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

Great. Okay. I think we are live now. Thanks, everyone, for -- who's tuning in right now. We're super excited to have Vivek Shah, J2 Global's CEO, here with us to do our virtual fireside chat. My name is Nick Jones. I'm the Internet analyst here at Citi. My disclosures, I believe, are on links below this webcast. And for anyone who has questions, which we'll leave time for towards the end of our fireside chat, please e-mail me at nicholas.jones@citi.com, and I'm happy to ask those questions for you. But anyway, Vivek, thank you so much for doing this. Last year, it was in person. This is still great virtually.

I think maybe to kick it off, J2 Global has been around for a long time, but I think some people still are maybe newer to the story, and J2 Global is also kind of ever evolving. So for those who might be newer to the story, can you walk through kind of the 2 big business units JCOM operates -- J2 Global operates? And maybe it's 3, if we separate out Everyday Health, and how that's evolved over time?

Sure. Well, Nick, thanks for having me. It's great to be here. So a little bit about J2. So we operate a diversified portfolio of Internet businesses. And as you've said, we organize the company in 2 reporting segments: Cloud Services, which are subscription-based software businesses; and then Digital Media, which is advertising and subscription-based content. And they're roughly about the same size in revenue. The Digital Media business currently is slightly larger than the Cloud Services business. And within the Digital Media segment, we operate in 2 divisions, our Ziff Davis division, which is about $500 million of revenues; and our Everyday Health Group division, which is about $235 million of revenues. And in total, the company is in excess of $1.4 billion of revenue. Underneath the 2 segments and the 3 operating divisions are over a dozen business units. And that's probably the most important atomic level to understand inside the company, because the company really operates highly decentralized, where each of the business units is run by a general manager who has full P&L responsibility for the business unit, oversees all of the functions for those business units. And really, the only aspect that we manage centrally and tightly are our capital allocation decisions. So while you run your P&L, the cash that you generate comes upstairs to corporate and is allocated based on the best investment opportunities that are available to the company. So the company operates mostly advertising and subscription-based business models. And there are -- they can sometimes seem quite disparate, but there are a lot of commonalities between some of these businesses.

Great. So maybe switch gears a little bit to M&A. M&A is a core piece of J2 Global's strategy for growth. I guess, first, how should we think about M&A in the current environment? Are there more or less opportunities? And has J2 Global maybe progressed a little bit, becoming more comfortable in transacting remotely, which is, I'm sure, unique to how things were done prior to COVID?

Well, let me start at a high level and talk about what we look for characteristically, and then I can talk about the current environment. So the first thing is the current portfolio and any additions to the portfolio would be businesses that are -- that where their products and services are digitally produced, digitally distributed and digitally sold. So everything we do is digital, and that was prior to the pandemic. Obviously, in the context of the pandemic, that's proven to be a significant advantage. The other thing I would say is that we value highly recurring revenue streams. So that's an obvious statement with respect to our subscription business. But even in our advertising business, about 90% of our revenues in the advertising portion of J2 represent recurring customers. We look for cash flow. That's an important aspect of our company. We run our businesses to generate free cash flow. We acquire businesses that we optimize for free cash flow, and then use that free cash flow in acquisitions and other capital allocation decisions. I would say that the other key thing is all of the businesses rely on online-based acquisition of traffic and/or customers. So there's a common skill set across all of those. And so broadly speaking, the company has a total growth mindset. And so what we mean by a total growth mindset is that we look to invest at the income statement level with respect to organic growth opportunities, which many of our businesses have and we invest against, and we also invest from our balance sheet to acquire companies that can generate growth. And from our point of view, we look at it as the same exercise and the same analysis, which is putting capital to work for returns. And if we find that the opportunities in a particular business unit are best expressed and put to work -- capital put to work against organic opportunities, we'll go against organic opportunities. If we think the opportunities are in acquisitions, we'll put them against acquisitions. Often, it's the both -- it's both. So in terms of today's market, I will tell you, and you've heard me talk about this, at the beginning of the pandemic, we put ourselves on the sidelines. And we did that for 2 reasons. Number one was we were just uncomfortable with the idea of transacting virtually. We've gotten over that. I think as a business, and I think generally in the landscape, we find ourselves far more comfortable transacting, diligencing and integrating assets on a virtual basis. But the other reason why we put ourselves on the sideline was we wanted to understand what this market -- what we were going to see. It was hard -- the visibility into what was going to happen day-by-day, week-by-week wasn't great. And so we said, you know what, let's use this as an opportunity to optimize the current portfolio and make sure that we're running that as well as we can. And then based on our Q1 results and our Q2 results, we've done, I think, an outstanding job in managing the portfolio as it is. And it's given our shareholders and it's given those who watch the company a really clean view into the company and into the quality of the assets that are inside the company. In terms of the pipeline right now, it's pretty robust. And we're seeing all sorts of situations. We're seeing a number of carve-out situations where companies, I think, are in the process of portfolio rationalization. And so we are looking on opportunities where companies are looking to possibly shut noncore assets. We have situations where you've got companies with liquidity issues and liquidity constraints, where we can be very helpful. We're -- we've got a ton of cash on our balance sheet and the ability to continue to produce significant free cash flow. We're looking at venture fatigue situations, Nick. I mean so you've got a number of venture-backed businesses that aren't where they'd like to be, and the pandemic has been challenging for them. So those are some interesting opportunities. And then a number of businesses, to getting ownership structure that are just subscale, that recognized that in an environment like this, scale matters and where we may be an opportunity, in combination with one of our businesses, to create a scaled player. So we're seeing a variety of different things. Obviously, we've got a ton of dry powder to put to work. And I can tell you, and I said this in our last earnings call, the M&A machine is back on. We've got all of our business unit general managers, all of our divisional presidents, all of the members of the corporate team as well as the corporate development team very focused on putting this capital to work, and we think there are a number of interesting opportunities for us.

