us, such as longer operating histories, greater brand recognition, larger client bases, greater access to advertising inventory on high-traffic websites, and significantly greater financial, technical and marketing resources. As a result, we may not be able to compete successfully. Competition from other marketing service providers’ online and offline offerings could affect both volume and price, and thus revenue. If we fail to deliver results that are superior to those that other online marketing service providers achieve, we could lose clients and our revenue may decline. 19 • online marketing or media services providers such as Halyard Education Partners in the education client vertical and BankRate in the financial services client vertical; • offline and online advertising agencies; • major Internet portals and search engine companies with advertising networks such as Google, Yahoo!, and Microsoft; • other online marketing service providers, including online affiliate advertising networks and industry-specific portals or lead generation companies; • website publishers with their own sales forces that sell their online marketing services directly to clients; • in-house marketing groups and activities at current or potential clients; • offline direct marketing agencies; • mobile and social media; and • television, radio and print companies. Table of Contents We have a significant amount of debt, which may limit our ability to fund general corporate requirements and obtain additional financing, limit our flexibility in responding to business opportunities and competitive developments and increase our vulnerability to adverse economic and industry conditions. As of June 30, 2012, we had an outstanding term loan with a principal balance of $97.5 million and a $200 million revolving credit line, all of which is available to be drawn, subject to compliance with applicable covenants. As of such date, we also had outstanding notes to sellers arising from numerous acquisitions in the total principal amount of $12.5 million. As a result of obligations associated with our debt: Our debt obligations may also impair our ability to obtain additional financing, if needed. Our indebtedness is secured by substantially all of our assets, leaving us with limited collateral for additional financing. Moreover, the terms of our indebtedness restrict our ability to take certain actions, including the incurrence of additional indebtedness, certain mergers and acquisitions, investments, asset sales and stock repurchase. In addition, even if we are able to raise needed equity financing, we are required to use a portion of the net proceeds of certain types of equity financings to repay the outstanding balance of our term loan. A failure to pay interest or indebtedness when due could result in a variety of adverse consequences, including the acceleration of our indebtedness. In such a situation, it is unlikely that we would be able to fulfill our obligations under our credit facility or repay the accelerated indebtedness or otherwise cover our costs. The continued global macroeconomic uncertainty poses additional risks to our business, financial condition and results of operations. The United States and the global economy are experiencing a prolonged period of economic uncertainty following severe economic downturns and credit issues in many countries. The slow pace of recovery in the United States, deterioration of global economies, potential insolvency of one or more countries globally, high unemployment and reduced and/or volatile equity valuations all create risks that could harm our business. If macroeconomic conditions were to worsen, we are not able to predict the impact such worsening conditions will have on the online marketing industry in general, and our results of operations specifically. Clients in particular client verticals such as financial services, particularly mortgage, credit cards and deposits, small- and medium-sized business customers and home services are facing very difficult conditions and their marketing spend has been negatively affected. These conditions could also damage our business opportunities in existing markets, and reduce our revenue and profitability. While the effect of these and related conditions poses widespread risk across our business, we believe that it may particularly affect our efforts in the mortgage, credit cards and deposits, small- and medium-sized business and home services client verticals, due to reduced availability of credit for households and businesses and reduced household disposable income. Economic conditions may not improve or may worsen. Poor perception of our business or industry as a result of the actions of third parties could harm our reputation and adversely affect our business, financial condition and results of operations. Our business is dependent on attracting a large number of visitors to our websites and providing leads and clicks to our clients, which depends in part on our reputation within the industry and with our clients. There are companies within our industry that regularly engage in activities that our clients’ customers may view as unlawful or inappropriate. These activities by third parties, such as spyware or deceptive promotions, may be seen by clients as characteristic of participants in our industry and, therefore, may have an adverse effect on the reputation of all participants in our industry, including us. Any damage to our reputation, including from publicity from legal proceedings against us or companies that work within our industry, governmental proceedings, consumer class action litigation, or the disclosure of information security breaches or private information misuse, could adversely affect our business, financial condition and results of operations. 20 • we may not have sufficient liquidity to respond to business opportunities, competitive developments and adverse economic conditions; • we may not have sufficient liquidity to fund all of our costs if our revenue declines or costs increase; and • we may not have sufficient funds to repay the principal balance of our debt when due. Table of Contents Our quarterly revenue and operating results may fluctuate significantly from quarter to quarter due to seasonal fluctuations in advertising spending. Our results are subject to significant fluctuation as a result of seasonality. In particular, our quarters ending December 31 (our second fiscal quarter) generally demonstrate seasonal weakness. In our second fiscal quarters, there is generally lower availability of some forms of media during the holiday period on a cost effective basis and some of our clients request fewer leads due to holiday staffing. Our fluctuating results could cause our performance to be below the expectations of securities analysts and investors, causing the price of our common stock to fall. To the extent our revenue contracts, we expect that the seasonality in our business may become more apparent and may in the future cause our operating results to fluctuate to a greater extent. If we do not effectively manage future growth, our operating performance will suffer and we may lose clients. Although we are currently experiencing challenges in growing our business, we have historically experienced rapid growth in our operations and operating locations. This growth has placed, and if we return to growth, will continue to place, significant demands on our management and our operational and financial infrastructure. In addition, we have actively acquired the assets of complementary businesses as part of our strategy to expand our portfolio of targeted media on a cost effective basis. Rapid growth and acquisitions may make it more difficult for us to accomplish the following: In addition, our personnel, systems, procedures and controls may be inadequate to support our future operations. The improvements required to manage such growth would require us to make significant expenditures, expand, train and manage our employee base and allocate valuable management resources. If we fail to effectively manage our growth or acquisitions, our operating performance will suffer and we may lose clients, key vendors and key personnel. Our future growth depends in part on our ability to identify and complete acquisitions. Any acquisitions that we pursue or complete will involve a number of risks. If we are unable to address and resolve these risks successfully, such acquisition activity could harm our business, results of operations and financial condition. Our historical growth has been in significant part due to the large number of acquisitions we have completed of third-party website publishing businesses and other businesses that are complementary to our own. We intend to evaluate and pursue additional acquisitions of complementary businesses and technologies to expand our capabilities, client base and media. We have also evaluated, and expect to continue to evaluate, a wide array of potential strategic transactions. However, we may not be successful in identifying suitable acquisition candidates or be able to complete acquisitions of such candidates. In addition, we may not be able to obtain financing on favorable terms, or at all, to fund acquisitions that we may wish to pursue. The anticipated benefit of acquisitions that we complete may not materialize and the process of integrating acquired businesses or technologies may create unforeseen operating difficulties and expenditures. Some of the areas where we may face acquisition-related risks include: 21 • successfully scale our technology to accommodate a larger business and integrate acquisitions; • maintain our standing with key vendors, including Internet search companies and third-party website publishers; • maintain our client service standards; and • develop and improve our operational, financial and management controls and maintain adequate reporting systems and procedures. • diversion of management time and potential business disruptions; • difficulties integrating and supporting acquired products or technologies; Table of Contents Foreign acquisitions involve risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political, administrative and management, and regulatory risks associated with specific countries. We may not be able to address these risks successfully, or at all, without incurring significant costs, delay or other operating problems. Our inability to resolve such risks could harm our business and results of operations. We may need additional capital in the future to meet our financial obligations and to pursue our business objectives. Additional capital may not be available or may not be available on favorable terms and our business and financial condition could therefore be adversely affected. While we anticipate that our existing cash and cash equivalents, together with availability under our credit facility and cash from operations, will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operations in the future or to finance acquisitions. If we seek to raise additional capital in order to meet various objectives, including developing future technologies and services, increasing working capital, acquiring businesses and responding to competitive pressures, capital may not be available on favorable terms or may not be available at all. In addition, pursuant to the terms of our credit facility, we are required to use a portion of the net proceeds of certain equity financings to repay the outstanding balance of our term loan. Lack of sufficient capital resources could significantly limit our ability to take advantage of business and strategic opportunities. Any additional capital raised through the sale of equity or debt securities with an equity component would dilute our stock ownership. If adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate material parts of our business strategy, including potential additional acquisitions or development of new technologies. If the market for online marketing services fails to continue to develop, our future growth may be limited and our revenue may decrease. The online marketing services market is relatively new and rapidly evolving, and it uses different measurements than traditional media to gauge its effectiveness. Some of our current or potential clients have little or no experience using the Internet for advertising and marketing purposes and have allocated only limited portions of their advertising and marketing budgets to the Internet. The adoption of Internet advertising, particularly by those entities that have historically relied upon traditional media for advertising, requires the acceptance of a new way of conducting business, exchanging information and evaluating new advertising and 22 • disruptions or reductions in client revenues associated with changes to the business models of acquired businesses; • expenses, distractions and potential claims resulting from acquisitions, whether or not they are completed; • retaining and integrating employees from any businesses we may acquire; • issuance of dilutive equity securities, incurrence of debt or reduction in cash balances; • integrating various accounting, management, information, human resource and other systems to permit effective management; • incurring possible impairment charges, contingent liabilities, amortization expense or write-offs of goodwill; • unexpected capital expenditure requirements; • insufficient incremental revenue to offset increased expenses associated with acquisitions; • underperformance of acquired businesses or assets; and • becoming involved in acquisition-related litigation. Table of Contents marketing technologies and services. In particular, we are dependent on our clients’ adoption of new metrics to measure the success of online marketing campaigns. We may also experience resistance from traditional advertising agencies who may be advising our clients. We cannot assure you that the market for online marketing services will continue to grow. If the market for online marketing services fails to continue to develop or develops more slowly than we anticipate, our ability to grow our business may be limited and our revenue may decrease. Third-party website publishers may engage in unauthorized or unlawful acts that could subject us to significant liability or cause us to lose clients. We generate a significant portion of our web visitors from media advertising that we purchase from third-party website publishers. Some of these publishers are authorized to display our clients’ brands, subject to contractual restrictions. In the past, some of our third-party website publishers have engaged in activities that certain of our clients have viewed as harmful to their brands, such as displaying outdated descriptions of a client’s offerings or outdated logos. Any activity by publishers that clients view as potentially damaging to their brands can harm our relationship with the client and cause the client to terminate its relationship with us, resulting in a loss of revenue. In addition, the law is unsettled on the extent of liability that an advertiser in our position has for the activities of third-party website publishers. Recent Department of Education regulations impose strict liability on our education clients for misrepresentations made by their marketing service providers and many of our contracts in the education client vertical impose liability on us for the acts of our third-party publishers. We could be subject to costly litigation and, if we are unsuccessful in defending ourselves, damages for the unauthorized or unlawful acts of third-party website publishers. Because many of our client contracts can be cancelled by the client with little or no prior notice or penalty, the cancellation of one or more contracts could result in an immediate decline in our revenue. We derive our revenue from contracts with our Internet marketing clients, most of which are cancelable with little or no prior notice. In addition, these contracts do not contain penalty provisions for cancellation before the end of the contract term. The non-renewal, renegotiation, cancellation, or deferral of large contracts, or a number of contracts that in the aggregate account for a significant amount of our revenue, is difficult to anticipate and could result in an immediate decline in our revenue. Unauthorized access to or accidental disclosure of consumer personally-identifiable information that we collect may cause us to incur significant expenses and may negatively affect our credibility and business. There is growing concern over the security of personal information transmitted over the Internet, consumer identity theft and user privacy. Despite our implementation of security measures, our computer systems may be susceptible to electronic or physical computer break-ins, viruses and other disruptions and security breaches. Any perceived or actual unauthorized disclosure of personally-identifiable information regarding website visitors, whether through breach of our network by an unauthorized party, employee theft, misuse or error or otherwise, could harm our reputation, impair our ability to attract website visitors and attract and retain our clients, or subject us to claims or litigation arising from damages suffered by consumers, and thereby harm our business and operating results. In addition, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding the unauthorized disclosure of personal information. If we do not adequately protect our intellectual property rights, our competitive position and business may suffer. Our ability to compete effectively depends upon our proprietary systems and technology. We rely on trade secret, trademark and copyright law, confidentiality agreements, and technical measures to protect our proprietary rights. We currently have two patent applications pending in the United States and no issued patents. Effective trade secret, copyright, trademark and patent protection may not be available in all countries where we currently operate or in which we may operate in the future. Some of our systems and technologies are not 23 Table of Contents covered by any copyright, patent or patent application. We cannot guarantee that: (i) our intellectual property rights will provide competitive advantages to us; (ii) our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties; (iii) our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak; (iv) any of the trademarks, copyrights, trade secrets or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged, or abandoned; (v) competitors will not design around our protected systems and technology; or (vi) that we will not lose the ability to assert our intellectual property rights against others. We are a party to a number of third-party intellectual property license agreements and in the future may need to obtain additional licenses or renew existing license agreements. We are unable to predict with certainty whether these license agreements can be obtained or renewed on commercially reasonable terms, or at all. We have from time to time become aware of third parties who we believe may have infringed on our intellectual property rights. The use of our intellectual property rights by others could reduce any competitive advantage we have developed and cause us to lose clients, third-party website publishers or otherwise harm our business. Policing unauthorized use of our proprietary rights can be difficult and costly. In addition, litigation, while it may be necessary to enforce or protect our intellectual property rights or to defend litigation brought against us, could result in substantial costs and diversion of resources and management attention and could adversely affect our business, even if we are successful on the merits. Confidentiality agreements with employees, consultants and others may not adequately prevent disclosure of trade secrets and other proprietary information. We have devoted substantial resources to the development of our proprietary systems and technology. In order to protect our proprietary systems and technology, we enter into confidentiality agreements with our employees, consultants, independent contractors and other advisors. These agreements may not effectively prevent unauthorized disclosure of confidential information or unauthorized parties from copying aspects of our services or obtaining and using information that we regard as proprietary. Moreover, these agreements may not provide an adequate remedy in the event of such unauthorized disclosures of confidential information and we cannot assure you that our rights under such agreements will be enforceable. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could reduce any competitive advantage we have and cause us to lose clients, publishers or otherwise harm our business. Third parties may sue us for intellectual property infringement which, if successful, could require us to pay significant damages or curtail our offerings. We cannot be certain that our internally-developed or acquired systems and technologies do not and will not infringe the intellectual property rights of others. In addition, we license content, software and other intellectual property rights from third parties and may be subject to claims of infringement if such parties do not possess the necessary intellectual property rights to the products they license to us. For example, we are currently defending a patent infringement action brought against us by LendingTree. While we believe that we have meritorious defenses against LendingTree’s claims, and intend to vigorously defend the matter, there can be no assurance that we will prevail in this matter and any adverse ruling may have a significant impact on our business and operating results. In addition, regardless of the outcome of the matter, we may incur significant legal fees defending the action until it is resolved. In addition, we have in the past and may in the future be subject to legal proceedings and claims that we have infringed the patent or other intellectual property rights of third-parties. These claims sometimes involve patent holding companies or other adverse patent owners who have no relevant product revenue and against 24 Table of Contents whom our own patents, if any, may therefore provide little or no deterrence. In addition, third parties have asserted and may in the future assert intellectual property infringement claims against our clients, which we have agreed in certain circumstances to indemnify and defend against such claims. Any intellectual property related infringement claims, whether or not meritorious, could result in costly litigation and could divert management resources and attention. Moreover, should we be found liable for infringement, we may be required to enter into licensing agreements, if available on acceptable terms or at all, pay substantial damages, or limit or curtail our systems and technologies. Moreover, we may need to redesign some of our systems and technologies to avoid future infringement liability. Any of the foregoing could prevent us from competing effectively and increase our costs. Additionally, the laws relating to use of trademarks on the Internet are currently unsettled, particularly as they apply to search engine functionality. For example, other Internet marketing and search companies have been sued in the past for trademark infringement and other intellectual property-related claims for the display of ads or search results in response to user queries that include trademarked terms. The outcomes of these lawsuits have differed from jurisdiction to jurisdiction. For this reason, it is conceivable that certain of our activities could expose us to trademark infringement, unfair competition, misappropriation or other intellectual property related claims which could be costly to defend and result in substantial damages or otherwise limit or curtail our activities, and adversely affect our business or prospects. If we fail to keep pace with rapidly-changing technologies and industry standards or if our technologies fail to perform as intended, we could lose clients or advertising inventory and our results of operations may suffer. The business lines in which we currently compete are characterized by rapidly-changing Internet media and marketing standards, changing technologies, frequent new product and service introductions, and changing user and client demands. The introduction of new technologies and services embodying new technologies and the emergence of new industry standards and practices could render our existing technologies and services obsolete and unmarketable or require unanticipated investments in technology. Our future success will depend in part on our ability to adapt to these rapidly-changing Internet media formats and other technologies. We will need to enhance our existing technologies and services and develop and introduce new technologies and services to address our clients’ changing demands. If we fail to adapt successfully to such developments or timely introduce new technologies and services, we could lose clients, our expenses could increase and we could lose advertising inventory. In addition, our proprietary technologies are relatively new, and they may contain design or performance defects that are not yet apparent. The use of our proprietary technologies may not achieve the intended results as effectively as other technologies that exist now or may be introduced by our competitors, in which case our business could be harmed. Changes in government regulation and industry standards applicable to the Internet and our business could decrease demand for our technologies and services or increase our costs. Laws and regulations that apply to Internet communications, commerce and advertising are becoming more prevalent. These regulations could increase the costs of conducting business on the Internet and could decrease demand for our technologies and services. In the United States, federal and state laws have been enacted regarding copyrights, sending of unsolicited commercial email, user privacy, search engines, Internet tracking technologies, direct marketing, data security, children’s privacy, pricing, sweepstakes, promotions, intellectual property ownership and infringement, trade secrets, export of encryption technology, taxation and acceptable content and quality of goods. Other laws and regulations may be adopted in the future. Laws and regulations, including those related to privacy and use of personal information, are changing rapidly outside the United States as well which may make compliance with 25 Table of Contents such laws and regulations difficult and which may negatively affect our ability to expand internationally. This legislation could: (i) hinder growth in the use of the Internet generally; (ii) decrease the acceptance of the Internet as a communications, commercial and advertising medium; (iii) reduce our revenue; (iv) increase our operating expenses; or (v) expose us to significant liabilities. The laws governing the Internet remain largely unsettled, even in areas where there has been some legislative action. While we actively monitor this changing legal and regulatory landscape to stay abreast of changes in the laws and regulations applicable to our business, we are not certain how our business might be affected by the application of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual property issues, libel, obscenity and export or import matters to the Internet advertising industry. The vast majority of such laws were adopted prior to the advent of the Internet. As a result, they do not contemplate or address the unique issues of the Internet and related technologies. Changes in laws intended to address such issues could create uncertainty in the Internet market. It may take years to determine how existing laws apply to the Internet and Internet marketing. Such uncertainty makes it difficult to predict costs and could reduce demand for our services or increase the cost of doing business as a result of litigation costs or increased service delivery costs. In particular, a number of U.S. federal laws impact our business. The Digital Millennium Copyright Act, or DMCA, is intended, in part, to limit the liability of eligible online service providers for listing or linking to third-party websites that include materials that infringe copyrights or other rights. Portions of the Communications Decency Act, or CDA, are intended to provide statutory protections to online service providers who distribute third-party content. We rely on the protections provided by both the DMCA and CDA in conducting our business. The U.S. Department of Education issued regulations on incentive compensation and other matters which became effective July 1, 2011. These regulations repeal all safe harbors regarding incentive compensation which existed under the prior regulations. The elimination of the safe harbors create uncertainty for us and our education clients and impact the way in which we are paid by our clients and, accordingly, could reduce the amount of revenue we generate from the education client vertical. In addition, the Department has issued regulations that also restrict Title IV funding for programs not meeting prescribed income-to-debt ratios (i.e., programs not leading to “gainful employment” as defined under the proposed regulation). These provisions, could negatively affect our business with education clients. Any changes in these laws or judicial interpretations narrowing their protections could subject us to greater risk of liability and may increase our costs of compliance with these regulations or limit our ability to operate certain lines of business. The financial services, education and medical industries are highly regulated and our marketing activities on behalf of our clients in those industries are also regulated. As described above, and for example, the regulations from the Department of Education on incentive compensation, “gainful employment” and other matters could limit our clients’ businesses and limit the revenue we receive from our education clients. As an additional example, our mortgage and insurance websites and marketing services we offer are subject to various federal, state and local laws, including state licensing laws, federal and state laws prohibiting unfair acts and practices, and federal and state advertising laws. Any failure to comply with these laws and regulations could subject us to revocation of required licenses, civil, criminal or administrative liability, damage to our reputation or changes to or limitations on the conduct of our business. Any of the foregoing could cause our business, operations and financial condition to suffer. If any regulatory audit, investigation or other proceeding finds us not in compliance with the numerous laws and regulations applicable to us, we may not be able to successfully challenge such finding and our business could suffer. We are subject to audits, inquiries, investigations, claims of non-compliance and lawsuits by federal and state governmental agencies, regulatory agencies, attorneys general and other governmental or regulatory bodies, any of whom may allege violations of the legal or regulatory requirements applicable to us. For example, we 26 Table of Contents responded to a civil investigation conducted by the attorneys general of Alabama, Arizona, Delaware, Florida, Idaho, Illinois, Iowa, Kentucky, Massachusetts, Minnesota, Nevada, North Carolina, Oregon, South Carolina, and Tennessee into certain of our marketing and business practices related to our education client vertical during fiscal year 2012. On June 26, 2012, we entered into an Assurance of Voluntary Compliance agreement (the “Agreement”) with the attorneys general which required us to transfer the GIBill.com website to the United States Veterans Administration, to pay $2.5 million to the settling states and to add disclosures and disclaimers to our education-related websites. The new disclosures and disclaimers required by the Agreement could negatively affect media conversion rates and thus our revenue or profitability. If the results of future audits, inquiries, investigations, claims and lawsuits are unfavorable to us, we may be required to pay monetary fines or penalties or have restrictions placed on our business. Any one of these sanctions could materially adversely affect our business, financial condition, results of operations and cash flows and result in the imposition of significant restrictions on us and our ability to operate. Increased taxation of companies engaged in Internet commerce may adversely affect the commercial use of our marketing services and our financial results. The tax treatment of Internet commerce remains unsettled, and we cannot predict the effect of current attempts to impose sales, income or other taxes on commerce conducted over the Internet. Tax authorities at the international, federal, state and local levels are currently reviewing the taxation of Internet commerce, particularly as many governmental agencies seek to address fiscal concerns and budgetary shortfalls by introducing new taxes or expanding the applicability of existing tax laws. We have experienced certain states taking expansive positions with regard to their taxation of our services. The imposition of new laws requiring the collection of sales or other transactional taxes on the sale of our services via the Internet could create increased administrative burdens or costs, discourage clients from purchasing services from us, decrease our ability to compete or otherwise substantially harm our business and results of operations. Limitations on our ability to collect and use data derived from user activities could significantly diminish the value of our services and cause us to lose clients and revenue. When a user visits our websites, we use technologies, including “cookies,” to collect information such as the user’s Internet Protocol, or IP, address, offerings delivered by us that have been previously viewed by the user and responses by the user to those offerings. In order to determine the effectiveness of a marketing campaign and to determine how to modify the campaign, we need to access and analyze this information. The use of cookies is the subject of regulatory scrutiny and industry self-regulatory activities, including the discussion of “do-not-track” technologies and guidelines and to litigation. Additionally, users are able to block or delete cookies from their browser. Periodically, certain of our clients and publishers seek to prohibit or limit our collection or use of this data. Interruptions, failures or defects in our data collection systems, as well as privacy concerns regarding the collection of user data, could also limit our ability to analyze data from our clients’ marketing campaigns. This risk is heightened when we deliver marketing services to clients in the financial and medical services client verticals. If our access to data is limited in the future, we may be unable to provide effective technologies and services to clients and we may lose clients and revenue. As a creator and a distributor of Internet content, we face potential liability and expenses for legal claims based on the nature and content of the materials that we create or distribute. If we are required to pay damages or expenses in connection with these legal claims, our operating results and business may be harmed. We create original content for our websites and marketing messages and distribute third-party content on our websites and in our marketing messages. As a creator and distributor of original content and third-party provided content, we face potential liability based on a variety of theories, including defamation, negligence, deceptive advertising (including the Department of Education’s regulations regarding misrepresentation in education marketing), copyright or trademark infringement or other legal theories based on the nature, creation or 27 Table of Contents distribution of this information. It is also possible that our website visitors could make claims against us for losses incurred in reliance upon information provided on our websites. In addition, as the number of users of forums and social media features on our websites increases, we could be exposed to liability in connection with material posted to our websites by users and other third parties. These claims, whether brought in the United States or abroad, could divert management time and attention away from our business and result in significant costs to investigate and defend, regardless of the merit of these claims. In addition, if we become subject to these types of claims and are not successful in our defense, we may be forced to pay substantial damages. Wireless devices and mobile phones are increasingly being used to access the Internet, and our online marketing services may not be as effective when accessed through these devices, which could cause harm to our business. The number of people who access the Internet through mobile devices such as smartphones and tablets has increased substantially in the last few years. Our online marketing services were designed for persons accessing the Internet on a desktop or laptop computer. The smaller screens, lower resolution graphics and less convenient typing capabilities of these devices may make it more difficult for visitors to respond to our offerings. In addition, the cost of mobile advertising is relatively high and may not be cost-effective for our services. If our services continue to be less effective or economically attractive for clients seeking to engage in marketing through these devices and this segment of web traffic grows at the expense of traditional computer Internet access, we will experience difficulty attracting website visitors and attracting and retaining clients and our operating results and business will be harmed. We may not succeed in expanding our businesses outside the United States, which may limit our future growth. If we were to expand our business outside of the United States, then we will face risks in conducting business in international markets. One potential area of growth for us is in the international markets and we have recently entered into certain international markets. However, we have limited experience in marketing, selling and supporting our services outside of the United States and we may not be successful in introducing or marketing our services abroad. There are risks inherent in conducting business in international markets, such as: If we are unable to successfully expand and market our services abroad, our business and future growth may be harmed and we may incur costs that may not lead to future revenue. 