Ziff Davis, Inc. (ZD) Earnings Call Transcript & Summary

All right, everybody. Thanks for sticking with us all the way through day 2. As many of you know, I'm Tom Egan, JPMorgan's analyst for telecommunications and technology companies. It's my pleasure today to introduce j2 Global, used to be known as JCOM. And I'll turn it over now to Scott Turicchi, the President and Chief Financial Officer. Scott?

Great. Thank you very much and thanks, everybody. It's been a long day. So I'm going to take you through some slides, hopefully, fairly quickly, so that we've got an opportunity for Tom and others in the room to ask questions. We are a 2-time issuer in the high-yield market, but not a very frequent issuer, so I would suspect we're going to not be as well-known as some other companies. So I will run through about 15 to 20 slides, hopefully, very quickly. We are reaffirming our annual guidance we just gave about 2 weeks ago in the context of our Q4 earnings call. I'll get to that at the end. So here's our safe harbor, some of the risk factors that come from our various SEC filings. So I'll give you an overview of j2. We are sort of a different kind of company because we're a portfolio of actually 13 businesses organized in 3 divisions, and I'll break that down in a little bit. But what we manage are a very diversified portfolio of Internet brands, and the thesis for a number of years has been really to take advantage of the continuing shift from the analog world to the digital world. And I'll give you some of those examples as we get through the presentation. The vast majority of our revenue is recurring. So we operate in 2 business models, a subscription revenue business model, which is heavily geared towards our cloud or SaaS services but is becoming an increasing share of our digital media properties, but even our core advertisers in digital media have a very high recurring renewal with us in terms of advertising year in and year out. We focus very much on our earnings, so every year since we have been a company but for the first year, we've grown revenues. That was true in 2019 over 2018. But more importantly, we've been growing the EBITDA over the years, had $550 million consolidated last year. What is really key to how we have evolved over 25 years is what we call our programmatic M&A system. We are very acquisitive. The way we've gotten to -- basically every single one of our businesses, with the exception of the original technology in our digital fax business, has come through acquisition. So it's a skill set we need at our division president level and our business unit leadership level. It is a core functionality of what those of us at the parent do, which is to evaluate transactions and to decide which of the deals should get funded or maybe be sent back for further negotiation. Because we focus on EBITDA and we have a high free cash flow conversion, we call it the virtuous cycle of free cash flow generation. These business units produce a lot of free cash flow, about $350 million last year. That comes up to the parent. We then decide which will get allocated back down for what are primarily small- to mid-size deals relative to the size of the BU. Occasionally, we do make a return to stockholder in the form of stock buybacks. This slide just gives you a real snapshot of what we look like on a consolidated basis. So it was $1.372 billion of revenues last year. Over the last 5 years, it's an 18% CAGR on the top line, most of that driven by M&A. About a 40% EBITDA margin across all the businesses. That generated $550 million of EBITDA, about a 16% CAGR over the last 5 years. As I mentioned, a mid-60s conversion of that EBITDA to free cash flow. And then since we've been acquiring companies, which is now in our 20th year of acquisitions, we've done 184 of them, spent about $3 billion total cumulative. And the vast majority of those are deals where any single transaction is less than $100 million in transaction value. Many of them in the tens of millions and some even sub $10 million. All of this program over 20 years has us basically in at about a 5.4 multiple of that cumulative spend on EBITDA. And although we have many more brands than 40, those are the key brands that are associated with our 13 business units. Now let me walk you through our acquisition strategy. As I say, we've been acquiring companies for 20 years, but it's really become formalized in the last 10. So of the 184 deals, 157 of them have been acquired since 2008, so in that 11-year time frame. And $2.5 billion of the $3 billion of total spend occurred in that time frame. So I think that's a representative period of time. In the back of these slides, there's actually a much deeper analysis of the return on invested capital by year that we won't go through in the core presentation, but it's there in the supplemental information. So what kind of ties all the things we do together is, first and foremost, that the fact -- the shift to digital still is very much of an ongoing play. So we find properties that are still very much maybe associated with the print area in digital media or there's an analog function that's now moving to the cloud. We take advantage of those shifts. We believe in having a portfolio of different businesses. We -- it allows us then to pit deals against each other, to really have some optionality in terms of what we want to fund. Two core business models, as I mentioned, subscriptions and advertising. Customer base pretty much spans the spectrum from consumers all the way up to