Great. Maybe zeroing in on one of your comments on venture fatigue. I mean can you talk about how the competition has maybe changed for the deals you're looking for? Are there more PEs or, I guess, even SPACs now trying to replicate JCOM's playbook or going after similar assets that J2 Global would typically target?

Look, I think that we've always had competition for assets, whether that's private equity and now you have SPACs. I think the comment of there's a lot of capital in the world chasing transactions and deals, that's a comment that we've been living with now for a number of years. I think where we're able to prevail is -- unlike a lot of what you just described, they're not leveraging platforms, they're not leveraging technology, they're not leveraging an existing management or leadership infrastructure. They don't have business models that they're bringing that are creating value. And so where we typically lean in, and it's always been this way, is we really are only interested in deals where we feel we can uniquely create value. Not just it's a good investment opportunity, or it's well-priced, or it has nice tailwinds, those are all good things. But as you say, anyone can compete on that basis, anyone can see that set of dynamics and decide they want to transact. And in situations where that's all that's at play, we're likely not going to even participate, because we know we're not going to win. Where we do participate is we say, you know what, we can uniquely create this revenue stream or we can uniquely create this cost synergy, hopefully a combination of both, and that puts us in a position where we know we can win this asset and meet the hurdles that we put in place in terms of rates of return on our invested capital. So look, the fact that there are SPACs and the fact that you've got a lot of private equity engaged, I don't view that as a new thing.

Got it. Makes sense. Maybe one more on M&A. I think, historically, you see J2 Global has made tuck-in acquisitions to help drive growth, as you've commented on earlier, across the various business lines. Is there an opportunity to maybe make a large platform-type acquisition, similar to kind of Everyday Health or something of that magnitude? Or is the kind of the strategy really harvesting the verticals you're really in today?

Well, look, we did -- in the history of the company, really, I would say we've done 2 platform acquisitions. The first was the Ziff Davis acquisition in 2012, which brought me to the company, and then the Everyday Health Group transaction in 2016. So I think if you look at it on that basis, I guess, we're due in 2020. And look, I think that the way we go about capital allocation, it isn't that we want to put a certain amount of money to work in this area or a certain amount of money to work in that area, it really is the then current investment opportunities and pursuing those where we think we're going to see the best rate of return. And because we have the business units, and because the business units generally pursue tuck-ins, we generally do most tuck-ins, because the volume of people competing for our capital are generally in the tuck-in space. Where the larger platform acquisitions happen is it either is going to happen at a corporate level, with myself and Scott Turicchi, our CFO, and Sean Alford, who runs Corporate Development; or amongst our 3 divisional presidents who decide they want to add a new business unit within their world. But that's a relatively small group of people inside of our company that are looking for those. So just I think by definition, in terms of where the activity is, most of the activity is going to happen within tuck-ins. And I think that's natural, and it's the way we're organized. But that isn't to say that we aren't looking, and we are looking at opportunities to add new platforms, larger scale businesses that would be needle movers within the company.

Great. It's great. Well, maybe we'll switch gears to the actual business segments. Let's maybe touch on Cloud first. You already commented on about capital allocation and the puts and takes between whether you drive organic growth or acquire to drive growth and profitability. Can you -- I guess can you talk about how we and investors should be thinking about organic growth across J2 Global's various cloud businesses? Are there some that are in managed declines, some that are kind of growing organic -- organically nicely? And which ones maybe need more kind of acquisition attention?