28 • the adaptation of technologies and services to foreign clients’ preferences and customs; • application of foreign laws and regulations to us, including marketing and privacy regulations; • changes in foreign political and economic conditions; • tariffs and other trade barriers, fluctuations in currency exchange rates and potentially adverse tax consequences; • language barriers or cultural differences; • reduced or limited protection for intellectual property rights in foreign jurisdictions; • difficulties and costs in staffing, managing or overseeing foreign operations; • education of potential clients who may not be familiar with online marketing; • challenges in collecting accounts receivables; and • employment regulations and local labor conditions. Table of Contents We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws. The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We operate in parts of the world outside the United States that have experienced governmental corruption to some degree. There can be no assurance that our internal control policies and procedures will always protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operations, financial condition, and cash flows. We rely on Internet bandwidth and data center providers and other third parties for key aspects of the process of providing services to our clients, and any failure or interruption in the services and products provided by these third parties could harm our business. We rely on third-party vendors, including data center and Internet bandwidth providers. Any disruption in the network access or co-location services provided by these third-party providers or any failure of these third-party providers to handle current or higher volumes of use could significantly harm our business. Any financial or other difficulties our providers face may have negative effects on our business, the nature and extent of which we cannot predict. We exercise little control over these third-party vendors, which increases our vulnerability to problems with the services they provide. We license technology and related databases from third parties to facilitate analysis and storage of data and delivery of offerings. We have experienced interruptions and delays in service and availability for data centers, bandwidth and other technologies in the past. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and services could adversely affect our business and could expose us to liabilities to third parties. Our systems also heavily depend on the availability of electricity, which also comes from third-party providers. If we or third-party data centers which we utilize were to experience a major power outage, we would have to rely on back-up generators. These back-up generators may not operate properly through a major power outage and their fuel supply could also be inadequate during a major power outage or disruptive event. Furthermore, we do not currently have backup generators at our Foster City, California headquarters. Information systems such as ours may be disrupted by even brief power outages, or by the fluctuations in power resulting from switches to and from back-up generators. This could give rise to obligations to certain of our clients which could have an adverse effect on our results for the period of time in which any disruption of utility services to us occurs. Interruption or failure of our information technology and communications systems could impair our ability to effectively deliver our services, which could cause us to lose clients and harm our operating results. Our delivery of marketing and media services depends on the continuing operation of our technology infrastructure and systems. Any damage to or failure of our systems could result in interruptions in our ability to deliver offerings quickly and accurately and/or process visitors’ responses emanating from our various web presences. Interruptions in our service could reduce our revenue and profits, and our reputation could be damaged if people believe our systems are unreliable. Our systems and operations are vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, break-ins, hardware or software failures, telecommunications failures, computer viruses or other attempts to harm our systems, and similar events. We lease or maintain server space in various locations, including in San Francisco, California. Our California facilities are located in areas with a high risk of major earthquakes. Our facilities are also subject to break-ins, sabotage and intentional acts of vandalism, and to potential disruptions if the operators of these facilities have financial difficulties. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons or other unanticipated problems at our facilities could result in lengthy interruptions in our service. 29 Table of Contents Any unscheduled interruption in our service would result in an immediate loss of revenue. If we experience frequent or persistent system failures, the attractiveness of our technologies and services to clients and website publishers could be permanently harmed. The steps we have taken to increase the reliability and redundancy of our systems are expensive, reduce our operating margin, and may not be successful in reducing the frequency or duration of unscheduled interruptions. Any constraints on the capacity of our technology infrastructure could delay the effectiveness of our operations or result in system failures, which would result in the loss of clients and harm our business and results of operations. Our future success depends in part on the efficient performance of our software and technology infrastructure. As the numbers of websites and Internet users increase, our technology infrastructure may not be able to meet the increased demand. A sudden and unexpected increase in the volume of user responses could strain the capacity of our technology infrastructure. Any capacity constraints we experience could lead to slower response times or system failures and adversely affect the availability of websites and the level of user responses received, which could result in the loss of clients or revenue or harm to our business and results of operations. We could lose clients if we fail to detect click-through or other fraud on advertisements in a manner that is acceptable to our clients. We are exposed to the risk of fraudulent clicks or actions on our websites or our third-party publishers’ websites. We may in the future have to refund revenue that our clients have paid to us and that was later attributed to, or suspected to be caused by fraud. Click-through fraud occurs when an individual clicks on an ad displayed on a website or an automated system is used to create such clicks with the intent of generating the revenue share payment to the publisher rather than to view the underlying content. Action fraud occurs when on-line forms are completed with false or fictitious information in an effort to increase the compensable actions in respect of which a web publisher is to be compensated. From time to time we have experienced fraudulent clicks or actions and we do not charge our clients for such fraudulent clicks or actions when they are detected. It is conceivable that this activity could negatively affect our profitability, and this type of fraudulent act could hurt our reputation. If fraudulent clicks or actions are not detected, the affected clients may experience a reduced return on their investment in our marketing programs, which could lead the clients to become dissatisfied with our campaigns, and in turn, lead to loss of clients and the related revenue. Additionally, we have from time to time had to terminate relationships with web publishers who we believed to have engaged in fraud, which we may have to do so in the future. Termination of such relationships entails a loss of revenue associated with the legitimate actions or clicks generated by such web publishers. An impairment in the carrying value of goodwill and other indefinite-lived intangible assets could negatively affect our operating results. We have a substantial amount of goodwill and purchased intangible assets on our balance sheet as a result of acquisitions we have completed. The carrying value of goodwill represents the fair value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of intangible assets with identifiable useful lives represents the fair value of relationships, content, domain names, acquired technology, among others, as of the acquisition date, and are amortized based on their economic lives. Goodwill expected to contribute indefinitely to our cash flows are not amortized, but must be evaluated for impairment at least annually. If the carrying value exceeds current fair value as determined based on the discounted future cash flows of the related business, the goodwill or intangible asset is considered impaired and is reduced to fair value via a non-cash charge to earnings. Events and conditions that could result in impairment include adverse changes in the regulatory environment, or other factors leading to reduction in expected long-term growth or profitability. If the value of goodwill or intangible assets is impaired, our earnings could be adversely affected. Goodwill impairment analysis and measurement is a process that requires significant judgment. Our stock price and any estimated control premium are factors impacting the assessment of the fair value of our underlying 30 Table of Contents reporting units for purposes of performing any goodwill impairment assessment. Our Common Stock price fluctuated from a high of $13.80 to a low of $7.80 during fiscal year 2012. If our stock price remains depressed and our market capitalization remains below our book value for a sustained period, then it is possible that this may be an indicator of goodwill impairment. A non-cash goodwill impairment charge would have the effect of decreasing our earnings or increasing our losses in such period. If we are required to take a substantial impairment charge, then our operating results would be materially adversely affected in such period. If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements on a timely basis could be impaired, which would adversely affect our ability to operate our business. Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. We may in the future discover areas of our internal financial and accounting controls and procedures that need improvement. Our internal control over financial reporting will not prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected. If we are unable to maintain proper and effective internal controls, we may not be able to produce accurate financial statements on a timely basis, which could adversely affect our ability to operate our business and could result in regulatory action. Risks Related to the Ownership of Our Common Stock Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid. The trading price of our common stock has been highly volatile since our initial public offering and may continue to be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include those discussed in this “Risk Factors” section of this report on Form 10-K and others such as: 31 • our ability to return to growth and to manage such growth effectively; • changes in earnings estimates or recommendations by securities analysts; • announcements about our revenues, earnings or growth rates that are not in line with analyst expectations, the risk of which is heightened because it is our policy not to give quarterly guidance on revenue, earnings, or growth rates. • changes in governmental regulations; • announcements regarding share repurchase programs and the timing and amount of shares we purchase under such programs; • announcements by us or our competitors of new services, significant contracts, commercial relationships, acquisitions or capital commitments; • changes in the search engine rankings of our sites or our ability to access PPC advertising; • developments with respect to intellectual property rights; • our ability to develop and market new and enhanced products on a timely basis; • our commencement of, or involvement in, litigation; • negative publicity about us, our industry, our clients or our clients’ industries; and • a slowdown in our industry or the general economy. Table of Contents In recent years, the stock market in general, and the market for technology and Internet-based companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. Such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse opinion regarding our stock, our stock price and trading volume could decline. The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us, our business or the industries or businesses of our clients. If any of the analysts who cover us issue an adverse opinion regarding our stock, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Material differences between our results and security analysts’ estimates could cause our stock price to decrease. Our results may differ materially from security analysts’ estimates, either in total or for a specific client vertical and such difference could cause the market price of our stock to decrease. We have generally not provided specific guidance or forecasts for near-term operating results, increasing the likelihood that analyst estimates could differ from our own expectations and increasing the likelihood that our future results could differ from analyst estimates, either in total or for a specific client vertical. Our directors and executive officers and their respective affiliates have substantial control over us and could delay or prevent a change in corporate control. As of June 30, 2012, our directors and executive officers, together with their affiliates, beneficially owned approximately 34% of our outstanding common stock. As a result, these stockholders, acting together, have substantial control over the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, have significant influence over the management and affairs of our company. Accordingly, this concentration of ownership may have the effect of: Future sales of shares by existing stockholders could cause our stock price to decline. If our directors, officers and/or their affiliates were to sell, or indicate an intent to sell, substantial amounts of our common stock held by them, the trading price of our common stock could decline significantly. 32 • delaying, deferring or preventing a change in corporate control; • impeding a merger, consolidation, takeover or other business combination involving us; or • discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. Table of Contents Provisions in our charter documents under Delaware law and in contractual obligations, could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management. Our amended and restated certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our board of directors. These provisions include: We are subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock. We do not intend to declare and pay dividends on our capital stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Additionally, the terms of our credit facility restrict our ability to pay dividends. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future. Item 1B. Unresolved Staff Comments None. Item 2. Properties Our principal executive offices are located in a leased facility in Foster City, California, consisting of approximately 63,998 square feet of office space under a lease that expires in October 2018 with the option to extend the lease term by another two years. This facility accommodates our principal engineering, sales, 33 • a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors; • no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; • the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; • the ability of our board of directors to determine to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; • a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders; • the requirement that a special meeting of stockholders may be called only by the chairman of the board of directors, the chief executive officer or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and • advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us. Table of Contents marketing, operations and finance and administrative activities. We also lease additional facilities to accommodate sales, marketing, and operations throughout the United States. Outside of the United States, we also lease facilities to accommodate engineering, sales, marketing, and operations in Brazil, India and the United Kingdom. We may add new facilities and expand our existing facilities as we add employees and expand our markets, and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations. Item 3. Legal Proceedings On September 8, 2010, LendingTree, LLC (“LendingTree”) filed a patent infringement lawsuit against us in the United States District Court for the Western District of North Carolina, seeking a judgment that we have infringed a patent held by LendingTree, an injunctive order against the alleged infringing activities and an award for damages. If an injunction were to be granted, it could force us to stop or alter certain of our business activities, such as our lead generation in certain client verticals. On April 12, 2012, the Court held a claim construction hearing and issued an order construing certain disputed terms of the patent-in-suit. We believe that we have meritorious defenses against LendingTree’s claims, and intend to vigorously defend the matter. There can be no assurance, however, that we will prevail in this matter and any adverse ruling may have a significant impact on our business and operating results. In addition, regardless of the outcome of the matter, we may incur significant legal fees defending the action until it is resolved. While we intend to vigorously defend our position, neither the outcome of the litigation nor the amount or potential range of exposure, if any, associated with the litigation can be assessed at this time. On August 12, 2011, the attorney general of Kentucky sent a letter of inquiry to us regarding marketing services that we provide to for-profit schools. The attorneys general of Alabama, Arizona, Delaware, Florida, Idaho, Illinois, Iowa, Massachusetts, Minnesota, Nevada, North Carolina, Oregon, South Carolina, and Tennessee (the “States”) subsequently joined Kentucky in the inquiry. The marketing services at issue relate to our websites, such as www.gibill.com, www.armystudyguide.com, and others, whose intended audience comprises service members and veterans of the United States military. The attorneys general expressed concerns that the websites could mislead consumers into believing that the websites are affiliated with the government or that the featured schools are the only ones that accept scholastic subsidies (such as through the GI Bill) from service members and veterans and may thus violate the consumer protection laws of the respective States. On August 25, 2011, the Kentucky attorney general initiated a civil investigative demand, requesting information about our marketing, pricing structure, business relationships, and financial data with respect to the for-profit schools that appear on www.gibill.com and similar websites. Other of the 14 States initiated identical civil investigative demands. On June 26, 2012, we entered into an Assurance of Voluntary Compliance agreement (the “Agreement”) with the attorneys general. Under the Agreement, we donated the URL “GIBill.com” to the United States Department of Veterans Affairs. We also agreed to pay a total of $2.5 million to the settling states to reimburse them for the cost of the investigation and negotiating process, and further agreed to provide expanded disclosures on other military-oriented and education-related websites. The new disclosures and disclaimers under the agreement could negatively affect media conversion rates. Early test results indicate that we should not suffer material diminishment of revenue. The tests were not exhaustive, so the full effects cannot be assessed with certainty. We believe that any negative effects we may experience could be mitigated by ongoing optimization efforts. We also believe that the changes are likely to be adopted more broadly in the industry, reducing or eliminating any relative disadvantage. From time to time, we may become involved in other legal proceedings and claims arising in the ordinary course of our business. Item 4. Mine Safety Disclosures Not Applicable. 34 Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock has been traded on the NASDAQ Global Select Market under the symbol “QNST” since our initial public offering on February 11, 2010. Prior to this time, there was no public market for our common stock. The following table shows the high and low sale prices per share of our common stock as reported on the NASDAQ Global Select Market for the periods indicated: On August 16, 2012, the closing price as reported on the NASDAQ Global Select Market of our common stock was $8.68 per share and we had approximately 137 stockholders of record of our common stock. We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our common stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. Our credit facility also restricts our ability to pay dividends. For equity compensation plan information refer to Item 12 in Part III of this Annual Report on Form 10-K. Stock Repurchase Program On November 3, 2011, we announced that our Board of Directors authorized a stock repurchase program allowing us to repurchase our outstanding shares of common stock up to $50.0 million. The repurchase program expires in November 2012. Repurchases under this program may take place in the open market or in privately negotiated transactions and may be made under a Rule 10b5-1 plan. There is no guarantee as to the exact number of shares that will be repurchased by us, and we may discontinue repurchases at any time. The amount authorized by our Board of Directors excludes broker commissions. All of our stock repurchases during fiscal year 2012 were made pursuant to our publicly announced stock repurchase plan through open market purchases under Rule 10b5-1 plans. As of June 30, 2012, we had repurchased an aggregate of 4,753,919 shares of our common stock under this repurchase program at a weighted average price of $9.47 per share for a total of $45.0 million. The remaining amount available for the repurchase of our common stock was $5.0 million as of June 30, 2012, all of which was used for repurchases in July 2012. 35 Fiscal Year Ended June 30, 2010 High Low First quarter ended September 30, 2010 $ 15.51 $ 9.79 Second quarter ended December 31, 2010 $ 21.38 $ 13.91 Third quarter ended March 31, 2011 $ 24.91 $ 18.92 Fourth quarter ended June 30, 2011 $ 22.98 $ 10.68 Fiscal Year Ended June 30, 2012 High Low First quarter ended September 30, 2011 $ 13.80 $ 10.12 Second quarter ended December 31, 2011 $ 12.64 $ 8.44 Third quarter ended March 31, 2012 $ 11.38 $ 8.60 Fourth quarter ended June 30, 2012 $ 11.90 $ 7.80 Table of Contents The following table summarizes the stock repurchase activity during the fourth quarter of fiscal year 2012 and the approximate dollar value of shares that may yet be purchased pursuant to our stock repurchase program that was available as of June 30, 2012: Performance Graph This performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of QuinStreet, Inc. under the Securities Act of 1933, as amended, or the Exchange Act. The following graph shows a comparison from February 11, 2010 (the date our common stock commenced trading on the NASDAQ Global Select Market) through June 30, 2012 of cumulative total return for our common stock, the NASDAQ Composite Index and the RDG Internet Composite Index. Such returns are based on historical results and are not intended to suggest future performance. Data for the NASDAQ Composite Index and the RDG Internet Composite Index assume reinvestment of dividends. 36 Shares Repurchases Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announce Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs (in millions) April 1, 2012 - April 30, 2012 — $ — — $ 13.5 May 1, 2012 - May 31, 2012 412,100 $ 8.07 412,100 $ 10.2 June 1, 2012 - June 30, 2012 581,500 $ 8.92 581,500 $ 5.0 Excludes $0.02 per share broker commission. (1) (1) Table of Contents Recent Sales of Unregistered Securities There were no unregistered sales of our equity securities during the fiscal year ended June 30, 2012. Item 6. Selected Consolidated Financial Data The following selected consolidated financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with the consolidated financial statements and accompanying notes appearing elsewhere in this report. The selected consolidated financial data in this section is not intended to replace our consolidated financial statements and the accompanying notes. The results of acquired businesses have been included in our consolidated financial statements since their respective dates of acquisition. Our historical results are not necessarily indicative of our future results and any interim results are not necessarily indicative of the results for a full fiscal year. We derived the consolidated statements of operations data for the fiscal years ended June 30, 2012, 2011, and 2010 and the consolidated balance sheets data as of June 30, 2012 and 2011 from our audited consolidated financial statements appearing elsewhere in this report. The consolidated statements of operations data for the fiscal year ended June 30, 2009 and 2008 and the consolidated balance sheets data as of June 30, 2010, 2009 and 2008 are derived from our audited consolidated financial statements, which are not included in this report. 37 Fiscal Year Ended June 30, 2012 2011 2010 2009 2008 (In thousands, except per share data) Consolidated Statements of Operations Data: Net revenue $ 370,468 $ 403,021 $ 334,835 $ 260,527 $ 192,030 Cost of revenue 283,466 291,991 240,730 181,593 130,869 Gross profit 87,002 111,030 94,105 78,934 61,161 Operating expenses: Product development 21,051 24,163 19,726 14,887 14,051 Sales and marketing 14,074 17,382 16,698 16,154 12,409 General and administrative 23,375 20,396 18,464 13,172 13,371 Total operating expenses 58,500 61,941 54,888 44,213 39,831 Operating income 28,502 49,089 39,217 34,721 21,330 Interest income 134 169 97 245 1,482 Interest expense (4,462 ) (4,213 ) (3,977 ) (3,544 ) (1,214 ) Other income (expense), net (42 ) 56 1,523 (239 ) 145 Interest and other income (expense), net (4,370 ) (3,988 ) (2,357 ) (3,538 ) 413 Income before income taxes 24,132 45,101 36,860 31,183 21,743 Provision for taxes (11,131 ) (17,887 ) (16,276 ) (13,909 ) (8,876 ) Net income $ 13,001 $ 27,214 $ 20,584 $ 17,274 $ 12,867 Less: 8% non-cumulative dividends on convertible preferred stock $ — $ — $ (2,018 ) $ (3,276 ) $ (3,276 ) Less: Undistributed earnings allocated to convertible preferred stock $ — $ — $ (5,784 ) $ (8,599 ) $ (5,925 ) Net income attributable to common stockholders — Basic $ 13,001 $ 27,214 $ 12,782 $ 5,399 $ 3,666 Undistributed earnings re-allocated to common stock $ — $ — $ 419 $ 399 $ 360 Net income attributable to common stockholders — Diluted $ 13,001 $ 27,214 $ 13,201 $ 5,798 $ 4,026 Net income per share attributable to common stockholders: Basic $ 0.28 $ 0.59 $ 0.50 $ 0.41 $ 0.28 Diluted $ 0.28 $ 0.55 $ 0.46 $ 0.39 $ 0.26 Weighted average shares used in computing net income per share attributable to common stockholders: Basic 45,846 46,222 25,616 13,294 13,104 Diluted 46,859 49,130 28,429 14,971 15,325 Cost of revenue and operating expenses include stock-based compensation expense as follows: Cost of revenue $ 4,293 $ 4,506 $ 3,111 $ 1,916 $ 1,112 Product development 2,570 2,705 2,176 669 443 Sales and marketing 3,096 3,747 3,463 1,761 581 General and administrative 3,037 2,992 4,621 1,827 1,086 (1) (1) (2) (1) Table of Contents The following table presents a reconciliation of Adjusted EBITDA to net income calculated in accordance with U.S. generally accepted accounting principles (GAAP), the most comparable GAAP measure, for each of the periods indicated: 38 See Note 3 to our consolidated financial statements included in this report for an explanation of the method used to calculate basic and diluted net income per share of common stock. June 30, 2012 2011 2010 2009 2008 (In thousands) Consolidated Balance Sheets Data: Cash and cash equivalents $ 68,531 $ 132,290 $ 155,770 $ 25,182 $ 24,953 Working capital 103,222 162,361 155,164 16,426 17,022 Total assets 507,160 524,924 434,630 212,878 179,746 Total liabilities 168,803 169,535 144,608 96,289 86,032 Total debt 107,596 106,048 93,608 57,240 51,654 Total stockholders’ equity 338,357 355,389 290,022 73,186 50,311 Fiscal Year Ended June 30, 2012 2011 2010 2009 2008 (In thousands) Consolidated Statements of Cash Flows Data: Net cash provided by operating activities $ 47,727 $ 78,171 $ 38,509 $ 32,570 $ 24,751 Depreciation and amortization 31,150 27,272 18,791 15,978 11,727 Capital expenditures 2,268 5,363 2,710 1,347 2,177 Fiscal Year Ended June 30, 2012 2011 2010 2009 2008 (In thousands) Other Financial Data: Adjusted EBITDA $ 72,648 $ 90,311 $ 71,379 $ 56,872 $ 36,279 We define Adjusted EBITDA as net income less provision for taxes, depreciation expense, amortization expense, stock-based compensation expense, interest and other income (expense), net. Please see the “Adjusted EBITDA” section with Management’s Discussion and Analysis for more information. Fiscal Year Ended June 30, 2012 2011 2010 2009 2008 (In thousands) Net income $ 13,001 $ 27,214 $ 20,584 $ 17,274 $ 12,867 Interest and other (income) expense, net 4,370 3,988 2,357 3,538 (413 ) Provision for taxes 11,131 17,887 16,276 13,909 8,876 Depreciation and amortization 31,150 27,272 18,791 15,978 11,727 Stock-based compensation expense 12,996 13,950 13,371 6,173 3,222 Adjusted EBITDA $ 72,648 $ 90,311 $ 71,379 $ 56,872 $ 36,279 (2) (1) (1) Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in the sections titled “Special Note Regarding Forward-Looking Statements” and “Risk Factors”. Management Overview QuinStreet is a leader in vertical marketing and media online. We have built a strong set of capabilities to engage internet visitors with targeted media and to connect our marketing clients with their potential customers online. We focus on serving clients in large, information-intensive industry verticals where relevant, targeted media and offerings help visitors make informed choices, find the products that match their needs, and thus become qualified customer prospects for our clients. We deliver cost-effective marketing results to our clients most typically in the form of a qualified lead or inquiry, or in the form of a click. These leads or clicks can then convert into a customer or sale for clients at a rate that results in an acceptable marketing cost to them. We are typically paid by clients when we deliver qualified leads or clicks as defined by our agreements with them. We bear the costs of media, thus our programs must deliver value to our clients and provide for a media yield, or margin on our media costs, that provides a sound financial outcome for us. Our general process is: 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 substantially all of our net revenue in fiscal years 2012, 2011 and 2010. Our DMS business derives its net revenue from fees earned through the delivery of qualified leads and clicks and, to a lesser extent, display advertisement, or impressions. Through a vertical focus, targeted media presence and our technology platform, we are able to deliver targeted, measurable marketing results to our clients. Our two largest client verticals are financial services and education. Our financial services client vertical represented 42%, 45% and 43% of net revenue in fiscal years 2012, 2011 and 2010, respectively. Our education client vertical represented 42%, 44% and 45% of net revenue in fiscal years 2012, 2011 and 2010, respectively. Other DMS client verticals, consisting primarily of business-to-business technology, home services and medical, represented 16%, 11% and 11% of net revenue in fiscal years 2012, 2011 and 2010, respectively. In addition, we derived less than 1% of our net revenue in fiscal years 2012, 2011 and 2010 from our Direct Selling Services, or DSS, business. We generated substantially all of our revenue from sales to clients in the United States. 