enterprise. I would say our Cloud business tends to be SMB-centric. And our Digital Media business as advertisers tend to be more enterprise-oriented but on the subscription side, somewhat more consumer-oriented. And then in terms of the verticals that we approach, we're primarily focused on technology, health, entertainment and shopping. And then unlike a PE firm, one of the things we bring to the table is actually a platform, customers and leadership across the other business units and an opportunity for acquired management to play a significant role in j2 and truly be the CEO of their own business. Something that happened just last year when we acquired some VPN assets out of -- from StackPath, we call it the privacy business unit, now part of the cloud. Our deals break down into sort of 3 types: deals that the corporate parent sponsors. These tend to be larger transactions. They're rare, and they generally set up a new division. So in 2012, when we were a cloud-only business, we made the decision to enter digital media by buying a company called Ziff Davis. We were looking for a management team, a platform and some core properties. Those were primarily in the area of tech. PcMag.com, Geek.com were some of the brands at the time. 4 years later, in late '16, we bought Everyday Health, which at the time was a public company, which brought us into the health care digital media space. So about 20% of our spend historically is in setting up a new division. About 17% is a division setting up a new business unit, such as buying into the VPN space last year for our cloud business, buying Ookla, better known as Speedtest, into our Ziff Davis business unit a few years ago. Most of the time and most of the capital, though, 64% is spent at the business unit level. So this is where we already have management, we have platforms, we have customers. They may be doing a transaction to enhance their scale, to add either new web properties if they're on the media side or new services on the cloud and/or extend their geographies. Those are all reasons why a business unit would be looking for an acquisition. One of our more recent ones on the media side was the acquiring of BabyCenter, which took our pregnancy and parenting business in Everyday Health, essentially doubled it in size and added to the brand what to expect for which we have the app and the website, which is all about primarily the months of pregnancy. This is just a summary of that snapshot I've already talked about, which is $3 billion of cumulative spend, $550 million of EBITDA. So our net investment is 4 point -- 5.4x, and that's without giving any benefit to the free cash flow generated. That's just a spot multiple basis. Now let's talk a little bit about the businesses that we run. As an accounting matter and a reporting matter, we have 2 segments. We have a Digital Media segment and we have a Cloud segment. As a practical matter though, we run in 3 divisions. So the media has 2 divisions, which is bifurcated between Ziff Davis, which is Ziff Davis media group. So that's those original tech properties I mentioned supplemented by Mashable, Offers.com and TechBargains. Our gaming business unit, which is IGN.com, which is really anything you'd ever want to know about the gaming industry, complemented by Humble Bundle, which is a subscription business that allows you to buy and own games. B2B, which is a business that generates leads, primarily for software companies. You can think of them through white papers and webinars, where that information is collected, cleansed and then provided back to the sponsor. And then our broadband business unit, which has really 2 assets, Ookla, otherwise known as Speedtest. So if you're testing the speed of connections in this hotel, that's free to you. There's some advertising revenue while that test is being conducted, but then there's a series of data points that are collected. They're anonymized. Telcos, ISPs and mobile providers around the world buy that data from us. That's its core business model. Its sister business is Ekahau, which goes into commercial buildings, stadiums, hotels, office buildings and actually lays out the design for Wi-Fi and then provides monitoring services after the fact. The other business unit or division is Everyday Health. It has 3 business units underlying it. The consumer, so this is catering to us as individuals. We have 2 properties here: everydayhealth.com, which is ours; and mayoclinic.org, which is the Mayo Clinic's. They provide the content. We manage that for them and share the revenues. Professional, which caters to doctors. Our brand is MedPages today. This will focus on things like continuing medical education and then pregnancy and parenting, which is what to expect in BabyCenter. Then we jump over to the Cloud. That operates as a segment and as a division, and it has 6 business units: digital fax, which goes all the way back to the beginnings of the company and is actually still the largest business unit as measured by revenues and EBITDA contribution; voice, which is digital voice, it's second line service and Virtual PBX solutions; backup, catering predominantly to businesses, although there's a little smattering of consumer backup in the U.K.; security, which primarily focuses on e-mail security and endpoint; martech, which is predominantly, today, e-mail marketing; and privacy, which is virtual private network. And then below, you'll just see some of the representative 40 brands that operate within each of those divisions. This very busy slide actually is fascinating. I'll let you digest it at your leisure, sort of 2 or 3 key takeaways. In 2019, almost a balanced book of revenue between Digital Media and Cloud. Digital Media had a slight lead at $710 million of revs. It was 52% of our total revs. Cloud had $662 million. There are different margin profiles, though, in these 2 segments. The Cloud is generally geared to run at about 50% EBITDA margins before any parent corporate allocations, last year at 51%. Media is targeted around 35%, which it hit last year. So as a result, because of that delta in margins, 58% of the company's EBITDA is generated by the Cloud business. And then what you'll see beneath are the EBITDA margins pre corporate allocation for each of the 2 segments in each of the last 6 years. Our businesses are highly recurring in revenue. 