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:

• we own or access targeted media;

• we run advertisements or other forms of marketing messages and programs in that media to create visitor responses or clicks through to client offerings;

• we match these responses or clicks to client offerings that meet visitor interests or needs, converting visitors into qualified leads or clicks; and

• we optimize client matches and media yield such that we achieve desired results for clients and a sound financial outcome for us.

Our primary financial objective has been and remains creating revenue growth from sustainable sources, at target levels of profitability. Our primary financial objective is not to maximize profits, but rather to achieve target levels of profitability while investing in various growth initiatives, as we believe we are in the early stages of a large, long-term market.

Our Direct Marketing Services, or DMS, business accounted for 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.

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

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.

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.

Results of Operations

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

                                                               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 (1)                    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: (1)
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 %

(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

Net Revenue



                         Fiscal Year Ended June 30,           2012 -  2011        2011 -  2010
                      2012          2011          2010          % Change            % Change
                               (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 %

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.

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



                                          Fiscal Year Ended June 30,              2012 -  2011          2011 -  2010
                                      2012            2011           2010           % Change              % Change
                                                (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 %

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.

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



                                          Fiscal Year Ended June 30,                2012 -  2011          2011 -  2010
                                     2012            2011            2010             % Change              % Change
                                                (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 %

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 . . .