39 • we own or access targeted media; • we run advertisements or other forms of marketing messages and programs in that media to create visitor responses or clicks through to client offerings; • we match these responses or clicks to client offerings that meet visitor interests or needs, converting visitors into qualified leads or clicks; and • we optimize client matches and media yield such that we achieve desired results for clients and a sound financial outcome for us. Table of Contents Trends Affecting our Business Client Verticals To date, we have generated the majority of our revenue from clients in our education and financial services client verticals. We expect that a majority of our revenue in fiscal year 2013 will be generated from clients in these two client verticals. Our education client vertical has been significantly affected by the adoption of regulations affecting for-profit educational institutions over the past several years. The regulations have affected and are expected to continue to affect our clients’ businesses and marketing practices, including an overall decrease in our clients’ external marketing expenditures and a related decrease in our revenues from this client vertical. The effect of these regulations may continue to result in fluctuations in the volume and mix of our business with these clients. In our financial services client vertical, prices are largely determined by bidding. In fiscal year 2012, we have seen pricing that we receive from clients stabilize. Throughout the year, our revenue has declined primarily due to volume declines caused by losses of traffic from third-party publishers resulting from acquisitions of media sources by competitors, changes in a search engine’s algorithms which reduced or eliminated traffic from some third-party publishers, and increased competition for quality media. Acquisitions Acquisitions in Fiscal Year 2012 In February 2012, we acquired certain assets of Ziff Davis Enterprise from Enterprise Media Group, Inc., a New York-based online media and marketing company in the business-to-business technology market, in exchange for $17.3 million in cash, to broaden our registered user database and brand name in the business-to-business technology market. In August 2011, we acquired 100% of the outstanding equity interests of NarrowCast Group, LLC, or IT BusinessEdge, a Kentucky-based Internet media company in the business-to-business technology market, in exchange for $24.0 million in cash, to broaden our registered user database and media access in the business-to-business technology market. During fiscal year 2012, in addition to certain assets of Ziff Davis Enterprise and all of the equity interests of IT BusinessEdge, we acquired eleven other online publishing businesses. Acquisitions in Fiscal Year 2011 In November 2010, we acquired 100% of the outstanding shares of Car Insurance.com, Inc., or CarInsurance.com, a Florida-based online insurance business, and certain of its affiliated companies, in exchange for $49.7 million in cash, for its capacity to generate online visitors in the financial services market. In July 2010, we acquired the website business Insurance.com from Insurance.com Group, Inc., an Ohio-based online insurance business, in exchange for $33.0 million in cash and the issuance of a $2.6 million non-interest-bearing, unsecured promissory note, for its capacity to generate online visitors in the financial services market. During fiscal year 2011, in addition to the acquisitions of CarInsurance.com and Insurance.com, we acquired 13 other online publishing businesses. Acquisitions in Fiscal Year 2010 In November 2009, we acquired the website business Internet.com, a division of WebMediaBrands, Inc., or Internet.com, a New York-based Internet media company, in exchange for $15.9 million in cash and the issuance of a $1.7 million non-interest-bearing, unsecured promissory note, to broaden our media access and client base in the business-to-business technology market. In October 2009, we acquired the website business Insure.com from 40 Table of Contents Life Quotes, Inc., or Insure.com, an Illinois-based online insurance quote service and brokerage business, in exchange for $15.0 million in cash and the issuance of a $1.0 million non-interest-bearing, unsecured promissory note, for its capacity to generate online visitors in the financial services market. During fiscal year 2010, in addition to the acquisitions of Internet.com and Insure.com, we acquired 31 other online publishing businesses. Our acquisition strategy may result in significant fluctuations in our available working capital from period to period and over the years. We may use cash, stock or promissory notes to acquire various businesses or technologies, and we cannot accurately predict the timing of those acquisitions or the impact on our cash flows and balance sheet. Large acquisitions or multiple acquisitions within a particular period may significantly affect our financial results for that period. We may utilize debt financing to make acquisitions, which could give rise to higher interest expense and more restrictive operating covenants. We may also utilize our stock as consideration, which could result in substantial dilution. Development, Retention and Acquisition of Targeted Media One of the primary challenges of our business is finding, retaining and developing media that is targeted enough to attract prospects for our clients at costs that work for our business model. In order to grow our business, we must be able to continue to find, develop and retain quality targeted media on a cost-effective basis. Our inability to find, develop and retain high quality targeted media has limited, during some periods, and may continue to limit our growth. Seasonality Our results are subject to significant fluctuation as a result of seasonality. In particular, our quarters ending December 31 (our second fiscal quarter) typically demonstrate seasonal weakness. In our second fiscal quarters, there is lower availability of cost effective media during the holiday period and some of our clients request fewer leads due to holiday staffing. In our quarters ending March 31 (our third fiscal quarter), this trend generally reverses with better lead availability and often new budgets at the beginning of the year for our clients with fiscal years ending December 31. Basis of Presentation General We operate in two segments: DMS and DSS. For further discussion and financial information about our reporting segments, see Note 14 to our consolidated financial statements. Net Revenue DMS. Our DMS business generates revenue from fees earned through the delivery of qualified leads, clicks and, to a lesser extent, display advertisements, or impressions. We deliver targeted and measurable results through a vertical focus that we classify into the following client verticals: financial services, education and “other” (which includes business-to-business technology, home services and medical). DSS. Our DSS business generated less than 1% of net revenue in fiscal years 2012, 2011 and 2010 from the provision of a hosted solution and related services for clients in the direct selling industry. We expect DSS to continue to represent an immaterial portion of our business. Cost of Revenue Cost of revenue consists primarily of media costs, personnel costs, amortization of acquisition-related intangible assets, depreciation expense and amortization of internal software development costs relating to revenue-producing technologies. Media costs consist primarily of fees paid to website publishers that are directly related to a revenue-generating event and pay-per-click, or PPC, ad purchases from Internet search companies. 41 Table of Contents We pay these Internet search companies and website publishers on a revenue-share, a cost-per-lead, or CPL, cost-per-click, or CPC, and cost-per-thousand-impressions, or CPM basis. Personnel costs include salaries, stock-based compensation expense, bonuses and employee benefit costs. Personnel costs are primarily related to individuals associated with maintaining our servers and websites, our editorial staff, client management, creative team, compliance group and media purchasing analysts. Costs associated with software incurred in the development phase or obtained for internal use are capitalized and amortized to cost of revenue over the software’s estimated useful life. We anticipate that our cost of revenue will exhibit trends consistent with trends in our overall revenue. Operating Expenses We classify our operating expenses into three categories: product development, sales and marketing, and general and administrative. Our operating expenses consist primarily of personnel costs and, to a lesser extent, professional services fees, rent and allocated costs. Personnel costs for each category of operating expenses generally include salaries, stock-based compensation expense, bonuses, commissions and employee benefit costs. Product Development. Product development expenses consist primarily of personnel costs and professional services fees associated with the development and maintenance of our technology platforms, development and launching of our websites, product-based quality assurance and testing. We believe that continued investment in technology is critical to attaining our strategic objectives and, as a result, we expect product development expenses to increase in absolute dollars in the future. Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs and, to a lesser extent, professional services fees, travel costs and advertising. We expect sales and marketing expenses to increase in absolute dollars as we hire additional personnel in sales and marketing to support our product offerings. General and Administrative . General and administrative expenses consist primarily of personnel costs of our executive, finance, legal, corporate and business development, employee benefits and compliance, technical support and other administrative personnel, as well as accounting and legal professional services fees and insurance. We expect general and administrative expenses to increase in absolute dollars in future periods as we continue to invest in corporate infrastructure and expanding our business internationally, including increased legal and accounting costs. Interest and Other Income (Expense), Net Interest and other income (expense), net, consists primarily of interest expense, other income and expense and interest income. Interest expense is related to our credit facility, including the related interest rate swap as well as promissory notes issued in connection with our acquisitions, and includes imputed interest on non-interest bearing notes. Borrowings under our credit facility and related interest expense could increase as we continue to implement our acquisition strategy. Interest income represents interest earned on our cash, cash equivalents and marketable securities, which may increase or decrease depending on market interest rates and the amounts invested. Other income (expense), net, includes foreign currency exchange gains and losses and other non-operating items. Income Tax Expense We are subject to tax in the United States as well as other tax jurisdictions or countries in which we conduct business. Earnings from our limited non-U.S. activities are subject to local country income tax and may be subject to U.S. income tax. 42 Table of Contents Results of Operations The following table sets forth our consolidated statement of operations for the periods indicated: Net Revenue Net revenue decreased $32.6 million, or 8%, in fiscal year 2012 compared to fiscal year 2011. This was primarily due to a decrease in revenue from our financial services and education client verticals, which was partially offset by growth in revenue in our other client verticals. Our financial services client vertical revenue decreased $26.2 million, or 14%, due to lower volumes resulting from reduced availability of quality publisher media and, to a lesser degree, lower click prices as compared to fiscal year 2011. Pricing in our financial services client vertical was relatively stable throughout fiscal year 2012. Our education client vertical revenue decreased $20.4 million, or 12%, as a result of our education clients purchasing fewer inquiries due to uncertainty surrounding new regulations affecting for-profit educational institutions. Lower inquiry volumes were marginally offset by higher prices. Revenue from other client verticals increased $14.1 million, or 31%, primarily due to the acquisition of IT BusinessEdge and certain assets of Ziff Davis Enterprise in the business-to-business technology client vertical and, to a lesser extent, higher lead volumes in our home services client vertical. 43 Fiscal Year Ended June 30, 2012 2011 2010 (In thousands) Net revenue $ 370,468 100.0 % $ 403,021 100.0 % $ 334,835 100.0 % Cost of revenue 283,466 76.5 291,991 72.5 240,730 71.9 Gross profit 87,002 23.5 111,030 27.5 94,105 28.1 Operating expenses: Product development 21,051 5.7 24,163 6.0 19,726 5.9 Sales and marketing 14,074 3.8 17,382 4.3 16,698 5.0 General and administrative 23,375 6.3 20,396 5.0 18,464 5.5 Operating income 28,502 7.7 49,089 12.2 39,217 11.7 Interest income 134 0.0 169 0.0 97 0.0 Interest expense (4,462 ) (1.2 ) (4,213 ) (1.0 ) (3,977 ) (1.2 ) Other income (expense), net (42 ) (0.0 ) 56 0.0 1,523 0.5 Income before income taxes 24,132 6.5 45,101 11.2 36,860 11.0 Provision for taxes (11,131 ) (3.0 ) (17,887 ) (4.4 ) (16,276 ) (4.9 ) Net income $ 13,001 3.5 % $ 27,214 6.8 % $ 20,584 6.1 % Cost of revenue and operating expenses include stock-based compensation expense as follows: Cost of revenue $ 4,293 1.2 % $ 4,506 1.1 % $ 3,111 0.9 % Product development 2,570 0.7 2,705 0.7 2,176 0.6 Sales and marketing 3,096 0.8 3,747 0.9 3,463 1.0 General and administrative 3,037 0.8 2,992 0.7 4,621 1.4 Fiscal Year Ended June 30, 2012 - 2011 % Change 2011 - 2010 % Change 2012 2011 2010 (In thousands) Net revenue $ 370,468 $ 403,021 $ 334,835 (8 %) 20 % Cost of revenue 283,466 291,991 240,730 (3 %) 21 % Gross profit $ 87,002 $ 111,030 $ 94,105 (22 %) 18 % (1) (1) (1) Table of Contents Net revenue increased $68.2 million, or 20%, in fiscal year 2011 compared to fiscal year 2010. 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 client vertical and other client verticals. Financial services client vertical revenue increased $38.0 million, or 26%, as increases in click and lead volume were partially offset by lower prices. Education client vertical revenue increased $23.2 million, or 15%, driven by higher prices, a shift in mix towards higher priced inquiries and an increase in inquiry volume. Revenue from other client verticals increased $7.0 million, or 18%, primarily due to the acquisition of Internet.com in November 2009. Cost of Revenue Cost of revenue decreased $8.5 million, or 3%, in fiscal year 2012 compared to fiscal year 2011, driven by decreased media costs of $12.6 million due to lower click volumes and decreased personnel costs of $2.0 million, partially offset by increased amortization of acquisition-related intangible assets of $4.1 million, professional service fees of $1.0 million and a one-time offline marketing event expense of $0.8 million related to an acquisition. The decreased personnel costs were attributable to a reduction in average headcount. Gross margin, which is the difference between net revenue and cost of revenue as a percentage of net revenue was 23% in fiscal year 2012 compared to 28% in fiscal year 2011, primarily due to a lower mix of traffic from owned and operated media, lower margins from publisher arrangements and higher amortization expenses, partially offset by the above-mentioned decreased personnel costs. Cost of revenue increased $51.3 million, or 21%, in fiscal year 2011 compared to fiscal year 2010, driven by an increase in media costs of $28.9 million due to higher lead and click volumes, increased personnel costs of $10.6 million and increased amortization of acquisition-related intangible assets of $6.9 million resulting from acquisitions in fiscal year 2011 and 2010. The increase in personnel costs was attributable to a 34% increase in average headcount, primarily resulting from acquisitions. Gross margin, remained flat as compared to fiscal 2010 at 28% in fiscal year 2011, as higher margins from publisher arrangements and a higher mix of traffic from owned and operated targeted media were offset by the above-mentioned increase in headcount and related personnel costs, as well as higher amortization expense. Operating Expenses Product Development Expenses Product development expenses decreased $3.1 million, or 13%, in fiscal year 2012 compared to fiscal year 2011, primarily due to decreased personnel costs of $1.7 million resulting from a reduction in average headcount, increased capitalized software expenses of $0.6 million, decreased professional services of $0.4 million and various smaller decreases in product development expenses. Product development expenses increased $4.4 million, or 22%, in fiscal year 2011 compared to fiscal year 2010, primarily due to increased personnel costs. The increase in personnel costs was due to increased compensation expense of $3.1 million, increased stock-based compensation expense of $0.5 million and various smaller increases in product development expenses. The increase in compensation expense and stock-based compensation expense was due to a 24% increase in average headcount from additional hiring in connection with development projects and acquisitions. 44 Fiscal Year Ended June 30, 2012 - 2011 % Change 2011 - 2010 % Change 2012 2011 2010 (In thousands) Product development $ 21,051 $ 24,163 $ 19,726 (13 %) 22 % Sales and marketing 14,074 17,382 16,698 (19 %) 4 % General and administrative 23,375 20,396 18,464 15 % 10 % Operating expenses $ 58,500 $ 61,941 $ 54,888 (6 %) 13 % Table of Contents Sales and Marketing Expenses Sales and marketing expenses decreased $3.3 million, or 19%, in fiscal year 2012 compared to fiscal year 2011, primarily due to decreased personnel costs of $2.3 million resulting from decreased performance bonus expenses and decreased stock-based compensation expense of $0.7 million. Sales and marketing expenses increased $0.7 million, or 4%, in fiscal year 2011 compared to fiscal year 2010, primarily due to increased compensation expense of $0.5 million. General and Administrative Expenses General and administrative expenses increased $3.0 million, or 15%, in fiscal year 2012 compared to fiscal year 2011. This was due to a $2.5 million payment to the attorneys general of multiple states in connection with a settlement related to online marketing for education companies, increased bad debt expense of $1.4 million resulting from the insolvency of an advertising agency of record of one of our clients, partially offset by decreased personnel costs of $1.4 million attributable to a reduction in average headcount. General and administrative expenses increased $1.9 million, or 10%, in fiscal year 2011 compared to fiscal year 2010, due to increased professional service fees of $1.4 million, higher insurance premiums of $0.3 million, state franchise tax charges of $0.3 million and various smaller increases in general and administrative expenses, partially offset by decreased personnel costs of $0.2 million. Professional service fees and insurance premiums increased due to our continued investment in corporate infrastructure and related expenses associated with being a public company, including increased compliance costs. The decrease in personnel costs was driven by a decline in stock-based compensation expense of $1.6 million primarily due to the grant of fully-vested options to certain members of the board of directors in fiscal year 2010. The decrease in stock-based compensation expense was partially offset by increased compensation expense of $1.4 million primarily due to higher salaries and performance bonus expenses associated with the achievement of specified financial metrics during fiscal year 2011. Interest and Other Income (Expense), Net Interest and other income (expense), net increased by $0.4 million, or 10%, in fiscal year 2012 compared to fiscal year 2011, primarily due to increased interest expense of $0.2 million in fiscal year 2012 and $0.2 million attributable to proceeds from a settlement of a legal matter in fiscal year 2011. Interest and other income (expense), net decreased by $1.6 million, or 69%, in fiscal year 2011 compared to fiscal year 2010, due to a decrease in other income of $1.5 million primarily from a gain of $1.2 million in fiscal year 2010 on the extinguishment of acquisition-related promissory notes that we paid off at discounts prior to maturity. Provision for Taxes 45 Fiscal Year Ended June 30, 2012 - 2011 % Change 2011 - 2010 % Change 2012 2011 2010 (In thousands) Interest income $ 134 $ 169 $ 97 (21 %) 74 % Interest expense (4,462 ) (4,213 ) (3,977 ) 6 % 6 % Other income (expense), net (42 ) 56 1,523 (175 %) -96 % Interest and other income (expense), net $ (4,370 ) $ (3,988 ) $ (2,357 ) 10 % 69 % Fiscal Year Ended June 30, 2012 2011 2010 (In thousands) Provision for taxes $ 11,131 $ 17,887 $ 16,276 Effective tax rate 46.1 % 39.7 % 44.2 % Table of Contents The increase in our effective tax rate for fiscal year 2012 compared to fiscal year 2011, was primarily due to higher non-deductible stock-based compensation expense. The decrease in our effective tax rate in fiscal year 2011 compared to fiscal year 2010, was primarily driven by lower state income tax expense. As of June 30, 2012, we had net deferred tax assets of $16.1 million. Our net deferred tax assets consist primarily of stock-based compensation expense, accruals and reserves not currently deductible for tax purposes. See Note 8 to our consolidated financial statements for more information about our deferred tax assets. Selected Quarterly Financial Data The following table sets forth our unaudited quarterly consolidated statements of operations data for the eight quarters ended June 30, 2012. We have prepared the statements of operations for each of these quarters on the same basis as the audited consolidated financial statements included elsewhere in this report and, in the opinion of management, each statement of operations includes all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of the results of operations for these periods. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this report. These quarterly operating results are not necessarily indicative of our operating results for any future period. 46 Three Months Ended June 30, 2012 Mar 31, 2012 Dec 31, 2011 Sept 30, 2011 June 30, 2011 Mar 31, 2011 Dec 31, 2010 Sept 30, 2010 (In thousands) Net revenue $ 85,698 $ 93,023 $ 90,523 $ 101,224 $ 94,118 $ 107,705 $ 97,582 $ 103,616 Costs of revenue 67,044 72,278 68,396 75,748 69,122 78,578 70,662 73,629 Gross profit 18,654 20,745 22,127 25,476 24,996 29,127 26,920 29,987 Operating expenses: Product development 4,806 5,069 5,102 6,074 5,843 6,836 5,933 5,551 Sales and marketing 2,960 3,394 3,686 4,034 3,285 4,687 4,665 4,745 General and administrative 7,072 6,239 4,847 5,217 5,206 5,525 4,943 4,722 Operating income 3,816 6,043 8,492 10,151 10,662 12,079 11,379 14,969 Interest income 29 31 36 38 30 25 47 67 Interest expense (1,153 ) (1,111 ) (1,115 ) (1,083 ) (1,105 ) (1,091 ) (1,028 ) (989 ) Other income (expense), net 79 3 (93 ) (31 ) (95 ) 66 (79 ) 164 Income before income taxes 2,771 4,966 7,320 9,075 9,492 11,079 10,319 14,211 Provision for taxes (2,570 ) (2,093 ) (2,887 ) (3,581 ) (3,046 ) (4,740 ) (3,391 ) (6,710 ) Net income $ 201 $ 2,873 $ 4,433 $ 5,494 $ 6,446 $ 6,339 $ 6,928 $ 7,501 Net income per share: Basic $ 0.00 $ 0.06 $ 0.09 $ 0.12 $ 0.14 $ 0.14 $ 0.15 $ 0.17 Diluted $ 0.00 $ 0.06 $ 0.09 $ 0.11 $ 0.13 $ 0.13 $ 0.14 $ 0.16 Other Financial Data: Adjusted EBITDA $ 15,214 $ 17,271 $ 19,530 $ 20,633 $ 20,779 $ 23,218 $ 21,718 $ 24,596 Net income per share for the four quarters of each fiscal year may not sum to the total for the fiscal year because of the different number of shares outstanding during each period. (1) (1) Table of Contents Adjusted EBITDA Our use of Adjusted EBITDA. We include Adjusted EBITDA in this report because (i) we seek to manage our business to a consistent level of Adjusted EBITDA as a percentage of net revenue, (ii) it is a key basis upon which our management assesses our operating performance, (iii) it is one of the primary metrics investors use in evaluating Internet marketing companies, (iv) it is a factor in the evaluation of the performance of our management in determining compensation, and (v) it is an element of certain financial covenants under our debt agreements. We define Adjusted EBITDA as net income less provision for taxes, depreciation expense, amortization expense, stock-based compensation expense, interest and other income (expense), net. We use Adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or fluctuations in permanent differences or discrete quarterly items) and the non-cash impact of depreciation, amortization and stock-based compensation expense. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use Adjusted EBITDA for business planning purposes, to incentivize and compensate our management personnel and in evaluating acquisition opportunities. In addition, we believe Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies and other interested parties in our industry as a measure of financial performance and debt-service capabilities. Our use of Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: Due to these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. When evaluating our performance, Adjusted EBITDA should be considered alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results. 47 • Adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments; • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements; • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA does not consider the potentially dilutive impact of issuing stock-based compensation to our management team and employees; • Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness; • Adjusted EBITDA does not reflect certain tax payments that may represent a reduction in cash available to us; and • other companies, including companies in our industry, may calculate Adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure. Table of Contents The following table presents a reconciliation of Adjusted EBITDA to net income, the most comparable GAAP measure, for each of the periods indicated: Adjusted EBITDA quarterly trends. We seek to manage our business to a consistent level of Adjusted EBITDA as a percentage of net revenue. We do so on a fiscal year basis by varying our operations to balance revenue growth and costs throughout the fiscal year. We do not seek to manage our business to a consistent level of Adjusted EBITDA on a quarterly basis and investors should expect our Adjusted EBITDA margins to vary from quarter to quarter. Liquidity and Capital Resources Our principal sources of liquidity as of June 30, 2012 consisted of cash and cash equivalents of $68.5 million, short-term marketable securities of $36.7 million, cash we expect to generate from operations, and our $200.0 million revolving credit facility, which is committed until November 2016, all of which is available to be drawn, subject to compliance with applicable covenants. Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. We believe our cash equivalents are liquid and accessible. In November 2011, we replaced our existing $225.0 million credit facility with a new credit facility that expanded our overall borrowing capacity by $75.0 million to $300.0 million, consisting of a $100.0 million term loan and a $200.0 million revolving credit facility. Additionally, in November 2011, our Board of Directors authorized a stock repurchase program allowing us to repurchase up to $50.0 million, excluding broker commissions, of our outstanding shares of common stock. Through June 30, 2012, we have repurchased an aggregate of 4.8 million shares of our common stock for an aggregate of $45.0 million. As of June 30, 2012, the remaining amount available for the repurchase of our common stock under this program was $5.0 million, all of which was used for repurchases in July 2012. Additionally, in August 2011, we acquired 100% of the outstanding equity interests of NarrowCast Group, LLC, or IT BusinessEdge, a Kentucky-based Internet media company in the business-to-business technology market, in exchange for $24.0 million in cash. In February 2012, we acquired certain assets of Ziff Davis Enterprise from Enterprise Media Group, Inc., a New York-based online media and marketing company in the business-to-business technology market, for $17.3 million in cash. Our short-term and long-term liquidity requirements primarily arise from our working capital requirements, acquisitions from time to time and share repurchases. Our primary operating cash requirements include the payment of media costs, personnel costs, costs of information technology systems and office facilities. Our 48 Three Months Ended June 30, 2012 Mar 31, 2012 Dec 31, 2011 Sept 30, 2011 June 30, 2011 Mar 31, 2011 Dec 31, 2010 Sept 30, 2010 (In thousands) Net income $ 201 $ 2,873 $ 4,433 $ 5,494 $ 6,446 $ 6,339 $ 6,928 $ 7,501 Interest and other income (expense), net 1,045 1,077 1,172 1,076 1,170 1,000 1,060 758 Provision for taxes 2,570 2,093 2,887 3,581 3,046 4,740 3,391 6,710 Depreciation and amortization 8,493 8,032 7,517 7,108 7,020 7,632 6,723 5,897 Stock-based compensation expense 2,905 3,196 3,521 3,374 3,097 3,507 3,616 3,730 Adjusted EBITDA $ 15,214 $ 17,271 $ 19,530 $ 20,633 $ 20,779 $ 23,218 $ 21,718 $ 24,596 Adjusted EBITDA as a percentage of revenue 18 % 19 % 22 % 20 % 22 % 22 % 22 % 24 % Table of Contents ability to fund these requirements will depend on our future cash flows, which are determined by future operating performance and are, therefore, subject to prevailing global macroeconomic conditions and financial, business and other factors, some of which are beyond our control, and also our ability to access our credit facility. We believe that our existing cash, cash equivalents, short-term marketable securities, cash generated from operations and our available borrowings under the credit facility will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months. Our ability to service any indebtedness we have incurred or may incur, including under our current credit facility, will depend on our ability to generate cash in the future. In addition, even though we may not need additional funds, we may still elect to obtain additional debt or equity securities or draw down on or increase our borrowing capacity under our current credit facility for other reasons. Net Cash Provided by Operating Activities Our net cash provided by operating activities is primarily the result of our net income adjusted for non-cash expenses such as depreciation and amortization, stock-based compensation expense and changes in working capital components, and is influenced by the timing of cash collections from our clients and cash payments for purchases of media and other expenses. Net cash provided by operating activities in fiscal year 2012 was due to net income of $13.0 million, non-cash depreciation, amortization, stock-based compensation expense and related tax benefits of $46.0 million, a decrease in other noncurrent assets comprised primarily of deferred taxes of $2.8 million, partially offset by an increase in prepaid expenses and other assets of $2.6 million, an increase in accounts receivable of $2.0 million and a decrease in accounts payable and accrued liabilities of $7.8 million. The decrease in accounts payable and accrued liabilities is due to timing of payments and decreased cost of revenue associated with decreased revenue. The increase in prepaid expenses and other assets is primarily due to timing of payments. The increase in accounts receivable is attributable to timing of receipts. The decrease in deferred taxes is due to larger temporary differences between the financial statement carrying amount and the tax basis of certain existing assets and liabilities. Net cash provided by operating activities in fiscal year 2011 was due to net income of $27.2 million, non-cash depreciation, amortization, stock-based compensation expense and related tax benefits of $33.8 million, an increase in accounts payable and accrued liabilities of $8.9 million, a decrease in prepaid expenses and other assets of $5.1 million and a decrease in accounts receivable of $3.9 million, partially offset by an increase in other noncurrent assets comprised primarily of deferred taxes of $3.3 million. The increase in accounts payable and accrued liabilities is due to timing of payments and increased cost of revenue associated with increased revenue. The decrease in prepaid expenses and other assets is primarily due to timing of payments. The decrease in accounts receivable is attributable to timing of receipts. The increase in deferred taxes is due to larger temporary differences between the financial statement carrying amount and the tax basis of certain existing assets and liabilities. Net cash provided by operating activities in fiscal year 2010 was due to net income of $20.6 million, non-cash depreciation, amortization, stock-based compensation expense and related tax benefits of $30.3 million and an increase in accounts payable and accrued liabilities of $11.3 million, partially offset by an increase in accounts receivable of $14.4 million, an increase in deferred taxes of $6.8 million, as well as a gain from the 49 Fiscal Year Ended June 30, 2012 2011 2010 (In thousands) Cash flows from operating activities $ 47,727 $ 78,171 $ 38,509 Cash flows from investing activities (67,906 ) $ (134,763 ) $ (72,233 ) Cash flows from financing activities (43,447 ) $ 33,072 $ 164,324 Table of Contents early extinguishment of debt of $1.2 million. The increase in accounts payable and accrued liabilities is due to timing of payments and increased cost of sales associated with increased revenue. The increase in accounts receivable is attributable to increased revenue, as well as timing of receipts. The increase in deferred taxes is primarily due to larger temporary differences between the financial statement carrying amount and the tax basis of certain existing assets and liabilities. Net Cash Used in Investing Activities Our investing activities include acquisitions of media websites and businesses; purchases, sales and maturities of marketable securities; capital expenditures; and capitalized internal development costs. Cash used in investing activities in fiscal year 2012 was primarily due to our acquisition of IT Business Edge for a cash payment of $24.0 million, acquisition of certain assets of Ziff Davis Enterprise of $17.3 million and the purchases of the operations of eleven other online publishing businesses for an aggregate of $14.6 million in cash payments, as well as net investments in marketable securities of $3.2 million. Capital expenditures and internal software development costs totaled $4.6 million in fiscal year 2012. Cash used in investing activities in fiscal year 2011 was primarily due to our acquisition of CarInsurance.com for an initial cash payment of $49.7 million and Insurance.com for an initial cash payment of $33.0 million. Cash used in investing activities was also impacted by purchases of the operations of 13 other online publishing businesses for an aggregate of $9.2 million in cash payments, which included $4.5 million of contingent consideration related to a prior period acquisition, as well as net investments in marketable securities of $35.2 million. Capital expenditures and internal software development costs totaled $7.2 million in fiscal year 2011. Cash used in investing activities in fiscal year 2010 was primarily due to our acquisitions of Internet.com, Insure.com and HSH Association Financial Publications (“HSH”). We acquired the website business of the Internet.com division of WebMediaBrands, Inc., a New York-based Internet media company, for an initial cash payment of $15.9 million. We acquired the website business of Insure.com from LifeQuotes, Inc., an Illinois-based online insurance quote service and brokerage business, for an initial cash payment of $15.0 million. We acquired HSH, a New Jersey-based online company providing comprehensive mortgage rate information, for an initial cash payment of $6.0 million. Cash used in investing activities was also affected by purchases of the operations of 30 other website publishing businesses for an aggregate of $31.2 million in cash payments, which included $4.5 million of contingent consideration related to the acquisition of SureHits in fiscal year 2008. Capital expenditures and internal software development costs totaled $4.1 million in fiscal year 2010. Net Cash Provided by or Used in Financing Activities Cash used in financing activities in fiscal year 2012 was primarily due to repurchases of our common stock of $43.9 million under our stock repurchase program and principal payments on acquisition-related notes payable and our term loan and related fees of $9.9 million, partially offset by proceeds from bank debt of $5.9 million and exercise of stock options of $4.7 million. Cash provided by financing activities in fiscal year 2011 was primarily due to net proceeds from the draw-down of our revolving credit line of $24.4 million, proceeds from the exercise of stock options of $16.7 million and excess tax benefits from stock-based compensation of $7.5 million, partially offset by $15.4 million in principal payments on acquisition-related promissory notes and our term loan. Cash provided by financing activities in fiscal year 2010 was primarily due to proceeds from our IPO, net of issuance costs, of $136.8 million, draw-down of our credit facility, net of principal payments, of $40.2 million, proceeds from stock option exercises of $1.6 million and excess tax benefits of $1.9 million, partially offset by $15.5 million of principal payments on acquisition-related promissory notes. 50 Table of Contents Off-Balance Sheet Arrangements During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Contractual Obligations Our contractual obligations relate primarily to borrowings under the credit facility, acquisition-related promissory notes and operating leases. The following table sets forth payments due under our contractual obligations as of June 30, 2012: The above table does not include approximately $2.4 million of long-term income tax liabilities for uncertainty in income taxes due to the fact that we are unable to reasonably estimate the timing of these potential future payments. Credit Facility On November 4, 2011, we replaced our existing $225.0 million credit facility with a new $300.0 million credit facility. The new facility consists of a $100.0 million five-year term loan, with annual principal amortization of 5%, 10%, 15%, 20% and 50%, and a $200.0 million five-year revolving credit line. Borrowings under the credit facility are collateralized by substantially all of our assets. Interest is payable at specified margins above either the Eurodollar Margin or the Prime Rate. The interest rate varies dependent upon the ratio of funded debt to adjusted EBITDA and ranges from Eurodollar Margin + 1.625% to 2.375% or Prime + 1.00% for the revolving credit line and from Eurodollar Margin + 2.00% to 2.75% or Prime + 1.00% for the term loan. Adjusted EBITDA is defined as net income less provision for taxes, depreciation expense, amortization expense, stock-based compensation expense, interest and other income (expense), and acquisition costs for business combinations. The interest rate margins for the new facility are 0.50% less than the commensurate margins under our previous credit facility. The revolving credit line requires a facility fee of 0.375% of the revolving credit line capacity. To reduce our exposure to rising interest rates under the term loan, on February 24, 2012, we entered into an interest rate swap encompassing the principal balances scheduled to be outstanding as of January 1, 2014 and thereafter, such principal amount totaling $85.0 million on January 1, 2014 and amortizing to $35.0 million on November 4, 2016. The interest rate swap effectively fixes the Eurodollar Margin at 0.97%. The credit facility expires in November 2016. The credit facility restricts our ability to raise additional debt financing and pay dividends, and also requires us to comply with other nonfinancial covenants. In addition, we are required to maintain financial ratios computed as follows: 1. A minimum fixed charge coverage ratio of 1.15:1, calculated as the ratio of (i) trailing twelve months of adjusted EBITDA to (ii) the sum of capital expenditures, net cash interest expense, cash taxes, cash dividends 51 Year Ending June 30, Promissory Notes Credit Facility Operating Leases Total 2013 $ 8,569 $ 7,500 $ 3,184 $ 19,253 2014 3,364 12,500 3,251 19,115 2015 560 17,500 3,117 21,177 2016 50 20,000 3,060 23,110 2017 and thereafter — 40,000 6,335 46,335 Total $ 12,543 $ 97,500 $ 18,947 $ 128,990 Table of Contents and trailing twelve months payments of indebtedness. Payment of unsecured indebtedness is excluded to the degree that sufficient unused revolving credit line capacity exists such that the relevant debt payment could be made from the credit facility. 2. A maximum funded debt to adjusted EBITDA ratio of 3:1, calculated as the 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. We were in compliance with the covenants of our new credit facility as of June 30, 2012. Interest Rate Swap We entered into an interest rate swap to reduce our exposure to the financial impact of changing interest rates under our term loan. The effective date of the swap is April 9, 2012 with a maturity date of November 4, 2016. At June 30, 2012, we had approximately $85.0 million of notional amount outstanding under the swap agreement that exchanges a variable interest rate base (Eurodollar margin) for a fixed interest rate of 0.97% over the term of the agreement. This interest rate swap is designated as a cash flow hedge of the interest rate risk attributable to forecasted variable interest payments. The effective portion of the fair value gains or losses on this swap will be included as a component of accumulated other comprehensive income (loss). At June 30, 2012, our interest rate swap qualifies as a cash flow hedge. For this qualifying hedge, the effective portion of the change in fair value will be recognized through earnings when the underlying transaction being hedged affects earnings, thereby allowing the swap’s gains to offset interest expense from the term loan on the income statement. Any hedge ineffectiveness is recognized in earnings in the current period. Headquarters Lease We entered into a lease agreement in February 2010 for approximately 63,998 square feet of office space located at 950 Tower Lane, Foster City, California. The term of the lease began on November 1, 2010 and expires on October 31, 2018. The monthly base rent was abated for the first 12 calendar months under the lease, and will remain at $0.1 million through the 24th calendar month of the term of the lease. After this 24 month period, monthly base rent will increase to $0.2 million for the subsequent 12 months and then increase approximately 3% after each 12-month anniversary during the remaining term, including any extensions under our options to extend. We have 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. Critical Accounting Policies and Estimates We have prepared our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In doing so, we are required 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. 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, estimates and assumptions and, therefore, could have the greatest potential impact on our consolidated financial 52 Table of Contents statements. In addition, we believe that a discussion of these policies is necessary to understand and evaluate the consolidated financial statements contained in this report. For further information on our critical and other significant accounting policies, see Note 2 of our consolidated financial statements included in this report. Revenue Recognition We derive our revenue from two sources: Direct Marketing Services (“DMS”) and Direct Selling Services (“DSS”). DMS revenue is derived primarily from fees which are earned through the delivery of qualified leads or clicks and, to a lesser extent, display advertisements, or impressions. We recognize 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. On July 1, 2010, as required under GAAP, we adopted the amended accounting guidance for multiple deliverable revenue arrangements which provides guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated. The adoption of this amended guidance did not have a significant impact on our revenue recognition for multiple deliverable revenue arrangements. The guidance requires the allocation of revenue in an arrangement using the estimated selling price (“ESP”) of deliverables if vendor-specific objective evidence (“VSOE”) of selling price based on historical stand-alone sales or third-party evidence (“TPE”) of selling price do not exist. Due to the unique nature of some of our multiple deliverable revenue arrangements, we may not be able to establish selling prices based on historical stand-alone sales or third party evidence, therefore we may use our best estimate to establish selling prices for these arrangements under the new standard. We establish best estimates within a range of selling prices considering multiple factors including, but not limited to, factors such as class of client, size of transaction, available media inventory, pricing strategies and market conditions. We believe the use of the best estimate of selling price allows revenue recognition in a manner consistent with the underlying economics of the transaction. From time to time, we 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. We have established a sales reserve based on historical experience. To date, such credits have been immaterial and within our expectations. For a portion of our revenue, we have agreements with providers of online media or traffic (“Publishers”) used in the generation of qualified leads or clicks. We receive a fee from our clients and pay a fee to Publishers either on a revenue-share, cost-per-lead, cost- per-click or cost-per-thousand-impressions basis. We are the primary obligor in the transaction. As a result, the fees paid by our clients are recognized as revenue and the fees paid to our Publishers are included in cost of revenue. DSS revenue 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. We define 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. 53 Table of Contents Stock-Based Compensation We measure and record the expense related to stock-based transactions based on the fair values of the awards as determined on the date of grant. For stock options, we selected and have historically used the Black-Scholes option pricing model to estimate the fair value. In applying the Black-Scholes option pricing model, our determination of fair value is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the 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. Since we do not have extensive trading history, we estimate the expected volatility of our common stock based on the historical volatility of comparable public companies over the stock option’s expected term. We have no history or expectation of paying cash dividends on our common stock. The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected term of the stock options. The fair value of restricted stock units is determined based on the closing price of our common stock on the date of grant. We recognize stock-based compensation expense over the requisite service period using the straight-line method, based on awards ultimately expected to vest. We estimate future forfeitures at the date of grant and revise the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Goodwill We conduct a test for the impairment of goodwill on at least an annual basis. We have two reporting units, DMS and DSS. We performed our annual goodwill impairment test in our quarter ending June 30, 2012, but will conduct the test at an earlier date if indicators of possible impairment arise that would cause a triggering event. The impairment test first compares the fair value of our reporting unit to its carrying amount, including goodwill, to assess whether impairment is present. In our quarter ending June 30, 2012, we determined that the estimated fair value of our DMS reporting unit was in excess of its carrying value. The carrying value of our DMS reporting unit was approximately $337.1 million in our quarter ending June 30, 2012. The estimated fair value of our DMS reporting unit under a market approach was approximately $431.7 million in our quarter ending June 30, 2012 based on our market capitalization of the entire business enterprise, including a control premium, less the estimated fair value of our DSS reporting unit. This resulted in an excess of fair value over the carrying value of approximately $94.6 million or 28%. In our quarter ending June 30, 2012, we determined that the estimated fair value of our DSS reporting unit was in excess of its carrying value. The carrying value of our DSS reporting unit was approximately $1.3 million in our quarter ending June 30, 2012. The estimated fair value of our DSS reporting unit under an income approach was approximately $1.4 million in our quarter ending June 30, 2012 based on the present value of estimated future cash flows. This resulted in an excess of fair value over the carrying value of approximately $0.1 million or 13%. Based on our impairment test conducted in our quarter ending June 30, 2012, we concluded that there was no impairment of goodwill for fiscal year 2012. No impairment charges were recorded in other periods presented. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions. We base these estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. Actual results could differ from those estimates, and such differences could affect the estimated fair value of the reporting units and hence the valuation of goodwill could be affected. Circumstances that could affect the valuation of goodwill include, among other things, a significant change in our market capitalization, the business climate and buying habits of our subscriber base, and with respect to the DSS reporting unit, the loss of a significant customer. The application of the goodwill impairment test requires judgment, including the identification of reporting units, the assignment of assets, liabilities and goodwill to reporting units and the 54 Table of Contents determination of 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, an appropriate control premium and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value which could trigger impairment. Long-Lived Assets We evaluate 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. We apply judgment when estimating the fair value of the assets based on the undiscounted future cash flows the assets are expected to generate and recognize 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. No impairment charges were recorded in the periods presented. Income Taxes We account for income taxes using an asset and liability approach to record deferred taxes. Our 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 our net deferred tax assets assumes that it is more likely than not that we will be able to generate sufficient future taxable income in certain tax jurisdictions. Our judgment regarding future profitability may change due to future market conditions, changes in U.S. or international tax laws and other factors. Recent Accounting Pronouncements See Note 2 to our consolidated financial statements for information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risks in the ordinary course of our business. These risks include primarily foreign currency exchange and interest rate risks. Interest Rate Risk We invest our cash equivalents and short-term investments primarily in liquid, highly-rated U.S. government or municipal fixed income securities, certificates of deposit with financial institutions and money market funds. Unrestricted cash, cash equivalents and short-term investments are held for working capital purposes and acquisition financing. We do not enter into investments for trading or speculative purposes. We believe that we do not have material exposure to changes in the fair value of these investments as a result of changes in interest rates due to the short-term nature of our investments. Declines in interest rates may reduce future investment income. However, a hypothetical decline of 1% in the interest rate on our investments would not have a material effect on our consolidated financial statements. As of June 30, 2012, our credit facility had a borrowing capacity of $300.0 million with $97.5 million in term loans outstanding, and no amounts outstanding under our revolving line of credit. Interest on borrowings under the credit facility is payable quarterly at specified margins above either the Eurodollar Margin or the Prime Rate. Our exposure to interest rate risk under the credit facility will depend on the extent to which we utilize such facility. To reduce our exposure to rising interest rates under the term loan, on February 24, 2012, we entered into an interest rate swap encompassing the principal balances scheduled to be outstanding as of January 1, 2014 and 55 Table of Contents thereafter, such principal amount will total $85.0 million on January 1, 2014 and amortize to $35.0 million on November 4, 2016. The interest rate swap effectively fixes the Eurodollar Margin at a fixed rate of 0.97%. A hypothetical change of 1% from prevailing interest rates as of June 30, 2012 would affect our interest expense and the fair value of the swap by less than $0.1 million. In addition to the $85.0 million of term loans covered by the interest rate swap as of June 30, 2012, the Company also had variable rate debt outstanding of $12.5 million. A hypothetical increase of 1% in the Eurodollar Margin or Prime Rate-based interest rate on our variable rate debt outstanding of $12.5 million as of June 30, 2012 would result in an increase in our interest expense of $0.1 million per year, assuming constant borrowing levels. Foreign Currency Exchange Risk To date, our international client agreements have been predominately denominated in U.S. dollars, and accordingly, we have limited exposure to foreign currency exchange rate fluctuations related to client agreements, and do not currently engage in foreign currency hedging transactions. As the local accounts for some of our foreign operations are maintained in the local currency of the respective country, we are subject to foreign currency exchange rate fluctuations associated with the remeasurement to U.S. dollars. A hypothetical change of 10% in foreign currency exchange rates would not have a material effect on our consolidated financial statements. 56 Table of Contents Item 8. Financial Statements and Supplementary Data QUINSTREET, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 57 Page Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm 58 Consolidated Balance Sheets 59 Consolidated Statements of Operations 60 Consolidated Statements of Convertible Preferred Stock, Stockholders’ Equity and Comprehensive Income 61 Consolidated Statements of Cash Flows 62 Notes to Consolidated Financial Statements 63 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of QuinStreet, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of QuinStreet, Inc. and its subsidiaries at June 30, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our audits (which was an integrated audit in 2012). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP San Jose, California August 23, 2012 58 Table of Contents QUINSTREET, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) See notes to consolidated financial statements 59 June 30, June 30, 2012 2011 Assets Current assets Cash and cash equivalents $ 68,531 $ 132,290 Marketable securities 36,736 34,927 Accounts receivable, net 52,830 48,225 Deferred tax assets 7,665 10,253 Prepaid expenses and other assets 7,774 5,773 Total current assets 173,536 231,468 Property and equipment, net 8,755 8,875 Goodwill 243,049 211,856 Other intangible assets, net 72,444 65,847 Deferred tax assets, noncurrent 8,446 5,866 Other assets, noncurrent 930 1,012 Total assets $ 507,160 $ 524,924 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 22,870 $ 23,300 Accrued liabilities 29,462 33,238 Deferred revenue 2,553 2,531 Debt 15,429 10,038 Total current liabilities 70,314 69,107 Deferred revenue, noncurrent 49 58 Debt, noncurrent 92,167 96,010 Other liabilities, noncurrent 6,273 4,360 Total liabilities 168,803 169,535 Commitments and contingencies (See Note 10) Stockholders’ equity Common stock: $0.001 par value; 100,000,000 shares authorized; 43,350,831 and 49,564,877 shares issued, and 43,222,031 and 47,387,425 shares outstanding at June 30, 2012 and 2011, respectively 43 50 Additional paid-in capital 220,552 255,689 Treasury stock, at cost (128,800 and 2,177,452 shares at June 30, 2012 and 2011, respectively) (1,178 ) (7,779 ) Accumulated other comprehensive income (1,439 ) 51 Retained earnings 120,379 107,378 Total stockholders’ equity 338,357 355,389 Total liabilities and stockholders’ equity $ 507,160 $ 524,924 Table of Contents QUINSTREET, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) See notes to consolidated financial statements 60 Fiscal Year Ended June 30, 2012 2011 2010 Net revenue $ 370,468 $ 403,021 $ 334,835 Cost of revenue 283,466 291,991 240,730 Gross profit 87,002 111,030 94,105 Operating expenses: Product development 21,051 24,163 19,726 Sales and marketing 14,074 17,382 16,698 General and administrative 23,375 20,396 18,464 Operating income 28,502 49,089 39,217 Interest income 134 169 97 Interest expense (4,462 ) (4,213 ) (3,977 ) Other income (expense), net (42 ) 56 1,523 Income before income taxes 24,132 45,101 36,860 Provision for taxes (11,131 ) (17,887 ) (16,276 ) Net income $ 13,001 $ 27,214 $ 20,584 Net income attributable to common stockholders: Basic $ 13,001 $ 27,214 $ 12,782 Diluted $ 13,001 $ 27,214 $ 13,201 Net income per share attributable to common stockholders: Basic $ 0.28 $ 0.59 $ 0.50 Diluted $ 0.28 $ 0.55 $ 0.46 Weighted average shares used in computing net income per share attributable to common stockholders: Basic 45,846 46,222 25,616 Diluted 46,859 49,130 28,429 Cost of revenue and operating expenses include stock-based compensation expense as follows: Cost of revenue $ 4,293 $ 4,506 $ 3,111 Product development 2,570 2,705 2,176 Sales and marketing 3,096 3,747 3,463 General and administrative 3,037 2,992 4,621 (1) (1) (1) Table of Contents QUINSTREET, INC. CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK, STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (In thousands, except share data) See notes to consolidated financial statements 61 Convertible Preferred Stock Common Stock Treasury Stock Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Shareholders’ Equity Comprehensive Income Shares Amount Shares Amount Shares Amount Balance at June 30, 2009 21,176,533 $ 43,403 15,413,000 $ 15 (2,097,652 ) $ (7,064 ) $ 20,634 $ 21 $ 59,580 $ 73,186 Issuance of common stock upon exercise of stock options — — 657,614 1 — — 1,639 — — 1,640 Issuance of common stock in connection with initial public offering, net of issuance costs of $13,215 — 10,000,000 10 — — 136,775 136,785 Conversion of preferred stock to common stock in connection with initial public offering (21,176,533 ) (43,403 ) 21,176,533 21 — — 43,382 — — 43,403 Stock-based compensation — — — — — — 13,371 — — 13,371 Excess tax benefits from stock-based compensation — — — — — — 1,780 — — 1,780 Repurchase of common stock — — — — (79,800 ) (715 ) — — — (715 ) Comprehensive income: Net income — — — — — — — — 20,584 20,584 $ 20,584 Currency translation adjustments — — — — — — — (12 ) — (12 ) (12 ) Comprehensive income — — — — — — — — — — $ 20,572 Balance at June 30, 2010 — $ — 47,247,147 $ 47 (2,177,452 ) $ (7,779 ) $ 217,581 $ 9 $ 80,164 $ 290,022 Issuance of common stock upon exercise of stock options — — 2,317,730 3 — — 16,967 — — 16,970 Payments of initial public offering issuance costs — — — — — — (101 ) — — (101 ) Stock-based compensation — — — — — — 13,950 — — 13,950 Excess tax benefits from stock-based compensation — — — — — — 7,292 — — 7,292 Repurchase of common stock — — — — — — — — — — Comprehensive income: Net income — — — — — — — — 27,214 27,214 $ 27,214 Unrealized gain (loss) on investments — — — — — — — 2 — 2 2 Currency translation adjustments — — — — — — — 40 — 40 40 Comprehensive income — — — — — — — — — — $ 27,256 Balance at June 30, 2011 — $ — 49,564,877 $ 50 (2,177,452 ) $ (7,779 ) $ 255,689 $ 51 $ 107,378 $ 355,389 Issuance of common stock upon exercise of stock options — — 525,995 1 — — 4,697 — — 4,698 Release of RSUs — — 62,530 — — — — — — — Stock-based compensation — — — — — — 12,996 — — 12,996 Withholding taxes on the net settlement of RSUs — — — — — — (417 ) — — (417 ) Excess tax losses from stock-based compensation — — — — — — (694 ) — — (694 ) Repurchase of common stock — — — — (4,753,919 ) (45,126 ) — — — (45,126 ) Retirement of treasury stock — — (6,802,571 ) (8 ) 6,802,571 51,727 (51,719 ) — — — Comprehensive income: Net income — — — — — — — — 13,001 13,001 $ 13,001 Unrealized gain (loss) on investments — — — — — — — (2 ) — (2 ) (2 ) Currency translation adjustments — — — — — — — (358 ) — (358 ) (358 ) Unrealized gain/loss on interest rate swap — — — — — — — (1,130 ) — (1,130 ) (1,130 ) Comprehensive income — — — — — — — — — — $ 11,511 Balance at June 30, 2012 — $ — 43,350,831 $ 43 (128,800 ) $ (1,178 ) $ 220,552 $ (1,439 ) $ 120,379 $ 338,357 Table of Contents QUINSTREET, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) See notes to consolidated financial statements 62 Fiscal Year Ended June 30, 2012 2011 2010 Cash Flows from Operating Activities Net income $ 13,001 $ 27,214 $ 20,584 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,150 27,272 18,791 Provision for sales returns and doubtful accounts receivable 84 (35 ) (751 ) Stock-based compensation 12,996 13,950 13,371 Excess tax benefits from stock-based compensation (197 ) (7,458 ) (1,859 ) Other non-cash adjustments, net 1,950 99 (1,622 ) Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (1,983 ) 3,885 (14,403 ) Prepaid expenses and other assets (2,695 ) 4,947 29 Other assets, noncurrent 78 120 11 Deferred taxes 2,782 (3,252 ) (6,771 ) Accounts payable (376 ) 6,375 3,363 Accrued liabilities (7,405 ) 2,552 7,900 Deferred revenue (242 ) 1,043 (112 ) Other liabilities, noncurrent (1,416 ) 1,459 (22 ) Net cash provided by operating activities 47,727 78,171 38,509 Cash Flows from Investing Activities Capital expenditures (2,268 ) (5,363 ) (2,710 ) Business acquisitions, net of notes payable and cash acquired (60,075 ) (91,838 ) (68,176 ) Internal software development costs (2,379 ) (1,841 ) (1,414 ) Purchases of marketable securities (48,216 ) (54,433 ) — Proceeds from sales and maturities of marketable securities 45,002 19,227 — Other investing activities 30 (515 ) 67 Net cash used in investing activities (67,906 ) (134,763 ) (72,233 ) Cash Flows from Financing Activities Net proceeds from issuance of common stock — (106 ) 136,790 Proceeds from exercise of common stock options 4,698 16,710 1,640 Proceeds from bank debt 5,884 24,425 43,300 Principal payments on bank debt (5,125 ) (3,963 ) (3,100 ) Payment of bank loan upfront fees (1,370 ) — — Principal payments on acquisition-related notes payable (3,366 ) (11,452 ) (15,450 ) Excess tax benefits from stock-based compensation 197 7,458 1,859 Withholding taxes related to restricted stock net share settlement (417 ) — — Repurchases of common stock (43,948 ) — (715 ) Net cash provided by (used in) financing activities (43,447 ) 33,072 164,324 Effect of exchange rate changes on cash and cash equivalents (133 ) 40 (12 ) Net (decrease) increase in cash and cash equivalents (63,759 ) (23,480 ) 130,588 Cash and cash equivalents at beginning of period 132,290 155,770 25,182 Cash and cash equivalents at end of period $ 68,531 $ 132,290 $ 155,770 Supplemental Disclosure of Cash Flow Information Cash paid for interest 3,786 4,128 3,860 Cash paid for taxes 13,721 16,885 22,109 Supplemental Disclosure of Noncash Investing and Financing Activities Notes payable issued in connection with business acquisitions 5,096 3,311 14,501 Conversion of preferred stock to common stock — — 43,403 Retirement of treasury stock 51,727 — — Table of Contents QUINSTREET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company QuinStreet, Inc. (the “Company”) is an online vertical marketing and media company. The Company was incorporated in California on April 16, 1999 and reincorporated in Delaware on December 31, 2009. The Company provides vertically oriented customer acquisition programs for its clients. The Company also provides hosted solutions for direct selling companies. The corporate headquarters are located in Foster City, California, with additional offices throughout the United States, Brazil and India. 