62% come from the subscription business. All of Cloud is subscription, 27% of Media is subscription. But what's interesting is the 38% that is non-subscription that is advertising, 94% of those year in, year out come from recurring advertisers. So as I mentioned at the beginning, they tend to be very large enterprises that are either advertising directly with us or they are storefronts, where we're participating in driving them traffic and participating by getting a share of the actual checkout. And then this is a very high-level overview of the full fiscal year '19 results. The quarterly results are deeper in the presentation if you want to fracture it by quarter. Our Cloud business was up about 11% in revenues last year to $662 million. It had a 51% EBITDA margin. Now this is after corporate allocations of about $10 million. So it's $325 million of EBITDA as reported. This is important because we have debt on the Cloud business. So the separate audited financials will show you $325 million of EBITDA because those corporate allocations are pushed down. So about 8% growth. On the Digital Media side, 16.6% growth in revenues, 19% growth in EBITDA. Same thing, since we pushed down certain corporate expenses to the Cloud business for the purpose of that audit, we do a similar calculation for the Media business. And then if you roll it all together, j2 consolidated last year had a little under 14% top line growth, about 12.5% EBITDA growth, 11.5% on the adjusted EPS, which is basically our GAAP earnings exclusive of our amortization expense from the M&A deals and our noncash comp expense, which is basically the primarily restricted stock awards that are granted. And then here's the last 6 years of revenue growth, 18% CAGR; adjusted EBITDA, about 16%. The real delta there between the 2 different growth rates is the increasing mix over the 6-year period to Digital Media coming in at a 15-point generally lower margin. And then here's our conversion of that EBITDA to free cash flow, which will generally hover between 62% and 70% on an annual basis. There are some timing issues that come into play. So for example, in Q4 of last year, our Media business is very Q4 seasonal. So it generates a lot of revenue, EBITDA and reported earnings in Q4, but the collections actually come in Q1. So it's about $25 million shift relative to our profitability in Q4 of '19, where the cash collections are actually coming in Q1 of 2020. And then this is our capitalization as of the end of the year. Late last year, we issued $550 million of the 1.75% converts. Those have a conversion price at $125.11. They're due in 7 years. Those, obviously, are out of the money. In 2014, we issued $402.5 million of the 3.75%. Those are actually fairly deep in the money. They have a slightly in excess of a $67 conversion price. Today, we closed in excess of $90 a share. Those have a put/call date coming up in about 16 months in June of 2021. And then the Cloud has $650 million of the 6% notes that were issued in the summer of '17. So at the Cloud credit on a gross basis, we're 2x levered. On a consolidated basis, about 2.6. We maintain about $550 million in cash, which is almost 1 full turn of leverage on a net debt basis, we're down to about 1.6 in terms of leverage. We have a philosophy, which has been the case since we issued debt back in 2012 to be 3x or under gross debt to EBITDA. And with the volume of free cash flow that we throw off and the fact that we have almost $600 million of cash on our balance sheet now, we don't see the need to increase that amount of aggregate debt or the multiple. As I mentioned, most of our deals actually are very small. We do them out of cash balances or free cash flow. We have a small line of credit at the Cloud level that's undrawn of $100 million, which gives us some additional flexibility. And then finally, this is the consolidated guidance for 2020. We give annual guidance, and we give it for revenues, EBITDA and non-GAAP earnings. So $1,465 million to $1,505 million is the revenue range. So $1,485 million is the midpoint. $575 million to $595 million of EBITDA, $585 million obviously being the midpoint. And on an earnings basis, bottom line, $7.36 to $7.66, $7.51, an odd number, being the midpoint of the range. So that's what j2 looks like today. We've got a number of slides that I won't take you through, which are basically supplemental information. They do 2 things. There's metrics for the businesses, and then there are reconciling statements between the GAAP and non-GAAP financial statements. There is that one slide that talks about a return on capital for the cohorts by year of deals that we have done. And with that, I will open it up to questions.