Yes. So I talked about the organic growth opportunities in the 3 areas where we see the most amount of potential and where we've had the greatest success. So the first is in health care. And as you know, Nick, we have put a lot of emphasis in leveraging our cloud fax infrastructure in the health care environment to allow for the secure transmission of medical records and documents within the health care system and affecting what the industry refers to as interoperability, which is really the easy movement of records between hospital systems and their EHRs. You have these electronic health record companies, of which there are several hundred that are in place in various instances across health systems. And what it's created is a dynamic where health records seem captive and difficult to move from one record system to another record system. And so this is a real issue in health care. And we believe, through our consensus platform and our cloud fax platform, we have the ability to affect that. And we have seen really strong high single to low double-digit growth in this area. And so we think we're long-term bullish, and we think that COVID-19 only accelerates the need for hospital systems and other stakeholders within the health care industry to work at freeing up these medical records and allowing them to move freely between points. The second organic theme or growth area is privacy. As you know, we transacted a couple of years ago with IPVanish, built out our VPN portfolio. It is a central part of our larger cybersecurity strategy. And we think privacy only grows in import, at the consumer level and at the business level. I think everyone has experiences where they feel that they're being tracked. They feel like that they're surveillanced. And as we have more and more people working remotely and from home, I actually think privacy concerns become even bigger to the individual as well as to companies. And so that's been a really great growth area, and it's one where we continue to see potential and we continue to see runway. And then I talked about it, but I'll -- as part of privacy, but I think cybersecurity for small and medium businesses, a lot of the cybersecurity focus in the marketplace has been at the enterprise. That makes a lot of sense. It's obviously where you see the biggest risk profiles and most of the criminal activity. But you're now seeing the need for smaller businesses to defend themselves as well. And so our combination of endpoint security, e-mail security, VPN, both from a privacy point of view but also from remote secure access, we think that combination proves to be a nice suite for SMBs. So that's a lot of where we see growth potential, where we have -- where we see challenges in the business, have been largely in the backup space, where we have been really managing some of those businesses for profitability and entirely for free cash flow. We haven't seen the opportunity to invest any of that cash back into the business because we don't see the return profile. It's a very competitive space. But we are moving a lot of our backup customers from our LiveVault-owned IP intellectual property to hosted service provider model, where we're basically leveraging third-party IP and not needing to always be the innovator. We're letting others innovate, and we're simply moving our customers into that platform. You get less margin, but you get revenue retention and you have the opportunity to get some revenue growth. And then we're optimistic about the SMB enablement assets we have, which are mostly martech, marketing, technology and voice. I'd say the current environment is a little under pressure, given the pressure that SMB are under. So in the near term, we're seeing some of that pressure. But long term, I think we're optimistic. I say this, is that all businesses have to become digital businesses. If there's a lesson from this pandemic, you can't rely entirely on physical alone, on analog alone. And so we think there's going to be opportunities for us in allowing SMBs to be present and to market and to communicate online.

Great. I think that it's kind of a great segue to my next question. When you look at your Cloud business and we try to unpack the impact of COVID-19, in 2Q, we saw cancellations actually decline relative to 1Q in 2019. I think at first glance, it was a little counterintuitive because everyone expected SMBs to be under pressure. I think you touched on why it probably played out that way. Can you expand on kind of the dynamic you're seeing in your customer base in the Cloud businesses? Why you're seeing more retention, you think?

Yes. I mean, look, I think we're pleased, obviously, to sort of -- to have actually seen an improvement in an area where, you rightly point out, most expected us to be under pressure. I think -- number one, I think it's -- a lot of what we're selling on the cloud side fall in the category of essential and essential tools. And so unless you are a business that is no longer a going concern, I think you're going to continue to retain the services that we provide. And whether that service is to securely move documents, whether that service is to provide voice, if that service is to provide backup, if that service is to provide endpoint, those things don't go away. You need those things. Those are need to haves, not like to haves. So I think on that basis, we're advantaged. I think the second is price point. At $14 a month, which is the average ARPU that we see at cloud, we don't quite fit into the category of items that are going to be needle movers from a cost reduction point of view, even for a SOHO business. We're not priced at a level where we feel like we're the first place for you to go. And when I think about what we've done as a business and as a spender, you rank order these things. And you stop at -- you start at the highest-priced items and you look to say, do we need that? Or can we reconfigure? Can we renegotiate, change our usage? That's the natural approach one takes. I don't care what size your business is. So I think we're -- we have an advantage from a price point point of view. And then, look, I think the last thing that I would say, again, is a point I made to your last question, which is if you are a small business that right now can't operate at the local level in a physical sense because of COVID restrictions, all you're doing is increasing your digital business. All you're doing is looking for ways in which to drive digital transactions. And that's where we play a role as well.

Great. So I mean, I guess, just one last one on the Cloud business before we switch to Digital Media. As COVID has played out, how do you feel about the portfolio you have in Cloud? You obviously have a lot of strengths with retention actually declining. Are there any areas that seem exciting or areas of focus now kind of within your portfolio that have been kind of uncovered as a result of COVID?