2. Summary of Significant Accounting Policies 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. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates. Revenue Recognition The Company derives its revenue from two sources: Direct Marketing Services (“DMS”) and Direct Selling Services (“DSS”). DMS revenue, which constituted more than 99% in fiscal year 2012, 2011 and 2010, is derived from fees which are earned through the delivery of qualified leads, clicks and, to a lesser extent, display advertisements (“impressions”). The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is reasonably assured. Delivery is deemed to have occurred at the time a qualified lead, click or impression is delivered to the client provided that no significant obligations remain. On July 1, 2010, as required under GAAP, the Company adopted the amended accounting standard for multiple deliverable revenue arrangements which provides guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated. The adoption of this amended standard did not have a significant impact on the Company’s revenue recognition for multiple deliverable revenue arrangements. The guidance requires an entity to allocate revenue in an arrangement using the estimated selling price (“ESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) of selling price based on historical stand-alone sales or third-party evidence (“TPE”) of selling price. Due to the unique nature of some of its multiple deliverable revenue arrangements, the Company may not be able to establish selling prices based on historical stand-alone sales or third party evidence, therefore the Company may use its best estimate to establish selling prices for these arrangements under the new standard. The Company establishes best estimates within a range of selling prices considering multiple factors including, but not limited to, class of client, size of transaction, available media inventory, pricing strategies and market conditions. The Company believes the use of the best estimate of selling price allows revenue recognition in a manner consistent with the underlying economics of the transaction. 63 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) From time to time, the Company may agree to credit a client for certain leads, clicks or impressions if they fail to meet the contractual or other guidelines of a particular client. The Company has established a sales reserve based on historical experience. To date, such credits have been immaterial and within management’s expectations. For a portion of its revenue, the Company has agreements with providers of online media or traffic (“Publishers”) used in the generation of leads and clicks. The Company receives a fee from its clients and pays a fee to Publishers as a portion of revenue generated or on a cost per lead, cost per click or cost per thousand impressions basis. The Company is the primary obligor in the transaction. As a result, the fees paid by the Company’s clients are recognized as revenue and the fees paid to its Publishers are included in cost of revenue. DSS revenue, which constituted less than 1% in fiscal year 2012, 2011 and 2010, comprises (i) set-up and professional services fees and (ii) usage fees. Set-up and professional service fees that do not provide stand-alone value to a client are recognized over the contractual term of the agreement or the expected client relationship period, whichever is longer, effective when the application reaches the “go-live” date. The Company defines the “go-live” date as the date when the application enters into a production environment or all essential functionalities have been delivered. Usage fees are recognized on a monthly basis as earned. Deferred revenue is comprised of contractual billings in excess of recognized revenue and payments received in advance of revenue recognition. Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and accounts receivable. The Company’s investment portfolio consists of liquid high-quality fixed income US government or municipal securities, certificates of deposit with financial institutions and money market funds. Cash and certificates of deposit are deposited with financial institutions that management believes are creditworthy. To date, the Company has not experienced any losses on its investment portfolio. 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. No client accounted for 10% or more of net accounts receivable for both fiscal year 2012 and 2011. Fair Value of Financial Instruments The Company’s financial instruments consist principally of cash equivalents, marketable securities, accounts receivable, accounts payable, acquisition-related promissory notes, an interest rate swap and a term loan. The fair value of the Company’s cash equivalents is determined based on quoted prices in active markets for identical assets for its money market funds; and quoted prices for similar instruments in active markets for its U.S municipal securities and certificates of deposits that mature within 90 days. 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 promissory notes approximate their recorded amounts as the interest rates on similar financing arrangements available to the Company at June 30, 2012 approximates the interest rates implied when these acquisition-related promissory notes were originally issued and recorded. The fair value of our interest rate swap is based upon valuation models as reported by our counterparty. The Company believes that the fair value of the term loan approximates its recorded amount at June 30, 2012 as the interest rate on the term loan is variable and is based on market interest rates and after consideration of default and credit risk. 64 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Cash and Cash Equivalents All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Cash equivalents consist primarily of money market funds, municipal securities and certificates of deposit with original maturities of three months or less. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization, and are depreciated on a straight-line basis over the estimated useful lives of the assets, as follows: 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 developments 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. The Company capitalized $1.9 million, $1.8 million, and $1.4 million in fiscal years 2012, 2011 and 2010, respectively. Amortization of internal software development costs is reflected in cost of revenue. 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, an appropriate control premium 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 and concluded that goodwill was not impaired. 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 65 Computer equipment 3 years Software 3 years Furniture and fixtures 3 to 5 years Leasehold improvements the shorter of the lease term or the estimated useful lives of the improvements Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 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. Advertising Costs The Company expenses advertising costs as they are incurred. Advertising expenses for fiscal years 2012, 2011 and 2010 were $0.2 million, $0.2 million and $0.1 million, respectively. 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. 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 the respective 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. Foreign Currency Translation The Company’s foreign operations are subject to exchange rate fluctuations. The majority of the Company’s sales and expenses are 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 other income (expense), net. 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 and were not material for any period presented. 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 comprehensive income (loss) and accumulative other comprehensive income (loss) consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency, unrealized gains and losses on marketable securities categorized as available-for-sale and unrealized gains and losses on the interest rate swap. Total accumulated other comprehensive income (loss) is displayed as a separate component of stockholders’ equity. Derivative Instrument During the third quarter of fiscal year 2012, the Company entered into an interest rate swap agreement to hedge the interest rate exposure relating to its borrowing under its term loan. The Company does not speculate using derivative instruments. The Company entered into this derivative instrument arrangement solely for the purpose of risk management. 66 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The current and noncurrent portion of the interest rate swap is recorded in accrued liabilities and other liabilities, noncurrent, respectively, on the consolidated balance sheets at fair value based upon quoted market prices. Changes in the fair value of this interest rate swap are recorded in other comprehensive income because the Company has designated the swap as a cash flow hedge. Gains or losses on the interest rate swap as reported in other comprehensive income are classified to interest expense in the period the hedged item affects earnings. If the term loan ceases to exist, any associated amounts reported in other comprehensive income are reclassified to earnings at that time. Any hedge ineffectiveness is recognized immediately in earnings in the current period. Refer to Note 9, Debt, for additional information regarding our credit facility and interest rate swap. Loss Contingencies The Company is subject to the possibility of various loss contingencies arising in the ordinary course of business. Management considers the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as its ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to its management to determine whether such accruals should be adjusted and whether new accruals are required. From time to time, the Company is involved in disputes, litigation and other legal actions. The Company records a charge equal to at least the minimum estimated liability for a loss contingency only when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements, and (ii) the range of loss can be reasonably estimated. The actual liability in any such matters may be materially different from the Company’s estimates, which could result in the need to adjust the liability and record additional expenses. Stock-Based Compensation The Company measures and records the expense related to stock-based transactions based on the fair values of stock-based payment awards, as determined on the date of grant. To estimate the fair value of stock options, the Company selected the Black-Scholes option pricing model. In applying the Black-Scholes option pricing model, the Company’s determination of the fair value of the stock option is affected by 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 fair value of restricted stock units is determined based on the closing price of the Company’s common stock on the date of grant. For awards with graded vesting the Company recognizes stock-based compensation expense over the requisite service period using the straight-line method, based on awards ultimately expected to vest. The Company estimates future forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. See Note 11 for further information. 401(k) Savings Plan The Company sponsors a 401(k) defined contribution plan covering all U.S. employees. Contributions made by the Company are determined annually by the Board of Directors. There were no employer contributions under this plan for fiscal years 2011, 2010 and 2009. 67 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Recent Accounting Pronouncements In September 2011, the FASB issued an update to the accounting standard for goodwill and intangibles. The revised standard is intended to simplify the goodwill impairment test by providing an option to first perform a qualitative assessment to determine whether further impairment testing is necessary. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company does not anticipate that its adoption of the revised standard on July 1, 2012 will have a material effect on its consolidated financial statements. In June 2011, the FASB issued guidance on the presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. This portion of the guidance became effective for the Company beginning July 1, 2012 and will require financial statement presentation changes only. The new guidance also required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. However, in December 2011, the FASB issued guidance which indefinitely defers the guidance related to the presentation of reclassification adjustments. In May 2011, the FASB issued guidance to achieve common fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards. The new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. The new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company’s adoption of the new guidance in the third quarter of fiscal year 2012 did not have a material impact on its financial position, results of operations or cash flows. 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 its initial public offering. 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 shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of period-to-date earnings that the preferred stockholders would have been entitled to receive pursuant to their dividend rights had this portion of net income been distributed. Diluted net income per share attributable to common stockholders is computed by using the weighted-average number of shares of common stock outstanding, including potential dilutive shares of common stock assuming the dilutive effect of outstanding stock options and restricted stock units using the treasury stock method. 68 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table presents the calculation of basic and diluted net income per share attributable to common stockholders: 69 Years Ended June 30, 2012 2011 2010 (in thousands, except per share data) Numerator: Basic: Net income $ 13,001 $ 27,214 $ 20,584 8% non-cumulative dividends on convertible preferred stock — — (2,018 ) Undistributed earnings allocated to convertible preferred stock — — (5,784 ) Net income attributable to common stockholders - basic $ 13,001 $ 27,214 $ 12,782 Diluted: Net income attributable to common stockholders - basic $ 13,001 $ 27,214 $ 12,782 Undistributed earnings re-allocated to common stock — — 419 Net income attributable to common stockholders - diluted $ 13,001 $ 27,214 $ 13,201 Denominator: Basic: Weighted average shares of common stock used in computing basic net income per share 45,846 46,222 25,616 Diluted: Weighted average shares of common stock used in computing basic net income per share 45,846 46,222 25,616 Weighted average effect of dilutive securities: Stock options 1,004 2,845 2,813 Restricted stock units 9 63 Weighted average shares of common stock used in computing diluted net income per share 46,859 49,130 28,429 Net income per share attributable to common stockholders: Basic $ 0.28 $ 0.59 $ 0.50 Diluted $ 0.28 $ 0.55 $ 0.46 Securities excluded from weighted average shares used in computing diluted net income per share because the effect would have been anti-dilutive: 6,749 2,689 2,918 These weighted shares relate to anti-dilutive stock options and restricted stock units as calculated using the treasury stock method and could be dilutive in the future. Earnings per share for the fiscal year ended June 30, 2010 includes the effects of the convertible preferred stock under the two-class method before its conversion in connection with its initial public offering. (2) (1) (1) (2) Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 4. Fair Value Measurements and Marketable Securities Fair Value Measurements Fair value is defined as the price that would be received on sale of an asset or paid to transfer a liability (“exit price”) in an orderly transaction between market participants at the measurement date. The FASB has established a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under the guidance for fair value measurement are described below: Level 1 — Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Pricing inputs are based upon quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. The valuations are based on quoted prices of the underlying security that are readily and regularly available in an active market, and accordingly, a significant degree of judgment is not required. As of June 30, 2012 and 2011, the Company used Level 1 assumptions for its money market funds. Level 2 — Pricing inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. As of June 30, 2012 and 2011, the Company used Level 2 assumptions for its U.S. municipal securities, certificates of deposits, acquisition-related promissory notes, term loan, and interest rate swap. Level 3 — Pricing inputs are generally unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management’s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. As of June 30, 2012 and 2011, the Company did not have any Level 3 financial assets or liabilities. 70 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The securities held by the Company as of June 30, 2012 and 2011 were categorized as follows in the fair value hierarchy (in thousands): Marketable Securities All liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Investments with maturities greater than three months at the date of purchase are classified as marketable securities. The Company’s marketable securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the available-for-sale designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a component of stockholders’ equity. 71 Fair Value Measurements as of June 30, 2012 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Total Assets: U.S. municipal securities $ — $ 30,861 $ 30,861 Certificates of deposit — 11,470 11,470 Money market funds 21,458 — 21,458 $ 21,458 $ 42,331 $ 63,789 Liabilities: Acquisition-related promissory notes $ — $ 12,215 $ 12,215 Term loan — 95,381 95,381 Revolving credit line — — — Interest rate swap — 1,138 1,138 $ — $ 108,734 $ 108,734 Fair Value Measurements as of June 30, 2011 Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Total Assets: U.S. municipal securities $ — $ 23,637 $ 23,637 Certificates of deposit — 19,036 19,036 Money market funds 51,654 — 51,654 Interest Rate Swap — — — $ 51,654 $ 42,673 $ 94,327 Liabilities: Acquisition-related promissory notes $ — $ 10,545 $ 10,545 Term loan — 29,801 29,801 Revolving credit line — 65,702 65,702 Interest rate swap — — — $ — $ 106,048 $ 106,048 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table summarizes unrealized gains and losses related to available-for-sale securities held by the Company as of June 30, 2012 and 2011 (in thousands): 5. Balance Sheet Components Accounts Receivable, Net Accounts receivable, net are comprised of the following (in thousands): Property and Equipment, Net Property and equipment, net is comprised of the following (in thousands): 72 As of June 30, 2012 Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. municipal securities $ 30,851 $ 10 $ — $ 30,861 Certificates of deposit 11,480 — 10 11,470 Money market funds 21,458 — — 21,458 $ 63,789 $ 10 $ 10 $ 63,789 As of June 30, 2011 Gross Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. municipal securities $ 23,625 $ 12 $ — $ 23,637 Certificates of deposit 19,046 — 10 19,036 Money market funds 51,654 — — 51,654 $ 94,325 $ 12 $ 10 $ 94,327 June 30, 2012 2011 Accounts receivable $ 55,637 $ 50,948 Less: Allowance for doubtful accounts (424 ) (276 ) Less: Allowance for sales returns (2,383 ) (2,447 ) $ 52,830 $ 48,225 June 30, 2012 2011 Computer equipment $ 10,862 $ 11,448 Software 7,116 6,344 Furniture and fixtures 2,725 2,404 Leasehold improvements 1,891 1,863 Internal software development costs 18,597 16,711 41,191 38,770 Less: Accumulated depreciation and amortization (32,436 ) (29,895 ) $ 8,755 $ 8,875 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Depreciation expense was $3.3 million, $3.6 million and $2.2 million for fiscal years 2012, 2011 and 2010, respectively. Amortization expense related to internal software development costs was $1.9 million, $1.5 million and $1.3 million for fiscal years 2012, 2011 and 2010, respectively. Accrued liabilities Accrued liabilities are comprised of the following (in thousands): 6. Acquisitions Acquisitions in Fiscal Year 2012 Acquisition of Ziff Davis Enterprise On February 3, 2012, the Company acquired certain assets of Ziff Davis Enterprise from Enterprise Media Group, Inc., a New York-based online media and marketing company in the business-to-business technology market, for $17.3 million in cash, to broaden its registered user database and brand name in the business-to-business technology market. The results of the acquired assets of Ziff Davis Enterprise have been included in the consolidated financial statements since the acquisition date. The acquisition was accounted for as a purchase business combination. The Company allocated the purchase price to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. The goodwill is deductible for tax purposes. The following table summarizes the preliminary allocation of the purchase price and the estimated useful lives of the identifiable intangible assets acquired as of the date of the acquisition (in thousands): 73 June 30, 2012 2011 Accrued media costs 15,485 $ 17,516 Accrued compensation and related expenses and taxes payable 9,096 12,920 Accrued professional service and other business expenses 4,881 2,802 Total accrued liabilities $ 29,462 $ 33,238 Amount (in thousands) Cash $ 17,270 Estimated Fair Value Estimated Useful Life Liabilities assumed $ (255 ) Customer/publisher/advertiser relationships 4,120 5 years Content 500 2 years Website/trade/domain names 4,630 5 years Registered user database 6,320 3 years Goodwill 1,955 Indefinite $ 17,270 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Acquisition of NarrowCast Group, LLC (“IT Business Edge” or “ITBE”) On August 25, 2011, the Company acquired 100% of the outstanding equity interests of ITBE, in exchange for $24.0 million in cash, to broaden its registered user database and media access in the business-to-business technology market. The results of ITBE’s operations have been included in the consolidated financial statements since the acquisition date. The acquisition was accounted for as a purchase business combination. The Company allocated the purchase price to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. The goodwill is deductible for tax purposes. The following table summarizes the preliminary allocation of the purchase price and the estimated useful lives of the identifiable intangible assets acquired as of the date of the acquisition (in thousands): Other Acquisitions in Fiscal Year 2012 During fiscal year 2012, in addition to the acquisition of certain assets of Ziff Davis Enterprise, and the acquisition of ITBE, the Company also acquired operations from eleven other online publishing businesses in exchange for an aggregate of $14.6 million in cash, $3.1 million in non-interest-bearing, promissory notes payable over a period of two years, secured by the assets acquired in respect to which the notes were issued and $2.1 million in non-interest-bearing, unsecured promissory notes payable over a period of one year. The Company also recorded $4.6 million in earn-out payments related to a prior period acquisition as an addition to goodwill. The aggregate purchase price recorded was as follows: 74 Amount (In thousands) Cash $ 23,961 Estimated Fair Value Estimated Useful Life Tangible assets acquired $ 3,597 Liabilities assumed (1,868 ) Customer/publisher/advertiser relationships 3,230 5 years Content 420 2 years Website/trade/domain names 2,220 5 years Registered user database 4,220 3 years Noncompete agreements 100 3 years Goodwill 12,042 Indefinite $ 23,961 Amount (In thousands) Cash $ 14,620 Fair value of debt (net of $99 of imputed interest) 9,696 $ 24,316 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The acquisitions were accounted for as purchase business combinations. In each of the acquisitions, the Company allocated the purchase price to identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. 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 (in thousands): Acquisitions in Fiscal Year 2011 Acquisition of CarInsurance.com On November 5, 2010, the Company acquired 100% of the outstanding shares of Car Insurance.com, Inc., or CarInsurance.com, a Florida-based online insurance business, and certain of its affiliated companies, in exchange for $49.7 million in cash paid upon closing of the acquisition. The results of CarInsurance.com’s operations have been included in the consolidated financial statements since the acquisition date. The Company acquired CarInsurance.com for its capacity to generate online visitors in the financial services market. The total purchase price recorded was as follows: The acquisition was accounted for as a purchase business combination. The Company allocated the purchase price to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. The goodwill is deductible for tax purposes. The following table summarizes the allocation of the purchase price and the estimated useful lives of the identifiable intangible assets acquired as of the date of the acquisition (in thousands): 75 Estimated Fair Value Estimated Useful Life Customer/publisher/advertiser relationships $ 435 3-5 years Content 4,540 2-5 years Website/trade/domain names 1,250 4-8 years Acquired technology and other 560 4-5 years Noncompete agreements 87 1-3.5 years Goodwill 17,443 Indefinite $ 24,316 Amount (In thousands) Cash $ 49,655 Estimated Fair Value Estimated Useful Life Tangible assets acquired $ 661 Liabilities assumed (807 ) Advertiser relationships 260 6-7 years Content 16,130 7 years Website/trade/domain names 4,350 10 years Acquired technology and others 3,000 2-4 years Noncompete agreements 40 4 years Goodwill 26,021 Indefinite $ 49,655 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Acquisition of Insurance.com On July 26, 2010, the Company acquired the website business of Insurance.com, from Insurance.com Group, Inc., an Ohio-based online insurance business, in exchange for $33.0 million in cash paid upon closing of the acquisition and the issuance of a $2.6 million non-interest-bearing, unsecured promissory note payable in one installment on the second anniversary of the acquisition date. The results of Insurance.com’s operations have been included in the consolidated financial statements since the acquisition date. The Company acquired Insurance.com for its capacity to generate online visitors in the financial services market. The total purchase price recorded was as follows: The acquisition was accounted for as a purchase business combination. The Company allocated the purchase price to tangible assets and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. The goodwill is deductible for tax purposes. The following table summarizes the allocation of the purchase price and the estimated useful lives of the identifiable intangible assets acquired as of the date of the acquisition (in thousands): Other Acquisitions in Fiscal Year 2011 During fiscal year 2011, in addition to the acquisitions of CarInsurance.com and Insurance.com, the Company acquired operations from 13 other online publishing businesses in exchange for $4.7 million in cash paid upon closing of the acquisitions and $0.9 million in non-interest-bearing, unsecured promissory notes payable over a period of time ranging from one to three years. The Company also recorded $4.5 million in earn-out payments related to a prior period acquisition as addition to goodwill. The aggregate purchase price recorded was as follows: 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 76 Amount (In thousands) Cash $ 33,000 Fair value of debt (net of $157 of imputed interest) 2,483 $ 35,483 Estimated Fair Value Estimated Useful Life Tangible assets acquired $ 1,204 Advertiser relationships 2,120 7 years Content 4,290 4 years Website/trade/domain names 2,940 10 years Acquired technology and others 5,530 2-4 years Noncompete agreements 60 5 years Goodwill 19,339 Indefinite $ 35,483 Amount (in thousands) Cash $ 9,222 Fair value of debt (net of $36 of imputed interest) 828 $ 10,050 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. Goodwill deductible for tax purposes is $7.9 million. The following table summarizes the allocation of the purchase prices of these other acquisitions and the estimated useful lives of the identifiable intangible assets acquired as of the respective dates of these acquisitions (in thousands): Acquisitions in Fiscal Year 2010 In fiscal year 2010, the Company acquired the website business of Internet.com, a division of WebMediaBrands, Inc., a New York-based Internet media company, to broaden its media access and client basein the business-to-business market, the website business Insure.com, from Life Quotes, Inc., an Illinois-based online marketing company for its capacity to generate online visitors in the financial services market, 100% of the outstanding shares of Payler Corp. D/B/A HSH Associates Financial Publishers (“HSH”), a New Jersey-based online marketing business, for its capacity to generate online visitors in the financial services market, as well as 30 other online publishing businesses. The Company also recorded $4.5 million in earn-out payments related to a prior period acquisition as addition to goodwill. The total purchase prices recorded were as follows (in thousands): The acquisitions were accounted for as a purchase business combinations. The Company allocated the purchase price to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. The goodwill deductible for tax purposes is $50.9 million. 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 acquisitions (in thousands): 77 Estimated Fair Value Estimated Useful Life Customer/publisher relationships $ 233 3-5 years Content 1,274 3-5 years Website/trade/domain names 541 4-5 years Noncompete agreements 88 1-3 years Goodwill 7,914 Indefinite $ 10,050 Internet.com Insure.com HSH Other Total Cash $ 15,943 $ 15,000 $ 6,000 $ 29,882 $ 66,825 Fair value of debt (net of imputed interest) 1,654 976 3,759 8,112 14,501 $ 17,597 $ 15,976 $ 9,759 $ 37,994 $ 81,326 Internet.com Insure.com HSH Other Total Estimated Useful Life Tangible assets acquired $ 3,136 $ — $ 50 $ 45 $ 3,231 Liabilities assumed (503 ) — (1,695 ) — (2,198 ) Customer/publisher/advertiser relationships 1,300 900 1,100 1,150 4,450 1-7 years Content 2,400 3,900 1,400 8,384 16,084 1-8 years Website/trade/domain names 2,500 1,250 800 2,748 7,298 5-8 years Acquired technology — — — 199 199 3 years Noncompete agreements 200 — — 224 424 2-3 years Goodwill 8,564 9,926 8,104 25,244 51,838 Indefinite $ 17,597 $ 15,976 $ 9,759 $ 37,994 $ 81,326 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Pro Forma Financial Information (unaudited) 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 2011. The pro forma financial information includes the business combination accounting effects resulting from these acquisitions including amortization charges from acquired intangible assets and the related tax effects as though the aforementioned companies were acquired as of the beginning of fiscal year 2011. 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 fiscal year 2011. 7. Intangibles Assets, Net and Goodwill Intangible assets, net consisted of the following (in thousands): Amortization of intangible assets was $26.0 million, $22.2 million and $15.3 million for fiscal years 2012, 2011 and 2010, respectively. Amortization expense for the Company’s acquisition-related intangible assets as of June 30, 2012 for each of the next five years and thereafter is as follows (in thousands): 78 Fiscal Year Ended June 30, 2012 2011 (in thousands) Net revenue $ 378,895 $ 444,590 Net income 13,608 35,287 Basic net income per share $ 0.30 $ 0.76 Diluted net income per share $ 0.29 $ 0.72 June 30, 2012 June 30, 2011 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer/publisher/advertiser relationships $ 37,045 $ (23,017 ) $ 14,028 $ 29,269 $ (16,892 ) $ 12,377 Content 62,076 (34,430 ) 27,646 56,663 (25,142 ) 31,521 Website/trade/domain names 31,615 (12,815 ) 18,800 23,533 (8,569 ) 14,964 Acquired technology and others 31,477 (19,507 ) 11,970 20,190 (13,205 ) 6,985 $ 162,213 $ (89,769 ) $ 72,444 $ 129,655 $ (63,808 ) $ 65,847 Year Ending June 30, 2013 $ 24,116 2014 18,962 2015 11,935 2016 8,397 2017 5,585 Thereafter 3,449 $ 72,444 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The changes in the carrying amount of goodwill for fiscal years 2012 and 2011 were as follows (in thousands): The additions to goodwill relate to the Company’s acquisitions as described in Note 6, 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. Any change in goodwill amounts resulting from foreign currency translation are presented as “Other” in the above table. 