I just was going to ask a clarifying question. So I was talking with one of your associates at another conference, and it seems like -- I believe it's backup and storage deals are coming at what seems to me, a relatively naive observer, a very high multiple, high teens, 20x. If that's correct, can you give any color as to like -- as to why, what characteristics of those business is driving them to have such high multiples?

You said the backup business?

I believe, yes. It was backup, yes.

Well, actually, I would say, no, that's not what OpenText paid for Carbonite. Gave us a chance to pay lower multiple.

Right. So -- okay. So I might have just been confused.

Yes. That was the most recent transaction in the market. So Carbonite was a public company. We, many years ago, actually owned about 9.9% of Carbonite. Way back in the days they were getting into the early stages of developing the B2B business, we actually made a hostile tender for them. That was ultimately withdrawn. We sold our shares. We went away. We did not, in any serious way, participate in the most recent auction, but I think OpenText paid sub 10x EBITDA.

It makes a little more sense. And just a second one, which is, is there any prospect in the intermedium term for a fax deal, another fax deal? Or is that highly unlikely?

Yes. Actually -- so the history and the way this whole M&A program got started was we only had one business unit for probably the first almost 15 years of the company's history, '95 to around 2010. So all of the sort of M&A philosophy was done within the fax business unit, predominantly. The voice came a little bit later in about '06, '07. And so we did a number of transactions in the early aughts to about 2010. In fact, the largest deal the company did up to that point was that buying a company called Protus out of Canada. Its largest asset was MyFax, a brand we still support to this day. Subsequent to that, we've done deals in the digital fax space from time to time. So I want to say there's been a couple of years since we have done a digital fax deal. We still search for them. We still very much like them. But quite frankly, there's not that many players that are out there that are acquirable. There are a few books of business that are owned by larger companies, but they're unlikely to part with them. So what we tend to find are very, very small deals of literally a few million dollars in revenue. And to give you a sense of scale in the digital fax space, that business unit does in excess of $320 million of revenue. So we can pick up a couple of million dollar and do that deal, but it's got to be done very efficiently, very quickly. And that's not so much from the fax business unit's perspective in terms of integration. That's more from the M&A team's perspective. So we look for them. We like them to be a little bit larger than that, but we are in some active dialogue, and I am hopeful that this year, we will close a digital fax deal.

And one last one if I might. Would you ever consider encumbering the Digital Media segment with traditional debt either by sort of doing some sort of holdco structure or just no?

Yes. Our view on the capital structure is we have somewhat of an unusual capital structure with the bulk of the debt really on the Cloud business, and Media is unlevered. And there were some historic reasons back in '16 and '17 why we did that. Those reasons, both the practical and the philosophical ones, basically sunset. So I anticipate that when we refinance, and I think it's likely, the 6% notes as opposed to just paying them off, that whatever market that occurs in and whenever it occurs, that will be done at the parent. Because our goal is to drive all of the debt at the parent level where the converts sit and to have the whole credit of j2 supporting that debt structure. I think it's cleaner. I think it's easier for people to understand. I think you get away from this issue of, well, is there something going on in media. It's not part of our asset base. Money, in some cases, leaves the Cloud business to go subsidize acquisitions in media. It'll all be one part of the credit. So I don't know when that will occur. But I think when it occurs, yes, you should expect us to move the debt up to the parent, not separately encumber the Media business. Yes? You need to use the microphone.

How do you think about the converts? And I think you said there's a put/call date coming up.