8. Income Taxes The components of income before income taxes are as follows (in thousands): The components of the provision for taxes are as follows (in thousands): 79 DMS DSS Total Balance at June 30, 2010 $ 157,351 $ 1,231 $ 158,582 Additions 53,274 — 53,274 Other — — — Balance at June 30, 2011 $ 210,625 $ 1,231 $ 211,856 Additions 31,440 — 31,440 Other (247 ) — (247 ) Balance at June 30, 2012 $ 241,818 $ 1,231 $ 243,049 Fiscal Year Ended June 30, 2012 2011 2010 US $ 23,957 $ 44,270 $ 35,987 Foreign 175 831 873 $ 24,132 $ 45,101 $ 36,860 Fiscal Year Ended June 30, 2012 2011 2010 Current Federal $ 10,417 $ 18,581 $ 17,555 State 413 2,741 5,827 Foreign 291 186 (88 ) 11,121 21,508 23,294 Deferred Federal $ (719 ) $ (3,260 ) $ (6,005 ) State 664 (324 ) (981 ) Foreign 65 (37 ) (32 ) 10 (3,621 ) (7,018 ) $ 11,131 $ 17,887 $ 16,276 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The reconciliation between the statutory federal income tax and the Company’s effective tax rates as a percentage of income before income taxes is as follows: The components of the current and long-term deferred tax assets, net are as follows (in thousands): Management periodically evaluates the realizability of the deferred tax assets and recognizes the tax benefit only as reassessment demonstrates that they are realizable. At such time, if it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be adjusted. As of June 30, 2012 the Company determined that no valuation allowance is required as it believes it is more likely than not to realize all its deferred tax assets in the foreseeable future. As of June 30, 2012, the Company had no operating loss carry-forwards for federal or state income tax purposes. The Company is currently updating its R&D credit study. Based on the preliminary results of the study, the Company has R&D carried forwards of $0.5 million, which may be carried over indefinitely. United States federal income taxes have not been provided for the $1.6 million of cumulative undistributed earnings of the Company’s foreign subsidiaries as of June 30, 2012. The Company’s present intention is that such undistributed earnings be permanently reinvested offshore, with the exception of the undistributed earnings of its Canadian subsidiary. The Company would be subject to additional United States taxes if these earnings were repatriated. The amount of the unrecognized deferred income tax liability related to these earnings is not material to the consolidated financial statements. 80 Fiscal Year Ended June 30, 2012 2011 2010 Federal tax rate 35.0 % 35.0 % 35.0 % States taxes, net of federal benefit 3.7 % 3.2 % 8.1 % Stock-based compensation expense 8.2 % 2.8 % 4.4 % Other (0.8 )% (1.3 )% (3.3 )% Effective income tax rate 46.1 % 39.7 % 44.2 % Fiscal Year Ended June 30, 2012 2011 Current: Reserves and accruals $ 5,432 $ 6,424 Stock options 2,044 1,954 Deferred revenue 35 959 Other 154 916 Total current deferred tax assets $ 7,665 $ 10,253 Noncurrent Stock options $ 6,131 $ 5,861 Intangible assets 3,442 1,156 Fixed assets (1,626 ) (1,161 ) Foreign 6 10 Other 493 — Total noncurrent deferred tax assets 8,446 5,866 Total deferred tax assets, net $ 16,111 $ 16,119 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands): The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Company’s provision for income taxes. As of June 30, 2012, the Company has accrued $0.6 million for interest and penalties related to the unrecognized tax benefits. The balance of unrecognized tax benefits and the related interest and penalties is recorded as a noncurrent liability on the Company’s consolidated balance sheet. As of June 30, 2012, unrecognized tax benefits of $2.4 million, if recognized, would affect the Company’s effective tax rate. The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. The Company is no longer subject to U.S. federal, state and local, or non-U.S., income tax examinations by tax authorities for years before 2007. The Company files income tax returns in the United States, various U.S. states and certain foreign jurisdictions. As of June 30, 2012, the tax years 2009 through 2011 remain open in the U.S., the tax years 2007 through 2011 remain open in the various state jurisdictions, and the tax years 2007 through 2011 remain open in various foreign jurisdictions. 9. Debt Promissory Notes During fiscal years 2012, 2011 and 2010, the Company issued total promissory notes for the acquisition of businesses of $5.1 million, $3.3 million and $14.5 million, respectively, net of imputed interest amounts of $0.1 million, $0.2 million and $0.8 million, respectively. All 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. Accretion of promissory notes of $0.3 million, $0.5 million and $1.2 million was recorded as interest expense during fiscal years 2012, 2011 and 2010, respectively. Certain of the promissory notes are secured by the assets acquired with respect to which the notes were issued. Credit Facility In September 2008, the Company replaced its existing revolving credit facility of $60.0 million with a credit facility totaling $100.0 million. The new facility consisted of a $30.0 million five-year term loan and a $70.0 million 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 $70.0 million to $100.0 million. In January 2010, the Company replaced its existing credit facility with a new credit facility with total borrowing capacity of $175.0 million. The new credit facility consisted of a $35.0 million four-year term loan, 81 Fiscal Year 2012 2011 2010 Balance at the beginning of the year $ 2,312 $ 2,014 $ 2,617 Gross increases - current period tax positions 351 493 219 Reductions as a result of lapsed statute of limitations (227 ) (195 ) (99 ) Gross decreases - settlements with tax authorities — — (723 ) Balance at the end of the year $ 2,436 $ 2,312 $ 2,014 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) with principal amortization of 10%, 15%, 35% and 40% annually, and a $140.0 million four-year revolving credit line with an optional increase of $50.0 million. In February 2011, the Company exercised this option, thereby increasing the total capacity of the credit facility to $225.0 million. In November 2011, the Company replaced its existing credit facility with a new $300.0 million credit facility. The new facility consists of a $100.0 million five-year term loan, with annual principal amortization of 5%, 10%, 15%, 20% and 50%, and a $200.0 million five-year revolving credit line. Borrowings under the credit facility are collateralized by substantially all of the Company’s assets. Interest is payable at specified margins above either the Eurodollar Margin or the Prime Rate. The interest rate varies dependent upon the ratio of funded debt to adjusted EBITDA and ranges from Eurodollar Margin + 1.625% to 2.375% or Prime + 1.00% for the revolving credit line and from Eurodollar Margin + 2.00% to 2.75% or Prime + 1.00% for the term loan. Adjusted EBITDA is defined as net income less provision for taxes, depreciation expense, amortization expense, stock-based compensation expense, interest and other income (expense), and acquisition costs for business combinations. The interest rate margins for the new facility are 0.50% less than the commensurate margins under the Company’s previous credit facility. The revolving credit line requires an annual facility fee of 0.375% of the revolving credit line capacity. To reduce the Company’s exposure to rising interest rates under the term loan, on February 24, 2012, the Company entered into an interest rate swap encompassing the principal balances scheduled to be outstanding as of January 1, 2014 and thereafter, such principal amount totaling $85.0 million on January 1, 2014 and amortizing to $35.0 million on November 4, 2016. The interest rate swap effectively fixes the Eurodollar Margin at 0.97%. The credit facility expires in November 2016. The credit facility agreement restricts the Company’s ability to raise additional debt financing and pay dividends, and also requires the Company to comply with other nonfinancial covenants. In addition, the Company is required to maintain financial ratios computed as follows: 1. A minimum fixed charge coverage ratio of 1.15:1, calculated as the 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. 2. A maximum funded debt to adjusted EBITDA ratio of 3:1, calculated as the 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 Company was in compliance with the covenants of this new credit facility as of June 30, 2012. Upfront arrangement fees incurred in connection with the credit facility totaled $1.5 million and will be deferred and amortized over the remaining term of the arrangement. As of June 30, 2012, $97.5 million was outstanding under the term loan. There was no outstanding balance under the revolving credit line. As of June 30, 2011, $30.2 million was outstanding under the term loan under the previous credit facility. As of June 30, 2011, $66.6 million was outstanding under the revolving credit line of the previous credit facility. The Company was in compliance with the covenants of its previous credit facility as of June 30, 2011. 82 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Interest Rate Swap As discussed in the derivative instrument section in Notes 2, the Company entered into an interest rate swap to reduce its exposure to the financial impact of changing interest rates under its term debt. The effective date of the swap is April 9, 2012 with a maturity date of November 4, 2016. At March 31, 2012, the Company had approximately $85.0 million of notional amount outstanding in the swap agreement that exchanges a variable interest rate base (Eurodollar margin) for a fixed interest rate of 0.97% over the term of the agreement. This interest rate swap is designated as a cash flow hedge of the interest rate risk attributable to forecasted variable interest payments. The effective portion of the fair value gains or losses on this swap will be included as a component of accumulated other comprehensive income (loss). At June 30, 2012, the fair value of the interest rate swap liability was $1.1 million, of which $0.6 million was classified in current accrued liabilities and $0.5 million was classified as noncurrent other liabilities, and the effective and ineffective portion of the interest rate swap was $1.1 million and $8 thousand, respectively. Debt Maturities The maturities of debt as of June 30, 2012 were as follows (in thousands): Letters of Credit The Company has a $0.4 million letter of credit agreement with a financial institution that is used as collateral for fidelity bonds placed with an insurance company and a $0.5 million letter of credit agreement with a financial institution that is used as collateral for the Company’s corporate headquarters’ operating lease. The letters of credit automatically renew annually without amendment unless cancelled by the financial institutions within 30 days of the annual expiration date. 10. Commitments and Contingencies Leases The Company leases office space and equipment under non-cancelable operating leases with various expiration dates through fiscal year 2018. Rent expense for fiscal years 2012, 2011 and 2010 was $3.4 million, $3.3 million and $3.1 million, respectively. The Company recognizes rent expense on a straight-line basis over the lease period and accrues for rent expense incurred but not paid. 83 Year Ending June 30, Promissory Notes Credit Facility 2013 $ 8,569 $ 7,500 2014 3,364 12,500 2015 560 17,500 2016 50 20,000 2017 — 40,000 12,543 97,500 Less: imputed interest and unamortized discounts (328 ) (2,119 ) Less: current portion (8,417 ) (7,012 ) Noncurrent portion of debt $ 3,798 $ 88,369 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Future annual minimum lease payments under all noncancelable operating leases as of June 30, 2012 were as follows (in thousands): The lease for the Company’s previous corporate headquarters located at 1051 Hillsdale Boulevard, Foster City, California expired in October 2010. In February 2010, the Company entered into a new lease agreement for office space located at 950 Tower Lane, Foster City, California. The term of the lease began on November 1, 2010 and expires on October 31, 2018. The Company has the option to extend the term of the lease twice by one additional year. The monthly base rent was abated for the first year of the lease, is $0.1 million in the current lease year and will be $0.2 million in the third year of the lease term. In the following years the monthly base rent will increase approximately 3% annually. 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 under certain circumstances and subject to deductibles and exclusions. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is not material. Accordingly, the Company had no liabilities recorded for these agreements as of June 30, 2012 and June 30, 2011. In the ordinary course of its business, the Company from time to time enters into standard indemnification provisions in its agreements with its clients. Pursuant to these provisions, the Company may be obligated to indemnify its clients for certain losses suffered or incurred, including losses arising from violations of applicable law by the Company or by its third-party website publishers, losses arising from actions or omissions of the Company or its third party publishers, and for 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 its liabilities under such indemnities. With respect to its DSS products, the Company also generally reserves the right to resolve intellectual property infringements claims by providing a non-infringing alternative or by obtaining a license on reasonable terms, and failing that, by terminating its relationship with the client and thus terminating the infringing activity. Subject to these limitations, the term of such indemnity provisions is generally coterminous with the corresponding agreements but in some cases survives for a short period of time after termination of the agreement. The potential amount of future payments to defend lawsuits or settle indemnified claims under these indemnification provisions is generally limited and the Company believes the estimated fair value of these indemnity provisions is not material, and accordingly, the Company had no liabilities recorded for these agreements as of June 30, 2012, 2011 and 2010, respectively. 84 Year Ending June 30, Operating Leases 2013 $ 3,184 2014 3,251 2015 3,117 2016 3,060 2017 2,698 Thereafter 3,637 $ 18,947 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Litigation In September 2010, Lending Tree, LLC (“Lending Tree”) filed a patent infringement lawsuit against the Company in the United States District Court for the Western District of North Carolina, seeking a judgment that the Company has infringed a patent held by LendingTree, an injunctive order against the alleged infringing activities and an award for damages. If an injunction were to be granted, it could force the Company to stop or alter certain of its business activities, such as its lead generation in certain client verticals. On April 12, 2012, the Court held a claim construction hearing and issued an order construing certain disputed terms of the patent-in-suit. The Company believes that it has meritorious defenses against LendingTree’s claims. There can be no assurance, however, that the Company will prevail in this matter and any adverse ruling may have a significant impact on its business and operating results. In addition, regardless of the outcome of the matter, the Company may incur significant legal fees defending the action until it is resolved. While the Company intends to vigorously defend its position, neither the outcome of the litigation nor the amount or potential range of exposure, if any, associated with the litigation can be assessed at this time. On August 12, 2011, the attorney general of Kentucky sent a letter of inquiry to the Company regarding marketing services that the Company provides to for-profit schools. The attorneys general of Alabama, Arizona, Delaware, Florida, Idaho, Illinois, Iowa, Massachusetts, Minnesota, Nevada, North Carolina, Oregon, South Carolina, and Tennessee (the “States”) subsequently joined Kentucky in the inquiry. The marketing services at issue relate to the Company’s websites, such as www.gibill.com, www.armystudyguide.com, and others, whose intended audience comprises service members and veterans of the United States military. The attorneys general expressed concerns that the websites could mislead consumers into believing that the websites are affiliated with the government or that the featured schools are the only ones that accept scholastic subsidies (such as through the GI Bill) from service members and veterans and may thus violate the consumer protection laws of the respective States. On August 25, 2011, the Kentucky attorney general initiated a civil investigative demand, requesting information about the Company’s marketing, pricing structure, business relationships, and financial data with respect to the for-profit schools that appear on www.gibill.com and similar websites. Other of the 14 States initiated identical civil investigative demands. On June 26, 2012, the Company entered into an Assurance of Voluntary Compliance agreement (the “Agreement”) with the attorneys general. Under the Agreement, the Company donated the URL “GIBill.com” to the United States Department of Veterans Affairs. The Company also agreed to pay a total of $2.5 million to the settling states to reimburse them for the cost of the investigation and negotiating process, and further agreed to provide expanded disclosures on other military-oriented and education-related websites. The Company believes it is in compliance with the terms of the Agreement. 11. Stock Benefit Plans Stock-Based Compensation In fiscal years 2012, 2011 and 2010, the Company recorded stock-based compensation expense of $13.0 million, $14.0 million, and $13.4 million, respectively, resulting in the recognition of related excess tax benefits of $0.7 million, $7.3 million and $1.8 million, respectively. The Company included as part of cash flows from financing activities a gross benefit of tax deductions of $0.2 million, $7.5 million and $1.9 million in fiscal years 2012, 2011 and 2010, respectively, related to stock-based compensation. Stock Incentive Plans In November 2009, the Company’s board of directors adopted the 2010 Equity Incentive Plan (the “2010 Incentive Plan”) and the Company’s stockholders approved the 2010 Incentive Plan in January 2010. The 2010 Incentive Plan became effective upon the completion of the IPO of the Company’s common stock in February 2010. Awards granted after January 2008 but before the adoption of the 2010 Incentive Plan continue to be 85 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) governed by the terms of the 2008 Equity Incentive Plan (the “2008 Plan”). All outstanding stock awards granted before January 2008 continue to be governed by the terms of the Company’s amended and restated 1999 Equity Incentive Plan (the “1999 Plan”). The 2010 Incentive Plan provides for the grant of incentive stock options (“ISOs”), nonstatutory stock options (“NQSOs”), restricted stock, restricted stock units, stock appreciation rights, performance-based stock awards and other forms of equity compensation, as well as for the grant of performance cash awards. The Company may issue ISOs only to its employees. NQSOs and all other awards may be granted to employees, including officers, nonemployee directors and consultants. To date, the Company has issued only ISOs, NQSOs and restricted stock units under the 2010 Incentive Plan. ISOs and NQSOs are generally granted to employees with an exercise price equal to the market price of the Company’s common stock at the date of grant. Stock options granted to employees generally have a contractual term of seven years and vest over four years of continuous service, with 25 percent of the stock options vesting on the one-year anniversary of the date of grant and the remaining 75 percent vesting in equal monthly installments over the three year period thereafter. Restricted stock units granted to employees generally vest over five years of continuous service, with 15 percent of the restricted stock units vesting on the one-year anniversary of the date of grant, 60 percent vesting in equal quarterly installments over the following three years and the remaining 25 percent vesting in equal quarterly installments over the last year of the vesting period. An aggregate of 4,905,132 shares of the Company’s common stock were reserved for issuance under the 2010 Incentive Plan as of June 30, 2012, and this amount will be increased by any outstanding stock awards that expire or terminate for any reason prior to their exercise or settlement. The number of shares of the Company’s common stock reserved for issuance may be increased annually through July 1, 2019 by up to five percent of the total number of shares of the Company’s common stock outstanding on the last day of the preceding fiscal year. The maximum number of shares that may be issued under the 2010 Incentive Plan is 30,000,000. As of June 30, 2012, 3,793,174 shares were available for issuance under the 2010 Incentive Plan. In November 2009, the Company’s board of directors adopted the 2010 Non-Employee Directors’ Stock Award Plan (the “Directors’ Plan”) and the stockholders approved the Directors’ Plan in January 2010. The Directors’ Plan became effective upon the completion of the Company’s IPO. The Directors’ Plan provides for the automatic grant of NQSOs to non-employee directors and also provides for the discretionary grant of restricted stock units. Stock options granted to new non-employee directors vest in equal monthly installments over four years; annual grants to existing directors vest in equal monthly installments over one year. An aggregate of 820,000 shares of the Company’s common stock were reserved for issuance under the Directors’ Plan as of June 30, 2012. This amount may be increased annually, by the sum of 200,000 shares and the aggregate number of shares of the Company’s common stock subject to awards granted under the Directors’ Plan during the immediately preceding fiscal year. As of June 30, 2012, 550,000 shares were available for issuance under the Directors’ Plan. Valuation Assumptions 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. The Company calculates the weighted average expected life of options using the simplified method pursuant to the accounting guidance for share-based payments as it does not have sufficient historical exercise experience. Since the Company’s does not have extensive trading history, the Company estimates the expected volatility of its common stock based on the historical volatility of comparable public companies over the stock option’s expected term. The Company has no history or expectation of paying cash dividends on its common stock. The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected term of the stock options. 86 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The weighted average Black-Scholes model assumptions and the weighted average grant date fair value of employee stock options in fiscal years 2012, 2011 and 2010 were as follows: The fair value of restricted stock units is determined based on the closing price of the Company’s common stock on the grant date. Compensation expense is amortized net of estimated forfeitures on a straight-line basis over the requisite service period of the stock-based compensation awards. Stock Option Award Activity The following table summarizes the stock option award activity under the Plans from June 30, 2010 to June 30, 2012: 87 Fiscal Year Ended June 30, 2012 2011 2010 Expected term (in years) 4.6 4.6 4.6 Expected volatility 55 % 54 % 67 % Expected dividend yield 0.0 % 0.0 % 0.0 % Risk-free interest rate 1.1 % 1.7 % 2.4 % Grant date fair value $ 5.31 $ 7.81 $ 9.42 Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding at June 30, 2010 11,796,062 $ 9.79 Granted 691,600 16.93 Exercised (2,317,730 ) 7.32 Forfeited (790,986 ) 12.04 Expired (30,411 ) 14.71 Outstanding at June 30, 2011 9,348,535 $ 10.73 4.51 $ 31,568 Granted 2,634,850 11.39 Exercised (525,995 ) 8.93 Forfeited (1,120,227 ) 12.91 Expired (624,847 ) 12.75 Outstanding at June 30, 2012 9,712,316 $ 10.62 4.09 $ 6,731,857 Vested and expected-to-vest at June 30, 2012 8,850,320 $ 10.44 3.96 $ 6,696,870 Vested and exercisable at June 30, 2012 6,786,645 $ 9.88 3.43 $ 6,642,476 The expected-to-vest options are the result of applying the pre-vesting forfeiture assumption to total outstanding options. (1) (1) Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table summarizes the total intrinsic value, the cash received and the actual tax benefit of all options exercised during fiscal years 2012, 2011 and 2010, respectively: As of June 30, 2012, there was $16.2 million of total unrecognized compensation expense related to unvested stock options which is expected to be recognized over a weighted average period of 2.55 years. Restricted Stock Unit Activity The following table summarizes the restricted stock unit activity under the Plans from June 30, 2010 to June 30, 2012: As of June 30, 2012, there was $4.2 million of total unrecognized compensation expense related to restricted stock units which is expected to be recognized over a weighted average period of 3.65 years. 12. Stockholders’ Equity Initial Public Offering of Common Stock In February 2010, the Company completed its initial public offering (“IPO”), whereby it sold 10,000,000 shares of common stock at a price of $15.00 per share. The Company received $136.7 million net of offering costs of $13.3 million. In conjunction with the closing of the IPO, all of the Company’s outstanding shares of convertible preferred stock automatically converted on a one-for-one basis into 21,176,533 shares of common stock. Stock Repurchases On November 3, 2011, the Board of Directors authorized a stock repurchase program allowing the Company to repurchase up to $50.0 million of its outstanding shares of its common stock. The repurchase program expires in November 2012. Repurchases under this program may take place in the open market or in privately negotiated 88 Fiscal Year Ended June 30, 2012 2011 2010 Intrinsic value $ 1,197 $ 25,795 $ 8,001 Cash received 4,697 16,967 1,640 Tax benefit 511 9,612 2,129 Shares Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value (in thousands) Outstanding at June 30, 2010 — $ — — $ — Granted 453,620 14.33 Vested — — Forfeited (48,860 ) 14.63 Outstanding at June 30, 2011 404,760 $ 14.29 2.13 $ 5,254 Granted 214,749 11.37 Vested (99,471 ) 10.92 Forfeited (140,483 ) 13.66 Outstanding at June 30, 2012 379,555 $ 13.76 1.95 $ 3,515 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) transactions and may be made under a Rule 10b5-1 plan. There is no guarantee as to the exact number of shares that will be repurchased by the Company, and the Company may discontinue repurchases at any time. The amount authorized by the Company’s board of directors excludes broker commissions. As of June 30, 2012, the Company had repurchased an aggregate of 4,753,919 shares of its common stock under this repurchase program at a weighted average price of $9.47 per share for a total of $45.0 million and the remaining amount available for the repurchase of the Company’s common stock was $5.0 million, all of which was used for repurchases in July 2012. The Company repurchased 79,800 shares of its outstanding common stock at a total cost of $0.7 million and an average cost of $8.96 per share in fiscal year 2010. These shares were accounted for as treasury stock in fiscal year 2010. Retirement of Treasury Stock During the fiscal year ended 2012, the Company retired 6,802,571 shares of treasury stock. These retired shares are now included in the Company’s pool of authorized but unissued shares. The retired treasury stock was initially recorded using the cost method and had a carrying value of approximately $51.7 million at June 30, 2012. The Company’s accounting policy upon the formal retirement of treasury stock is to deduct its par value from common stock, reduce additional paid-in capital by the amount recorded in additional paid-in capital when the stock was originally issued and any remaining amount as a deduction from retained earnings. 13. Related Party Transactions Katrina Boydon, the sister of Bronwyn Syiek, the Company’s President and Director, serves as the Company’s Vice President of Content and Compliance. In fiscal years 2012, 2011 and 2010, Ms. Boydon received a base salary of $214,000, $203,000 and $193,000 per year, respectively, and a bonus payout of $60,000, $69,000 and $67,000, respectively. In fiscal years 2012 and 2010, Ms. Boydon was granted options to purchase an aggregate of 40,000 shares and 45,000 shares, respectively, of the Company’s common stock. Ms. Boydon’s fiscal year 2013 base salary is $220,000 per year, and she has a fiscal year 2013 target bonus of $80,000. From March 2009 through January 2012, Rian Valenti, the son of Doug Valenti, the Company’s Chief Executive Officer and Chairman, served as a client strategy and development senior manager. In fiscal years 2012, 2011 and 2010, Mr. Rian Valenti received a base salary of $41,000, $62,000 and $54,000 per year, respectively, and a commission payout of $28,000, $32,000 and $23,000, respectively. In fiscal year 2012 and 2011, Mr. Rian Valenti was granted 1,250 restricted stock units and 750 restricted stock units, respectively, of the Company’s common stock. In fiscal year 2012, the Company’s president, Bronwyn Syiek, informed QuinStreet that she desired to start a company using her own resources that would develop and offer websites serving local communities such as parent-teacher associations and other locally-affiliated groups. The Company had previously explored a similar business opportunity and had concluded that the opportunity was not consistent with its business direction and did not address a sufficiently large market to justify further investment. Accordingly, the Company had discontinued its investment in this business opportunity in fiscal year 2011. During the time that the Company considered this business opportunity and tested the market with a product offering, Ms. Syiek, within the scope of her employment by QuinStreet, gained certain know-how about the community-based website business. In January 2012, Ms. Syiek’s proposal to pursue the business opportunity for herself was presented to the Company’s Board of Directors for their consideration under the Company’s Related Person Transactions Policy. The Board of Directors, with Mr. Valenti and Ms. Syiek abstaining, concluded that Ms. Syiek’s proposal did not 89 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) present a conflict of interest and directed management to negotiate agreements to document the arrangement. On August 23, 2012 the Company, Ms. Syiek and TownB Corporation, a company founded and substantially owned by Ms. Syiek, entered into a License and Investment Agreement pursuant to which QuinStreet provided TownB with a license to Ms. Syiek’s community-based website business know-how and QuinStreet will receive a 15% ownership interest in TownB, preemptive rights to maintain its ownership level and a right of first refusal in the event that Ms. Syiek chooses to sell her shares or TownB should be sold. Other than the know-how held by Ms. Syiek, no other Company intellectual property has been licensed to TownB or Ms. Syiek. The Company believes that both the know-how licensed, and the minority interest and associated rights in TownB that the Company will receive, have a nominal fair market value. 14. 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 revenue from fees earned through the delivery of qualified leads, clicks and, to a lesser extent, impressions, and DSS, which derives revenue from the sale of direct selling services through a hosted solution. The Company’s reportable and operating segments consist of DMS and DSS. The accounting policies of the two reportable and operating segments are the same as those described in Note 2. The Company evaluates the performance of its operating segments based on operating income before depreciation, amortization and stock-based compensation expense. The Company does not allocate all of its assets, or its depreciation and amortization expense, stock-based compensation expense, interest income, interest expense and income tax expense by segment. Accordingly, the Company does not report such information. Summarized information by segment was as follows (in thousands): 90 Fiscal Year Ended June 30, 2012 2011 2010 Net revenue by segment: DMS $ 369,023 $ 401,703 $ 333,090 DSS 1,445 1,318 1,745 Total net revenue 370,468 403,021 334,835 Segment operating income before depreciation, amortization, and stock-based compensation expense: DMS 71,840 89,590 70,423 DSS 808 721 956 Total segment operating income before depreciation, amortization, and stock-based compensation expense 72,648 90,311 71,379 Depreciation and amortization (31,150 ) (27,272 ) (18,791 ) Stock-based compensation expense (12,996 ) (13,950 ) (13,371 ) Total operating income $ 28,502 $ 49,089 $ 39,217 Table of Contents The following tables set forth net revenue and long-lived assets by geographic area (in thousands): Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2012, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of its assets, 91 Fiscal Year Ended June 30, 2012 2011 2010 Net revenue: United States $ 369,081 $ 401,673 $ 334,131 International 1,387 1,348 704 Total net revenue $ 370,468 $ 403,021 $ 334,835 June 30 June 30 2012 2011 Property and equipment, net: United States 8,493 $ 8,641 International 262 234 Total property and equipment, net $ 8,755 $ 8,875 Table of Contents (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of any unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of internal control effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management has assessed the effectiveness of the internal control over financial reporting as of June 30, 2012. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control — Integrated Framework. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of June 30, 2012. The effectiveness of our internal control over financial reporting as of June 30, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in this annual report on Form 10-K. Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information None. 92 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this item concerning directors is incorporated herein by reference from the sections to be titled “Election of Class III Directors” and “Board of Directors” in our definitive proxy statement to be filed with the Securities and Exchange Commission in connection with our 2012 annual meeting of stockholders (the “Proxy Statement”). The Proxy Statement is expected to be filed no later than 120 days after the end of our fiscal year ended June 30, 2012. Information regarding executive officers required by Item 401 of Regulation S-K is furnished in a separate disclosure in Part I of this report, under the caption “Executive Officers of the Registrant,” because we will not furnish such information in our definitive proxy statement prepared in accordance with Schedule 14A. The information required by this item with respect to Section 16(a) of the Exchange Act is incorporated herein by reference from the section to be titled “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement. Code of Ethics We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions), agents and representatives, including directors and consultants. We will disclose future amendments to our Code of Business Conduct and Ethics, or waivers of such provisions, applicable to any principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions or our directors at www.quinstreet.com . Item 11. Executive Compensation The information required by this item will be set forth in the sections to be titled “Report of the Compensation Committee”, “Board of Directors” and “Executive Compensation” in our Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item will be set forth in the sections to be titled “Executive Compensation” and “Stock Ownership of Certain Beneficial Owners and Management” in our Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this item will be included in the section to be titled “Stock Ownership of Certain Beneficial Owners and Management” and “Board of Directors” in the Proxy Statement and is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information required by this item will be set forth in the section to be titled “Ratification of the Selection of PricewaterhouseCoopers LLP as our Independent Registered Public Accounting Firm” in our Proxy Statement and is incorporated herein by reference. 93 Table of Contents PART IV Item 15. Exhibits, Financial Statement Schedules (a) We have filed the following documents are part of this Annual Report on Form 10-K: 1. Consolidated Financial Statements 2. Financial Statement Schedules The following financial statement schedule is filed as a part of this report: Schedule II: Valuation and Qualifying Accounts Allowance for doubtful accounts receivables and sales returns (in thousands): Note: Additions to the allowance for doubtful accounts are charged to expense. Additions to the allowance for sales credits are charged against revenue. All other schedules are omitted because they are not required or the required information is shown in the financial statements or notes thereto. 94 Page Report of Independent Registered Public Accounting Firm 58 Consolidated Balance Sheets 59 Consolidated Statements of Operations 60 Consolidated Statements of Convertible Preferred Stock, Stockholders’ Equity and Comprehensive Income 61 Consolidated Statements of Cash Flows 62 Notes to Consolidated Financial Statements 63 Balance at the beginning of the year Charged to expenses/ against the revenue Write-offs Net of Receivables Balance at the end of the year Fiscal year 2010 $ 3,509 $ 263 $ (1,014 ) $ 2,758 Fiscal year 2011 $ 2,758 $ 1,156 $ (1,191 ) $ 2,723 Fiscal year 2012 $ 2,723 $ 2,185 $ (2,101 ) $ 2,807 Table of Contents (b) Exhibits 95 Exhibit No. Description of Exhibit 2.1 Stock Purchase Agreement, dated November 5, 2010, by and among QuinStreet, Inc., Car Insurance.com, Inc., Car Insurance Agency, Inc., Car Insurance Holdings, Inc., CarInsurance.com, Inc., Lloyd Register IV, Lloyd Register III, David Fitzgerald, Timothy Register, Randy Horowitz and Erick Pace. 3.1 Amended and Restated Certificate of Incorporation. 3.2 Amended and Restated Bylaws. 4.1 Form of QuinStreet, Inc.’s Common Stock Certificate. 4.2 Second Amended and Restated Investor Rights Agreement, by and between QuinStreet, Inc., Douglas Valenti and the investors listed on Schedule 1 thereto, dated May 28, 2003. 10.1 + QuinStreet, Inc. 2008 Equity Incentive Plan. 10.2 + Forms of Option Agreement and Option Grant Notice under 2008 Equity Incentive Plan (for non-executive officer employees). 10.3 + Forms of Option Agreement and Option Grant Notice under 2008 Equity Incentive Plan (for executive officers). 10.4 + Forms of Option Agreement and Option Grant Notice under 2008 Equity Incentive Plan (for non-employee directors). 10.5 + QuinStreet, Inc. 2010 Equity Incentive Plan. 10.6 + Forms of Option Agreement and Option Grant Notice under 2010 Equity Incentive Plan (for non-executive officer employees). 10.7 + Forms of Option Agreement and Option Grant Notice under 2010 Equity Incentive Plan (for executive officers). 10.8*+ Forms of Senior Management Restricted Stock Unit (RSU) Grant Notice and Agreement under 2010 Equity Incentive Plan (for executive officers). 10.9*+ Forms of Restricted Stock Unit (RSU) Grant Notice and Agreement under 2010 Equity Incentive Plan (for non-executive officer employees). 10.10 + QuinStreet, Inc. 2010 Non-Employee Directors’ Stock Award Plan. 10.11 + Forms of Option Agreement and Option Grant Notice for Initial Grants under the 2010 Non-Employee Directors’ Stock Award Plan. 10.12 + Forms of Option Agreement and Option Grant Notice for Annual Grants under the 2010 Non-Employee Directors’ Stock Award Plan. 10.13 + Form of Incremental Bonus Plan. 10.14 + Annual Incentive Plan. 10.15 Second Amended and Restated Revolving Credit and Term Loan Agreement, by and among QuinStreet, Inc., the lenders thereto and Comerica Bank as Administrative Agent Sole Lead Arranger and Sole Bookrunner, Bank of America N.A. as Syndication Agent, and Union Bank, N.A. as Documentation Agent dated as of November 4, 2011. 10.16 + Form of Indemnification Agreement made by and between QuinStreet, Inc. and each of its directors and executive officers. 10.17 Office Lease Metro Center, dated as of February 24, 2010, between the registrant and CA-Metro Center Limited Partnership. (8) (6) (7) (3) (1) (1) (1) (1) (1) (2) (2) (2) (13) (14) (15) (11) (12) (9) (4) (5) Table of Contents 96 Exhibit No. Description of Exhibit 10.18 Assurance of Voluntary Compliance dated June 26, 2012 by and among QuinStreet, Inc. and the Attorneys General of the States of Alabama, Arizona, Arkansas, Delaware, Florida, Idaho, Illinois, Iowa, Kentucky, Massachusetts, Mississippi, Missouri, Nevada, New York, North Carolina, Ohio, Oregon, South Carolina, Tennessee and West Virginia. 10.19* License and Investment Agreement by and among Quinstreet, Inc., Bronwyn Syiek and TownB Corporation dated August 23, 2012. 23.1* Consent of Independent Registered Public Accounting Firm. 24.1* Power of Attorney (incorporated by reference to the signature page of this Annual Report on Form 10-K). 31.1* Certification of the Chief Executive Officer of QuinStreet, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act. 31.2* Certification of the Chief Financial Officer of QuinStreet, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act. 32.1** Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. 101.INS** XBRL Instance Document 101.SCH** XBRL Taxonomy Extension Schema Document 101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF** XBRL Taxonomy Extension Definition Linkbase Document 101.LAB** XBRL Taxonomy Extension Label Linkbase Document 101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document * Filed herewith. ** Furnished herewith. + Indicates management contract or compensatory plan. Incorporated by reference to the same numbered exhibit to QuinStreet, Inc.’s Registration Statement on Form S-1 (SEC File No. 333-163228) filed on November 19, 2009. Incorporated by reference to the same numbered exhibit to QuinStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on December 22, 2009. Incorporated by reference to the same numbered exhibit to QuinStreet, Inc.’s Amendment No. 2 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on January 14, 2010. Incorporated by reference to Exhibit 10.19 to QuinStreet, Inc.’s Amendment No. 3 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on January 26, 2010. Incorporated by reference to Exhibit 10.1 to QuinStreet, Inc.’s quarterly report on Form 10-Q (SEC File No. 001-34628) filed on May 12, 2010. Incorporated by reference to Exhibit 3.2 to QuinStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on December 22, 2009. Incorporated by reference to Exhibit 3.4 to QuinStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on December 22, 2009. Incorporated by reference to the same numbered exhibit to QuinStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-34628) filed on November 8, 2011. Incorporated by reference to Exhibit 10.1 to QuinStreet, Inc.’s quarterly report on Form 10-Q (SEC File No. 001-34628) filed on November 8, 2011. (10) (1) (2) (3) (4) (5) (6) (7) (8) (9) Table of Contents 97 Incorporated by reference to Exhibit 10.1 to QuinStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-34628) filed on June 27, 2012. Incorporated by reference to Exhibit 10.11 to QuinStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-34628) filed on August 30, 2011. Incorporated by reference to Exhibit 10.12 to QuinStreet, Inc.’s Amendment No. 2 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on January 14, 2010. Incorporated by reference to Exhibit 10.8 to QuinStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on December 22, 2009. Incorporated by reference to Exhibit 10.9 to QuinStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on December 22, 2009. Incorporated by reference to Exhibit 10.10 to QuinStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on December 22, 2009. (10 ) (11) (12) (13) (14) (15) Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 23, 2012. KNOW ALL PERSONS BY THESE PRESENTS , that each person whose signature appears below constitutes and appoints Douglas Valenti and Kenneth Hahn, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission hereby ratifying and confirming that each of said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. 98 QuinStreet, Inc. By: /s/ Douglas Valenti Douglas Valenti Chairman and Chief Executive Officer Signature Title Date /s/ Douglas Valenti Douglas Valenti Chairman of the Board and Chief Executive Officer (Principal Executive Officer) August 23, 2012 /s/ Kenneth Hahn Kenneth Hahn Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) and Chief Operating Officer August 23, 2012 /s/ Bronwyn Syiek Bronwyn Syiek President and Director August 23, 2012 /s/ William Bradley William Bradley Director August 23, 2012 /s/ John G. McDonald John G. McDonald Director August 23, 2012 /s/ Gregory Sands Gregory Sands Director August 23, 2012 /s/ James Simons James Simons Director August 23, 2012 /s/ Glenn Solomon Glenn Solomon Director August 23, 2012 /s/ Dana Stalder Dana Stalder Director August 23, 2012 Table of Contents EXHIBIT INDEX 99 Exhibit No. Description of Exhibit 2.1 Stock Purchase Agreement, dated November 5, 2010, by and among QuinStreet, Inc., Car Insurance.com, Inc., Car Insurance Agency, Inc., Car Insurance Holdings, Inc., CarInsurance.com, Inc., Lloyd Register IV, Lloyd Register III, David Fitzgerald, Timothy Register, Randy Horowitz and Erick Pace. 3.1 Amended and Restated Certificate of Incorporation. 3.2 Amended and Restated Bylaws. 4.1 Form of QuinStreet, Inc.’s Common Stock Certificate. 4.2 Second Amended and Restated Investor Rights Agreement, by and between QuinStreet, Inc., Douglas Valenti and the investors listed on Schedule 1 thereto, dated May 28, 2003. 10.1 + QuinStreet, Inc. 2008 Equity Incentive Plan. 10.2 + Forms of Option Agreement and Option Grant Notice under 2008 Equity Incentive Plan (for non-executive officer employees). 10.3 + Forms of Option Agreement and Option Grant Notice under 2008 Equity Incentive Plan (for executive officers). 10.4 + Forms of Option Agreement and Option Grant Notice under 2008 Equity Incentive Plan (for non-employee directors). 10.5 + QuinStreet, Inc. 2010 Equity Incentive Plan. 10.6 + Forms of Option Agreement and Option Grant Notice under 2010 Equity Incentive Plan (for non-executive officer employees). 10.7 + Forms of Option Agreement and Option Grant Notice under 2010 Equity Incentive Plan (for executive officers). 10.8*+ Forms of Senior Management Restricted Stock Unit (RSU) Grant Notice and Agreement under 2010 Equity Incentive Plan (for executive officers). 10.9*+ Forms of Restricted Stock Unit (RSU) Grant Notice and Agreement under 2010 Equity Incentive Plan (for non-executive officer employees). 10.10 + QuinStreet, Inc. 2010 Non-Employee Directors’ Stock Award Plan. 10.11 + Forms of Option Agreement and Option Grant Notice for Initial Grants under the 2010 Non-Employee Directors’ Stock Award Plan. 10.12 + Forms of Option Agreement and Option Grant Notice for Annual Grants under the 2010 Non-Employee Directors’ Stock Award Plan. 10.13 + Form of Incremental Bonus Plan. 10.14 + Annual Incentive Plan. 10.15 Second Amended and Restated Revolving Credit and Term Loan Agreement, by and among QuinStreet, Inc., the lenders thereto and Comerica Bank as Administrative Agent Sole Lead Arranger and Sole Bookrunner, Bank of America N.A. as Syndication Agent, and Union Bank, N.A. as Documentation Agent dated as of November 4, 2011. 10.16 + Form of Indemnification Agreement made by and between QuinStreet, Inc. and each of its directors and executive officers. 10.17 Office Lease Metro Center, dated as of February 24, 2010, between the registrant and CA-Metro Center Limited Partnership. (8) (6) (7) (3) (1) (1) (1) (1) (1) (2) (2) (2) (13) (14) (15) (11) (12) (9) (4) (5) Table of Contents 100 Exhibit No. Description of Exhibit 10.18 Assurance of Voluntary Compliance dated June 26, 2012 by and among QuinStreet, Inc. and the Attorneys General of the States of Alabama, Arizona, Arkansas, Delaware, Florida, Idaho, Illinois, Iowa, Kentucky, Massachusetts, Mississippi, Missouri, Nevada, New York, North Carolina, Ohio, Oregon, South Carolina, Tennessee and West Virginia. 10.19* License and Investment Agreement by and among Quinstreet, Inc., Bronwyn Syiek and TownB Corporation dated August 23, 2012. 23.1* Consent of Independent Registered Public Accounting Firm. 24.1* Power of Attorney (incorporated by reference to the signature page of this Annual Report on Form 10-K). 31.1* Certification of the Chief Executive Officer of QuinStreet, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act. 31.2* Certification of the Chief Financial Officer of QuinStreet, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act. 32.1** Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. 101.INS** XBRL Instance Document 101.SCH** XBRL Taxonomy Extension Schema Document 101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF** XBRL Taxonomy Extension Definition Linkbase Document 101.LAB** XBRL Taxonomy Extension Label Linkbase Document 101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document * Filed herewith. ** Furnished herewith. + Indicates management contract or compensatory plan. Incorporated by reference to the same numbered exhibit to QuinStreet, Inc.’s Registration Statement on Form S-1 (SEC File No. 333-163228) filed on November 19, 2009. Incorporated by reference to the same numbered exhibit to QuinStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on December 22, 2009. Incorporated by reference to the same numbered exhibit to QuinStreet, Inc.’s Amendment No. 2 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on January 14, 2010. Incorporated by reference to Exhibit 10.19 to QuinStreet, Inc.’s Amendment No. 3 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on January 26, 2010. Incorporated by reference to Exhibit 10.1 to QuinStreet, Inc.’s quarterly report on Form 10-Q (SEC File No. 001-34628) filed on May 12, 2010. Incorporated by reference to Exhibit 3.2 to QuinStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on December 22, 2009. Incorporated by reference to Exhibit 3.4 to QuinStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on December 22, 2009. Incorporated by reference to the same numbered exhibit to QuinStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-34628) filed on November 8, 2011. Incorporated by reference to Exhibit 10.1 to QuinStreet, Inc.’s quarterly report on Form 10-Q (SEC File No. 001-34628) filed on November 8, 2011. (10) (1) (2) (3) (4) (5) (6) (7) (8) (9) Table of Contents 101 Incorporated by reference to Exhibit 10.1 to QuinStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-34628) filed on June 27, 2012. Incorporated by reference to Exhibit 10.11 to QuinStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-34628) filed on August 30, 2011. Incorporated by reference to Exhibit 10.12 to QuinStreet, Inc.’s Amendment No. 2 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on January 14, 2010. Incorporated by reference to Exhibit 10.8 to QuinStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on December 22, 2009. Incorporated by reference to Exhibit 10.9 to QuinStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on December 22, 2009. Incorporated by reference to Exhibit 10.10 to QuinStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-163228) filed on December 22, 2009. (10 ) (11) (12) (13) (14) (15) Exhibit 10.8 Q UIN S TREET , I NC . S ENIOR M ANAGEMENT R ESTRICTED S TOCK U NIT (RSU) G RANT N OTICE 2010 E QUITY I NCENTIVE P LAN QuinStreet, Inc. (the “ Company ”), pursuant to its 2010 Equity Incentive Plan (the “ Plan ”), hereby grants to you as the Participant named below a Restricted Stock Unit Award with respect to the number of shares of the Company’s Common Stock set forth below. This Restricted Stock Unit Award is subject to all of the terms and conditions as set forth herein, in the Restricted Stock Unit Agreement, the Plan and the Plan Prospectus, all of which are attached hereto and incorporated herein in their entirety. No Monetary Payment Required . You are not required to make any monetary payment (other than applicable Tax Obligations (as defined in the Restricted Stock Unit Agreement)) as a condition to receiving the Restricted Stock Unit Award or shares of Common Stock issued upon vesting and settlement of the Restricted Stock Unit Award. Additional Terms/Acknowledgements: The Participant acknowledges receipt of, and understands and agrees to, this Restricted Stock Unit (RSU) Grant Notice, the Restricted Stock Unit Agreement, the Plan Prospectus, and the Plan. Participant further acknowledges that as of the Date of Grant, this Restricted Stock Unit (RSU) Grant Notice, the Restricted Stock Unit Agreement, the Plan Prospectus, and the Plan set forth the entire understanding between Participant and the Company regarding this Award. A TTACHMENTS : Restricted Stock Unit Agreement, 2010 Equity Incentive Plan, 2010 Equity Incentive Plan Prospectus Participant: Date of Grant: Vesting Commencement Date: No. of Shares Subject to Award: Vesting Schedule: Subject to accelerated vesting under specified circumstances as provided in the Restricted Stock Unit and the Plan, the Restricted Stock Unit Award shall become vested in installments over four years as follows: • 25% of the Restricted Stock Unit Award will vest on the first anniversary of the Vesting Commencement Date; and • 6.25% of the Restricted Stock Unit Award will vest quarterly thereafter for the next 12 quarters. Q UIN S TREET , I NC . 2010 E QUITY I NCENTIVE P LAN R ESTRICTED S TOCK U NIT A GREEMENT (S ENIOR M ANAGEMENT ) Pursuant to the Restricted Stock Unit (RSU) Grant Notice (“ Grant Notice ”) and this Restricted Stock Unit Agreement (this “ Agreement ”), QuinStreet, Inc. (the “ Company ”) has granted you a Restricted Stock Unit Award under its 2010 Equity Incentive Plan (the “ Plan ”) representing the right to receive the number of shares of the Company’s Common Stock indicated in the Grant Notice on the terms and conditions set forth herein and in the Grant Notice. Defined terms not explicitly defined in this Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your Restricted Stock Unit Award are as follows: 1. V ESTING . Subject to the limitations contained herein and the potential vesting acceleration provisions set forth in Section 9 hereof, your Restricted Stock Unit Award will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. Immediately upon termination of your Continuous Service for any reason, any unvested portion of the Restricted Stock Unit Award shall be forfeited without consideration. 2. C ONVERSION I NTO S HARES . Shares of Common Stock will be issued on the applicable vesting date (or, to the extent not administratively feasible, as soon as practicable thereafter). As a condition to such issuance, you shall have satisfied your Tax Obligations as specified in this Agreement and shall have completed, signed and returned any documents and taken any additional action that the Company deems appropriate to enable it to accomplish the delivery of such shares. In no event will the Company be obligated to issue a fractional share. 3. T AX T REATMENT . (a) Regardless of any actions taken by the Company, you will be ultimately responsible for any withholding tax liabilities, whether as a result of federal, state or other law and whether for the payment and satisfaction of any income tax, social security tax, payroll tax, or payment on account of other tax related to withholding obligations that arise by reason of the Restricted Stock Unit Award, incurred in connection with the Restricted Stock Unit Award becoming vested and Common Stock being issued, or otherwise incurred in connection with the Restricted Stock Unit Award (collectively, “ Tax Obligations ”). (b) Unless otherwise determined by the Company in its sole discretion, and subject to applicable law, the Company shall require you to satisfy the Tax Obligations (as defined below) by the Company deducting from the shares of Common Stock otherwise deliverable to you in settlement of applicable portion of the Restricted Stock Unit Award on the vesting date a number of whole shares having a fair market value (as determined by the Company) as of the date on which the Tax Obligations arise not in excess of the amount of such Tax Obligations determined by the applicable minimum statutory withholding rates. The Company may in its sole discretion permit you to elect an alternative method of satisfying your Tax Obligations with notice to the Company, which may include the following if specified by the Company (and the Company may with notice to you require any of the following methods): (i) by payment by you to the Company in cash or by check an amount equal to the minimum amount of taxes that the Company concludes it is required to withhold under applicable law; or (ii) by the sale by you of a number of shares of Common Stock that are issued on the applicable vesting date under the Restricted Stock Unit Award, which the Company determines is sufficient to generate an amount that meets the Tax Obligations plus additional shares to account for rounding and market fluctuations, and payment of such tax withholding to the Company, and such shares may be sold as part of a block trade with other Participants. You hereby authorize the Company to withhold such tax withholding amount from any amounts owing to you to the Company and to take any action necessary in accordance with this paragraph. (c) The Restricted Stock Unit Award is intended to qualify for the short-term deferral exception to Section 409A of the Code described in the regulations promulgated thereunder, and therefore shares of Common Stock will be issued within 2 / months after the taxable year in which the applicable portion of the Restricted Stock Unit Award is no longer subject to a substantial risk of forfeiture. 4. S ECURITIES L AW C OMPLIANCE . Notwithstanding anything to the contrary contained herein, the Company shall not be obligated to deliver any Common Stock during any period when the Company determines that the conversion of any portion of the Restricted Stock Unit Award or the delivery of shares hereunder would violate any federal, state or other applicable laws and/or may issue shares subject to any restrictive legends that, as determined by the Company’s counsel, is necessary to comply with securities or other regulatory requirements. 5. R ESTRICTIONS ON T RANSFER OF A WARDS . You understand and agree that the Restricted Stock Unit Award may not be sold, given, transferred, assigned, pledged or otherwise hypothecated. 6. C APITALIZATION A DJUSTMENTS . The number of shares of Common Stock subject to your Restricted Stock Unit Award may be adjusted from time to time for Capitalization Adjustments. 7. N O S TOCKHOLDER R IGHTS . You will have no voting or other rights as the Company’s other stockholders with respect to the shares of Common Stock underlying the Restricted Stock Unit Award until issuance of such shares. 8. D IVIDEND E QUIVALENT U NITS . Unless otherwise determined by the Compensation Committee of the Company’s Board of Directors in its sole discretion, you shall not have any rights to dividends or dividend equivalents in the event that the Company pays a cash dividend to holders of Common Stock generally. RSU Award Agt – Sr Mgmt 3 Last Updated: July 27, 2012 1 2 9. I NVOLUNTARY T ERMINATION F OLLOWING A C HANGE I N C ONTROL . (a) If a Change in Control occurs and as of, or within six months after, the effective time of such Change in Control your Continuous Service terminates due to an involuntary termination (not including death or Disability) without Cause or due to a voluntary termination which is a Resignation for Good Reason (as defined below), then, as of the date of termination of Continuous Service, twenty-five percent (25%) of the portion of your Restricted Stock Unit Award subject to vesting that is unvested on the effective date of such termination will vest immediately upon such termination and the vested shares, less shares withheld for taxes, will be promptly released to you. (b) “ Resignation for Good Reason ” means that you voluntarily terminate employment after any of the following are undertaken without your express written consent: (i) the assignment to you of any duties or responsibilities that results in a significant diminution in your employment role in the Company as in effect immediately prior to the effective date of the Change in Control; provided, however, that mere changes in your title or reporting relationships alone shall not constitute a basis for Resignation for Good Reason; (ii) a greater than five percent (5%) aggregate reduction by the Company in your annual base salary, as in effect on the effective date of the Change in Control or as increased thereafter; provided, however, that if there are across-the-board proportionate salary reductions for all officers, management-level and other salaried employees due to the financial condition of the Company, a greater than ten percent (10%) aggregate reduction by the Company in your annual base salary will be required; (iii) any failure by the Company to continue in effect any benefit plan or program, including fringe benefits, incentive plans and plans with respect to the receipt of securities of the Company, in which you are participating immediately prior to the effective date of the Change in Control (hereinafter referred to as “Benefit Plans”), or the taking of any action by the Company that would adversely affect your participation in or reduce your benefits under the Benefit Plans; provided, however , that a basis for Resignation for Good Reason shall not exist under this clause (c) following a Change in Control if the Company offers a range of benefit plans and programs that, taken as a whole, is comparable to the Benefit Plans; or (iv) a non-temporary relocation of your business office to a location more than fifty (50) miles from the location at which you perform duties as of the effective date of the Change in Control, except for required travel by you on the Company’s business to an extent substantially consistent with your business travel obligations prior to the Change in Control. RSU Award Agt – Sr Mgmt 4 Last Updated: July 27, 2012 (c) If any payment or benefit you would receive pursuant to a Change in Control from the Company or otherwise (“ Payment ”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “ Excise Tax ”), then such Payment shall be equal to the Reduced Amount. The “Reduced Amount” shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in your receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in payments or benefits constituting “parachute payments” is necessary so that the Payment equals the Reduced Amount, reduction shall occur in the following order: reduction of cash payments; cancellation of accelerated vesting of Stock Awards; reduction of employee benefits. In the event that acceleration of vesting of Stock Award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant of your Stock Awards ( i.e. , earliest granted Stock Award cancelled last). The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the Change in Control shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder. The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to you and the Company within fifteen (15) calendar days after the date on which your right to a Payment is triggered (if requested at that time by you or the Company) or such other time as requested by you or the Company. If the accounting firm determines that no Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish you and the Company with an opinion reasonably acceptable to you that no Excise Tax will be imposed with respect to such Payment. Any good faith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon you and the Company. 10. A WARD NOT A S ERVICE C ONTRACT . Your Restricted Stock Unit Award is not an employment or service contract, and nothing in your Restricted Stock Unit Award shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your Restricted Stock Unit Award shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. 11. N OTICES . Any notices provided for in your Restricted Stock Unit Award or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. RSU Award Agt – Sr Mgmt 5 Last Updated: July 27, 2012 12. G OVERNING P LAN D OCUMENT . Your Restricted Stock Unit Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Restricted Stock Unit Award, and is further subject to all interpretations, amendments, rules and regulations, which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Restricted Stock Unit Award and those of the Plan, the provisions of the Plan shall control. RSU Award Agt – Sr Mgmt 6 Last Updated: July 27, 2012 Exhibit 10.9 Q UIN S TREET , I NC . R ESTRICTED S TOCK U NIT (RSU) G RANT N OTICE 2010 E QUITY I NCENTIVE P LAN QuinStreet, Inc. (the “ Company ”), pursuant to its 2010 Equity Incentive Plan (the “ Plan ”), hereby grants to you as the Participant named below a Restricted Stock Unit Award with respect to the number of shares of the Company’s Common Stock set forth below. This Restricted Stock Unit Award is subject to all of the terms and conditions as set forth herein, in the Restricted Stock Unit Agreement, the Plan and the Plan Prospectus, all of which are attached hereto and incorporated herein in their entirety. Vesting Schedule : The Restricted Stock Unit Award shall become vested in installments over four years as follows: No Monetary Payment Required . You are not required to make any monetary payment (other than applicable Tax Obligations (as defined in the Restricted Stock Unit Agreement)) as a condition to receiving the Restricted Stock Unit Award or shares of Common Stock issued upon vesting and settlement of the Restricted Stock Unit Award. Additional Terms/Acknowledgements: The Participant acknowledges receipt of, and understands and agrees to, this Restricted Stock Unit (RSU) Grant Notice, the Restricted Stock Unit Agreement, the Plan Prospectus, and the Plan. Participant further acknowledges that as of the Date of Grant, this Restricted Stock Unit (RSU) Grant Notice, the Restricted Stock Unit Agreement, the Plan Prospectus, and the Plan set forth the entire understanding between Participant and the Company regarding this Award. A TTACHMENTS : Restricted Stock Unit Agreement, 2010 Equity Incentive Plan, 2010 Equity Incentive Plan Prospectus Participant: Date of Grant: Vesting Commencement Date: No. of Shares Subject to Award: • 25% of the Restricted Stock Unit Award will vest on the first anniversary of the Vesting Commencement Date; and • 6.25% of the Restricted Stock Unit Award will vest quarterly thereafter for the next 12 quarters. Q UIN S TREET , I NC . 2010 E QUITY I NCENTIVE P LAN R ESTRICTED S TOCK U NIT A GREEMENT Pursuant to the Restricted Stock Unit (RSU) Grant Notice (“ Grant Notice ”) and this Restricted Stock Unit Agreement (this “ Agreement ”), QuinStreet, Inc. (the “ Company ”) has granted you a Restricted Stock Unit Award under its 2010 Equity Incentive Plan (the “ Plan ”) representing the right to receive the number of shares of the Company’s Common Stock indicated in the Grant Notice on the terms and conditions set forth herein and in the Grant Notice. Defined terms not explicitly defined in this Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your Restricted Stock Unit Award are as follows: 1. V ESTING . Subject to the limitations contained herein, your Restricted Stock Unit Award will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. Immediately upon termination of your Continuous Service for any reason, any unvested portion of the Restricted Stock Unit Award shall be forfeited without consideration. 2. C ONVERSION I NTO S HARES . Shares of Common Stock will be issued on the applicable vesting date (or, to the extent not administratively feasible, as soon as practicable thereafter). As a condition to such issuance, you shall have satisfied your Tax Obligations as specified in this Agreement and shall have completed, signed and returned any documents and taken any additional action that the Company deems appropriate to enable it to accomplish the delivery of such shares. In no event will the Company be obligated to issue a fractional share. 3. T AX T REATMENT . (a) Regardless of any actions taken by the Company, you will be ultimately responsible for any withholding tax liabilities, whether as a result of federal, state or other law and whether for the payment and satisfaction of any income tax, social security tax, payroll tax, or payment on account of other tax related to withholding obligations that arise by reason of the Restricted Stock Unit Award, incurred in connection with the Restricted Stock Unit Award becoming vested and Common Stock being issued, or otherwise incurred in connection with the Restricted Stock Unit Award (collectively, “ Tax Obligations ”). (b) Unless otherwise determined by the Company in its sole discretion, and subject to applicable law, the Company shall require you to satisfy the Tax Obligations (as defined below) by the Company deducting from the shares of Common Stock otherwise deliverable to you in settlement of applicable portion of the Restricted Stock Unit Award on the vesting date a number of whole shares having a fair market value (as determined by the Company) as of the date on which the Tax Obligations arise not in excess of the amount of such Tax Obligations determined by the applicable minimum statutory withholding rates. The Company may in its sole discretion permit you to elect an alternative method of satisfying your Tax Obligations with notice to the Company, which may include the following if specified by the Company (and the Company may with notice to you require any of the following methods): (i) by payment by you to the Company in cash or by check an amount equal to the minimum amount of taxes that the Company concludes it is required to withhold under applicable law; or (ii) by the sale by you of a number of shares of Common Stock that are issued on the applicable vesting date under the Restricted Stock Unit Award, which the Company determines is sufficient to generate an amount that meets the Tax Obligations plus additional shares to account for rounding and market fluctuations, and payment of such tax withholding to the Company, and such shares may be sold as part of a block trade with other Participants. You hereby authorize the Company to withhold such tax withholding amount from any amounts owing to you to the Company and to take any action necessary in accordance with this paragraph. (c) The Restricted Stock Unit Award is intended to qualify for the short-term deferral exception to Section 409A of the Code described in the regulations promulgated thereunder, and therefore shares of Common Stock will be issued within 2 / months after the taxable year in which the applicable portion of the Restricted Stock Unit Award is no longer subject to a substantial risk of forfeiture. 4. S ECURITIES L AW C OMPLIANCE . Notwithstanding anything to the contrary contained herein, the Company shall not be obligated to deliver any Common Stock during any period when the Company determines that the conversion of any portion of the Restricted Stock Unit Award or the delivery of shares hereunder would violate any federal, state or other applicable laws and/or may issue shares subject to any restrictive legends that, as determined by the Company’s counsel, is necessary to comply with securities or other regulatory requirements. 5. R ESTRICTIONS ON T RANSFER OF A WARDS . You understand and agree that the Restricted Stock Unit Award may not be sold, given, transferred, assigned, pledged or otherwise hypothecated. 6. C APITALIZATION A DJUSTMENTS . The number of shares of Common Stock subject to your Restricted Stock Unit Award may be adjusted from time to time for Capitalization Adjustments. 7. N O S TOCKHOLDER R IGHTS . You will have no voting or other rights as the Company’s other stockholders with respect to the shares of Common Stock underlying the Restricted Stock Unit Award until issuance of such shares. 8. D IVIDEND E QUIVALENT U NITS . Unless otherwise determined by the Compensation Committee of the Company’s Board of Directors in its sole discretion, you shall not have any rights to dividends or dividend equivalents in the event that the Company pays a cash dividend to holders of Common Stock generally. 9. A WARD NOT A S ERVICE C ONTRACT . Your Restricted Stock Unit Award is not an employment or service contract, and nothing in your Restricted Stock Unit Award shall be 3 1 2 deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your Restricted Stock Unit Award shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. 10. N OTICES . Any notices provided for in your Restricted Stock Unit Award or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 11. G OVERNING P LAN D OCUMENT . Your Restricted Stock Unit Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Restricted Stock Unit Award, and is further subject to all interpretations, amendments, rules and regulations, which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Restricted Stock Unit Award and those of the Plan, the provisions of the Plan shall control. 4 Exhibit 10.19 LICENSE AND INVESTMENT AGREEMENT This License and Investment Agreement (the “ Agreement ”) dated as of the last date signed as set forth on the signature page hereto (“ Effective Date ”) between QuinStreet, Inc., a Delaware corporation (“ QuinStreet ”), TownB Corporation, a Delaware corporation (“ TownB ”) and Bronwyn Syiek (“ Ms. Syiek ”) (each a “ Party ” and collectively the “ Parties ”). WHEREAS, QuinStreet owns findsmithGROUPS (“ FSG ”), a technology that web-enables online communities (the “ FSG Business ”); WHEREAS, TownB desires to obtain and QuinStreet has agreed to grant to TownB a license to the Know-How (as defined below) for use by TownB in its current and future businesses primarily in the field of online communities (collectively “ TownB’s Business ”); and WHEREAS, Bronwyn Syiek, QuinStreet’s President and a member of QuinStreet’s board of directors, is a principal of TownB and has disclosed her interest in TownB and its Business to QuinStreet. NOW, THEREFORE, for good and valuable consideration (including the mutual promises set forth herein), the receipt and sufficiency of which is hereby acknowledged by both parties, the Parties agree as follows: ARTICLE 1 D EFINITIONS Section 1.01. Certain Definitions . The following terms, as used herein, have the following meanings: “ Confidential Information ” means any non-public, confidential or proprietary information relating to a disclosing party, whether or not technical in nature, including any information that is designated by the disclosing party as Confidential Information at the time of its disclosure, either by a written or visual confidentiality designation, or orally. Notwithstanding the foregoing, “ Confidential Information ” does not include information, technical data or know-how which: (i) is in the public domain at the time of disclosure or becomes available thereafter to the public without restriction, and in either case not as a result of the act or omission of the receiving party; (ii) is rightfully obtained by the receiving party from a third party without restriction as to disclosure; (iii) is lawfully in the possession of the receiving party at the time of disclosure by the disclosing party and not otherwise subject to restriction on disclosure; (iv) is approved for disclosure by prior written authorization of the disclosing party; or (v) is developed independently and separately by a Party without use of the disclosing party’s Confidential Information. “ Know-How ” means all trade secrets, methods, procedures, formulas, processes and general knowledge of Ms. Syiek related to the FSG Business, in each case: (i) solely to the extent used by FSG in the development or operation of any part of the FSG Business; (ii) which are held in the unaided memory of Ms. Syiek; and (iii) which are owned or licensable by QuinStreet or any affiliate of QuinStreet at the effective date of this Agreement. ARTICLE 2 G RANT OF L ICENSE Section 2.01. License . QuinStreet hereby grants to TownB a perpetual, fully paid-up, irrevocable, non-exclusive, non-transferable and non-sublicensable worldwide license to use the Know-How in connection with the development and operation of TownB’s Business (the “ License ”) subject to the terms and conditions herein; provided that TownB may sublicense the Know-How to the extent reasonably necessary to conduct TownB’s Business and at all times consistent with the scope of the License. Section 2.02. Acknowledgement . QuinStreet acknowledges and agrees that to the extent (if any) that Ms. Syiek and/or TownB commenced using any of the Know-How prior to the Effective Date, QuinStreet hereby consents to any such prior use under the terms and conditions of this Agreement. Ms. Syiek and TownB acknowledge and agree that to the extent (if any) that either of them used any of the Know-How prior to the Effective Date, any such use shall be on the terms and conditions of this Agreement as if this Agreement had been in effect when such use commenced. Section 2.03. Reservation of Rights. TownB acknowledges that (i) the License is the only license granted to TownB with respect to the Know-How and (ii) without limitation to the preceding sub-clause, no other licenses whatsoever have been granted, expressly, or by implication or estoppel, by the provisions of this Agreement, including any license to Internet domains, trademarks, copyright or other intellectual property rights embodied in any software, technology or tangible media that is owned by QuinStreet. Any and all rights in and to the Know-How possessed by QuinStreet and not expressly granted to TownB are reserved and retained by QuinStreet. TownB shall not, and shall not permit its employees, agents or representatives to, allow any third party to use or have access to any Know-How except to the extent reasonably necessary for the furtherance of TownB’s Business and at all times consistent with the scope of the License. ARTICLE 3 C ONSIDERATION Section 3.01. Consideration . In consideration of the License, on or before September 6, 2012, TownB shall issue or cause to be transferred to QuinStreet shares of its voting common stock representing a 15 percent ownership interest of TownB (based on the number of TownB’s fully diluted shares of capital stock outstanding as of the date of issuance or transfer). Section 3.02 . Transfers by Ms. Syiek. (a) For so long as QuinStreet owns capital stock of TownB, Ms. Syiek agrees that, if she proposes to sell or otherwise transfer to a third party any of her shares of TownB’s capital stock other than with respect to a Permitted Transfer (as defined below), she shall, first deliver to QuinStreet a written notice (a “ Stockholder Notice ”) stating in good faith the terms and conditions of the proposed sale or transfer, including, without limitation, the nature of the offer or transfer, the consideration to be paid, and the name and address of each prospective purchaser License & Investment Agt 2 or transferee. Within fifteen (15) business days after receipt of such Stockholder Notice, QuinStreet shall have the first right, but not the obligation, to elect by written notice to Ms. Syiek (“ QuinStreet Notice ”) to purchase all (but not less than all) of the shares of TownB’s capital stock subject to the Stockholder Notice, upon the price and terms of payment and other terms and conditions designated in the Stockholder Notice (“ ROFR Shares ”). In the event that QuinStreet elects to purchase the ROFR Shares hereunder, the sale and purchase of the ROFR Shares shall be closed between the Parties no later than thirty (30) calendar days following the date of the QuinStreet Notice. For purposes of this Agreement, a “ Permitted Transfer ” by Ms. Syiek is a transfer made for bona fide estate planning purposes to Ms. Syiek’s ancestors, descendants, siblings or spouse or to trusts for the benefit of such persons or Ms. Syiek (each, a “ Permitted Transferee ”); provided that the Permitted Transferee shall furnish QuinStreet and TownB with a written agreement to be bound by and comply with all provisions of this Agreement as if such person or trust was Ms. Syiek. (b) If QuinStreet has declined to exercise its right of first refusal described in Section 3.02(a), QuinStreet shall have the right, exercisable upon written notice to Ms. Syiek within fifteen (15) days after receipt of the Stockholder Notice, to participate in such sale of the Shares on a pro rata basis on the same terms and conditions as those set forth in the Stockholder Notice. To the extent QuinStreet exercises such right of participation, the number of Shares that Ms. Syiek may sell in the transaction shall be correspondingly reduced. (c) If any transaction in connection with which a notice is required pursuant to this Section 3.02 provides for the payment of non-cash consideration, QuinStreet may pay the consideration in cash equal to QuinStreet’s good faith determination of the present fair market value of the non-cash consideration to be provided by the purchaser or transferee in the transaction. (d) If QuinStreet elects not to purchase the ROFR Shares subject to any notice pursuant to Section 3.02(a), Ms. Syiek may, subject to Section 3.02(b), consummate the transaction contemplated by such notice within sixty (60) days following the earlier of (i) the date on which QuinStreet provides written notice of such election not to purchase or (ii) the expiration of the applicable election period as provided herein, whichever is earlier; provided however that the transaction is made in all material respects at the price and terms designated in the Stockholder Notice. Section 3.03 Transactions Involving TownB. (a) For so long as QuinStreet owns capital stock of TownB and has not sold any of its interest, TownB agrees that, if TownB proposes to issue additional shares of its capital stock, TownB shall provide written notice of the same to QuinStreet to ensure that QuinStreet has the opportunity to invest in the TownB issuances so as to maintain its 15%, or lower at QuinStreet’s sole discretion, ownership interest in TownB, on the same terms and conditions of the proposed issuance. QuinStreet shall advise TownB in writing as to whether it wishes to invest in such issuance within fifteen (15) business days of such notice from TownB. To the extent that QuinStreet elects to not invest in the proposed issuance, TownB shall have six (6) months from the end of the notice period to close the proposed stock issuance. If TownB does not close within this period, QuinStreet shall be offered another opportunity to invest in the issuance to License & Investment Agt 3 maintain its ownership percentage. This Section does not apply to issuance of the initial founder’s shares to Ms. Syiek or to Kimarie Matthews prior to the Effective Date of this Agreement or shares to employees or other service providers in exchange for bona fide services to TownB under a duly adopted stock incentive plan of TownB. (b) For so long as QuinStreet owns capital stock of TownB, TownB agrees that, if TownB proposes to enter into an agreement or series of related agreements to transfer all or substantially all of TownB’s assets or to sell shares of its capital stock constituting greater than 50% of the then total outstanding voting securities of TownB (a “ TownB Transaction ”), TownB shall within two (2) business days of determining to make such issuance or transfer, deliver to QuinStreet a written notice (a “ TownB Transaction Notice ”) stating in good faith the terms and conditions of the sale or transfer, including, without limitation, the nature of the sale or transfer, the consideration to be paid, and the name and address of each prospective purchaser or transferee. Within fifteen (15) business days after receipt of such TownB Transaction Notice, QuinStreet shall have the first right, but not the obligation, to elect by written notice to TownB (“ QuinStreet Notice ”) to purchase all (but not less than all) of such shares of TownB’s capital stock or such assets subject to the TownB Transaction Notice upon the price and terms of payment designated in the TownB Transaction Notice. In the event that QuinStreet elects to purchase such shares or assets hereunder, the sale and purchase of such shares or assets shall be closed between the Parties no later than thirty (30) calendar days following the date of the QuinStreet Notice. (c) If any transaction in connection with which a notice is required pursuant to Section 3.03 provides for the payment of non-cash consideration, QuinStreet may pay the consideration in cash equal to QuinStreet’s good faith determination of the present fair market value of the non-cash consideration to be provided by the purchaser or transferee in the transaction. (d) If QuinStreet elects not to purchase the shares or assets subject to any notice pursuant to Section 3.03(b), as the case may be, then, TownB may consummate the transaction contemplated by such notice within sixty (60) days following the earlier of (i) the date on which QuinStreet provides written notice of such election not to purchase or (ii) the expiration of the applicable election period as provided herein, whichever is earlier; provided however that the transaction is made in all material respects at the price and terms designated in the TownB Transaction Notice. (e) The foregoing provisions of this Section 3.03 (including all rights of first refusal hereunder) shall terminate upon the closing date of the initial underwritten public offering of TownB securities pursuant to an effective registration statement under the Securities Act of 1933 (as amended)(the “ Public Offering ”). Section 3.04 . Drag-along Right. (a) In the event that a TownB Transaction involves (i) the proposed sale or other Transfer of all or substantially all of the assets of TownB, or the proposed sale or other Transfer, whether by direct purchase, merger or otherwise, of all or substantially all of the outstanding shares of capital stock of TownB in one or more related transactions to, or (ii) the approval of such a transaction with, a bona fide third party purchaser or acquirer who in the good faith License & Investment Agt 4 judgment of QuinStreet is not a direct competitor of QuinStreet (such Transfer or transaction, a “ Company Sale ,” and such purchaser or acquirer, the “ Proposed Purchaser ”), then, to the extent QuinStreet elects not to exercise its rights of first refusal pursuant to Section 3.03 to purchase such shares or assets, TownB or the transferring stockholders, as the case may be (collectively “ Transferring Stockholders ”) shall have the right to require that QuinStreet transfer all of its shares of capital stock of TownB to the Proposed Purchaser for, or otherwise vote in favor of the Company Sale with the Transferring Stockholders, at the same price per share and otherwise on the same terms and conditions as the Transferring Stockholders with the same class of stock (“ Drag-Along Right ”). The Drag-Along Right shall in no way limit QuinStreet’s rights pursuant to Section 3.03. (b) Subject to Section 3.03, the closing of any Company Sale shall be held at the principal offices of TownB or at such other location as TownB and the Proposed Purchaser shall agree, on the closing date set forth in the Company Sale Notice. At the closing of any Company Sale, (a) QuinStreet shall deliver all of its shares of TownB capital stock to the Proposed Purchaser on the same terms and conditions as the other TownB stockholders with the same class of stock, and (b) the Proposed Purchaser shall deliver to QuinStreet the purchase price for its shares of TownB capital stock. (c) QuinStreet shall execute any customary agreements, certificates, instruments, or other documents as the Proposed Purchaser may reasonably request in connection with and customary for the Company Sale; provided, however, that any such obligation shall be no more burdensome in substance for QuinStreet than for any other Transferring Stockholder, and provided further, however, that in no circumstances will QuinStreet be required to accept or assume any liability to the Proposed Purchaser for any amount in excess of the purchase price paid to QuinStreet for its TownB capital stock in connection with the Company Sale. (d) For purposes hereof, “Transfer” collectively means any sale or other transfer of shares of the capital stock or assets of TownB in a Company Sale, whether by sale or exchange or by merger or consolidation or corporate reorganization or other form of acquisition of TownB or its capital stock. (e) The foregoing provisions of this Section 3.04 shall be applicable to any purchaser or transferee of any shares of the capital stock of TownB issued to QuinStreet, and as a condition of any such purchase or transfer, QuinStreet shall require the proposed purchaser or transferee to agree to become a party to and be bound by the provisions of this Section 3.04. (f) The foregoing provisions of this Section 3.04 (including all drag-along rights hereunder) shall terminate upon the closing date of the Public Offering of TownB securities. Section 3.05. Equitable Relief . Each of the Parties acknowledge that its or her breach of this Section may cause irreparable harm to the other Parties which may not be compensable by monetary damages, and, accordingly, in the event of a breach of this Section 3 by a Party, the other Party or Parties shall be entitled to, in addition to any other remedies that such Party or Parties may have at law or in equity as a result of any breach of this Section, injunctive relief requiring the breaching Party to comply with the applicable provisions of this Section 3. License & Investment Agt 5 ARTICLE 4 R EPRESENTATIONS AND W ARRANTIES Section 4.01 . Mutual Representations and Warranties. Each party represents and warrants to the other party that: (a) it is duly organized, validly existing and in good standing under its jurisdiction of organization and has the right to enter into this Agreement; (b) complete and accurate copies of TownB’s governing documents have been provided, or prior to the issuance of the shares to QuinStreet, will be provided to QuinStreet; and (c) the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby are within the corporate powers of such party and have been duly authorized by all necessary corporate action on the part of such party, and constitute a valid and binding agreement of such party. Section 4.02. Investor Representations . QuinStreet represents and warrants that (i) it is an “accredited investor” under U.S. and state securities laws; and (ii) it is acquiring its shares for investment for its own account and not with a view to, or for sale or resale in connection with, any distribution of the security; and QuinStreet understands that the shares are not registered and may not be resold or transferred except in compliance with U.S. and state securities laws. SECTION 4.03. No Other Warranties. THE REPRESENTATIONS AND WARRANTIES PROVIDED IN THIS ARTICLE 4 ARE THE ONLY WARRANTIES PROVIDED BY QUINSTREET IN RELATION TO THE KNOW-HOW. QUINSTREET DISCLAIMS ALL IMPLIED GUARANTEES AND WARRANTIES, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF CONDITION, QUALITY, PERFORMANCE, SATISFACTORY QUALITY, FITNESS FOR A PARTICULAR PURPOSE AND NON INFRINGEMENT. ARTICLE 5 T ERMINATION Section 5.01. Term. This Agreement is effective as of the date hereof and continues in full force and effect unless terminated by the parties in accordance with this Article (the “ Term ”). Section 5.02. Termination by Either Party . Notwithstanding anything in this Agreement to the contrary, any Party (“ non-defaulting party ”) may, by written notice to the other Party or Parties (the “ defaulting party ”), terminate this Agreement if any of the following events occurs: (a) If the defaulting party is in material breach of any provision of this Agreement and such breach is not cured within 15 days after the first party gives such other party written notice of such breach detailing the same; or (b) If the defaulting party (i) becomes insolvent, admits in writing its inability to pay its debts as they mature, makes an assignment for the benefit of creditors, or becomes subject to direct control of a trustee, receiver or similar authority, or (ii) becomes subject to any bankruptcy or insolvency proceeding under federal, state or foreign statutes which is not rescinded or dismissed or stayed within sixty (60) days of the commencement of such proceeding. License & Investment Agt 6 Section 5.03. Effect of Termination . Notwithstanding any termination of this Agreement, the provisions of Article 2, Article 4, Article 6 and Article 7 shall survive termination. ARTICLE 6 C ONFIDENTIALITY Section 6.01. Confidential Information. TownB and Ms. Syiek shall retain any Confidential Information of QuinStreet it receives in connection with this Agreement in the strictest confidence (on a need to know basis) and shall not disclose such confidential information to any person without QuinStreet’s express written consent, other than on a need-to-know basis to an employee, agent or professional advisor of TownB or an affiliate thereof. Notwithstanding anything to the contrary herein, the obligation to maintain the confidentiality of Confidential Information shall not apply to the extent that TownB or Ms. Syiek is required to disclose such confidential information pursuant to law or a legally enforceable order of, or a request for information from, a court or judicial body or governmental authority; provided that TownB or Ms. Syiek, as the case may be, provides written notice to QuinStreet to enable QuinStreet to seek a protective order or an injunction. ARTICLE 7 M ISCELLANEOUS Section 7.01. Notices . All notices, requests and other communications to any Party hereunder shall be in writing (including facsimile transmission) and shall be given, if to QuinStreet, to: 950 Tower Lane, 6 floor Foster City, CA 94404 Attention: Legal Department Telephone: 650-578-7700 Facsimile: 650-350-1423 if to TownB or Ms. Syiek, to: TownB Corporation c/o Bronwyn Syiek 111 Baywood Avenue Hillsborough, California 94010 Telephone: 415-606-6106 License & Investment Agt 7 th Section 7.02. Limitation of Liability. OTHER THAN AS EXPRESSLY SET FORTH IN THIS AGREEMENT, THE KNOW-HOW IS PROVIDED “AS IS” WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED, TO THE FULLEST EXTENT PERMISSIBLE PURSUANT TO APPLICABLE LAW, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT. QUINSTREET SHALL NOT BE LIABLE FOR ANY DAMAGES RELATED TO OR ARISING FROM TOWNB’S USE OF THE KNOW-HOW. Section 7.03. Amendments and Waivers . (a) Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by all Parties hereto or, in the case of a waiver, by the Party or Parties against whom the waiver is to be effective. (b) No failure or delay by any Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 7.04. Expenses . Each Party shall bear its own costs and expenses incurred in connection with the preparation, negotiation, and entering into of this Agreement and performance of its obligations under this Agreement. Section 7.05 . Taxes. TownB shall indemnify the QuinStreet, within 10 days after demand therefor, for any taxes, duties, levies, tariffs or charges of any kind (including withholding or value added taxes) imposed by any U.S. or foreign national, state, local or other governmental entity (collectively, “ Taxes ”) arising as a result of the grant of the License of the Know-How to TownB hereunder or the original issuance to QuinStreet of the shares as consideration therefor, whether or not such Taxes were correctly or legally imposed or asserted by the relevant governmental entity. An official governmental certificate as to the amount of such payment or liability delivered to TownB by QuinStreet shall be conclusive absent fraud or manifest error. In the event TownB wishes to contest the tax liability, QuinStreet shall provide reasonable cooperation in connection with the same. The foregoing indemnity shall be limited to the grant of the License hereunder and shall not be applicable to any transaction involving the stock or securities of TownB (other than the original issuance of shares to QuinStreet in consideration for the License of the Know-How) or any other dealings between the parties, including but not limited to the exercise of any right of first refusal or drag-along rights. Section 7.06. No Beneficiaries . This Agreement is for the sole benefit of the Parties hereto and, except as otherwise contemplated herein, nothing herein expressed or implied shall give or be construed to give any person, other than the Parties hereto, any legal or equitable rights hereunder. License & Investment Agt 8 Section 7.07 . Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of California, without regard to the conflicts of law rules of such state. Section 7.08 . Assignment. Neither this Agreement nor any rights under this Agreement may be assigned, sublicensed (except as expressly permitted hereunder) or otherwise transferred by TownB or Ms. Syiek, including by operation of law, without the prior written consent of QuinStreet, and this Agreement shall benefit and be binding upon the parties hereto, their respective legal representatives, successors and assigns. Section 7.09. Counterparts . This Agreement may be signed in any number of counterparts, each of which shall be deemed an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each Party hereto shall have received a counterpart hereof signed by all of the other Parties hereto. Section 7.10. Entire Agreement . This Agreement constitutes the entire agreement among the Parties hereto with respect to the subject matter hereof, and supersedes all other prior agreements or undertakings with respect thereto, both written and oral. Section 7.11. Construction . Headings are for ease of reference only and shall not form a part of this Agreement. This Agreement has been negotiated by the Parties and their respective counsel and will be interpreted fairly in accordance with its terms and without any strict construction in favor of or against either Party. Section 7.12. Severability . If any provision of this Agreement conflicts with governing law or if any provision is held to be null, void or otherwise ineffective or invalid by a court of competent jurisdiction, (a) such provision shall be deemed to be restated to reflect as nearly as possible the original intentions of the parties in accordance with applicable law, and (b) the remaining terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect. Section 7.13. Further Assurances . Each of the Parties covenants and agrees on behalf of itself, its successors, and its assigns, without further consideration, to prepare, execute, acknowledge, file, record, publish, and deliver such other instruments, documents and statements, and to take such other action as may be required by law or reasonably necessary to effectively carry out the purposes of this Agreement. [Signature Page Follows] License & Investment Agt 9 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. QUINSTREET, INC. By: /s/ Kenneth M. Siegel Name: Kenneth M. Siegel Title: SVP & General Counsel Date Signed: August 22, 2012 TOWNB CORPORATION By: /s/ Bronwyn Syiek Name: Bronwyn Syiek Title: President Date Signed: August 23, 2012 Bronwyn Syiek /s/ Bronwyn Syiek Date Signed: August 23, 2012 License & Investment Agt 10 Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-176272, 333-168322, and 333-165534) of QuinStreet, Inc. of our report dated August 22, 2012 relating to the consolidated financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP San Jose, California August 23, 2012 Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Douglas Valenti, certify that: 1. I have reviewed this annual report on Form 10-K of QuinStreet, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and 5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: August 23, 2012 /s/ Douglas Valenti Douglas Valenti Chairman and Chief Executive Officer (Principal Executive Officer) Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Kenneth Hahn, certify that: 1. I have reviewed this annual report on Form 10-K of QuinStreet, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and 5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: August 23, 2012 /s/ Kenneth Hahn Kenneth Hahn Chief Financial Officer (Principal Financial Officer) and Chief Operating Officer Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The certification set forth below is being submitted in connection with the report on Form 10-K of QuinStreet, Inc. (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code. Douglas Valenti, the Chief Executive Officer and Kenneth Hahn, the Chief Financial Officer and Chief Operating Officer of QuinStreet, Inc., each certifies that, to the best of his knowledge: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of QuinStreet, Inc.. Date: August 23, 2012 /s/ Douglas Valenti Name: Douglas Valenti Chairman and Chief Executive Officer /s/ Kenneth Hahn Name: Kenneth Hahn Chief Financial Officer and Chief Operating Officer 

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