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

Okay. Good morning, everyone. My name is Saket Kalia. Welcome to the Barclays TMT conference. I cover software here at Barclays, very happy to have with us the team from J2 Global. We've got -- for the first time at Barclays Tech conference, Chief Executive Officer Vivek Shah. We've also got Chief Financial Officer, Scott Turicchi. We've got about 25 minutes together. Let's take maybe the first 15 or 20 minutes to go through some fireside chat. And then for those of you on the webcast, if you've got any questions, we don't -- we're not doing live Q&A, but if you do have any questions, feel free to e-mail me at [email protected], and I'll do my best to weave them in. So with maybe all of that as a framework, first and foremost, the Vivek, Scott, thanks so much for being with us here today.

Thanks for having us, Saket.

Absolutely.

Absolutely, absolutely. Scott, I wasn't sure if there was anything you wanted to kind of give us here as a preamble.

No. I would just note that you may have seen the 8-K released a couple of days ago. We are reconfirming our guidance that was raised in early November, we announced Q3 results. I will refer you to the safe harbor language in those documents as well as to the specific guidance that was articulated on November 3 and is being reaffirmed today.

Excellent. Very helpful. Vivek, let's jump right into it. And maybe start with the cloud services business. When COVID hit, we all, myself included, expected this segment to take a hit, given the small medium business customer base. But it's actually held up pretty well considering what we're seeing with other SMB companies. And so the question is, what's changed about the business in your view that's enabling that sort of, what I'll call, resiliency?

Yes. No, look, so Saket, I don't think anything's changed. I think just with the benefit of hindsight, I think we have an understanding of why the businesses have held up as well as they have. And I think the first is look, I think we sell what are viewed as essential tools to our customer Saket, and whether that's marketing, technology, cyber security or secure document transfer. Those aren't like to haves, those are need to haves. So I think that has been a real key driver to why we've held up pretty well. I think -- look, I think the other thing is price points. I've talked about this on calls in the past. I mean, half our business, our price point is $10 per month. And so I don't think we sit into the category of expenses that are most likely to be on the chopping block within some of these companies. I think broadly, I do think the pandemic has really been about a shift to digital, which, as you know, is kind of the fundamental thesis of J2, right, which is the shift from analog to digital. I think the pandemic has driven that. So as you have many individuals working remotely, our tools are really remote work in orientation. And then the last thing I would say is, while SMB is certainly an important part of the cloud services segment. We have not an inconsequential enterprise business through our corporate cloud fax business, which has done very well as well as our VPN privacy business, which can skew consumer. So I think that basket, I mean, look, when we went into this, it wasn't -- we weren't entirely sure what to expect in the pandemic, I don't think anybody was. I think we are obviously still in the middle of it, but feel really good about how these businesses have held up.

Absolutely. Absolutely. Scott, maybe staying on this segment, but maybe thinking about the cloud business from a profitability standpoint. I would say that profitability has been very consistent. As the mix of the business changes here, with corporate fax or security or marketing tech, for example. Can you just talk about how you view the margin profile of the cloud business long term, of course, excluding any potential M&A?

Sure. And I think key thing maybe to start with is, while the margins over time have been within a range and stable, they're not actually the same because the margins, and it's true also for our media business is highly influenced by the mix. So within the cloud, for example, we have a range of EBITDA margins. We have 6 different business units. They're going to contribute anywhere from around the 40% to up to 60% EBITDA margins per business unit. So the mix of those business units highly influences the aggregate margin. If you go back a few years, we had margins that were higher, we've had margins a little bit lower. People tend to coalesce and probably because we've articulated it around a 50% EBITDA margin, which could be 1 point or 2 higher, it could be 1 point or 2 lower. And to your point, a lot of it has to do with things that are going on on a relative basis in those different categories. Security, for example, tends to be a higher growth business for us, but at a somewhat lower margin. It's in that 40% range. I don't see right now digital fax, actually, even in the corporate space, hurting the margin. In fact, to some extent, actually aids the margin. So I think the better way to think about it is whether you're looking at the cloud segment or J2 as a whole, we're trying to manage to an overall earnings growth year in and year out. And then there will be different mixes that will get us to that, which, as a result, will lead to a certain margin. I think it's been somewhat coincident that in the case of the cloud, we've been in that 50% range for probably 4, 5 years, but with some moderation. And I would expect that moderation to potentially continue because I can't tell you what the mix will be 3 years from now or even 2 years from now.

That's helpful color. That's great. Vivek, maybe we'll -- there's still tons to dig into in the cloud services business, but maybe just to balance it out a little bit. I'd love to dig into the Digital Media business a little bit. And really hit on a segment that I think has done very well these last couple of quarters, which is Everyday Health. And I think we understand the higher traffic amidst COVID, right? Everybody a little bit more interested in health, of course, kind of given the pandemic. But is there anything else to consider right there in terms of Everyday Health's performance, whether it's volume of advertising or pricing or anything else that you feel like is driving the particularly outstanding performance in Everyday Health?

Yes. Look, I mean, so traffic is certainly up. But I think the real driver of the business's performance has to do with what we're -- what we believe is a permanent shift in the way in which pharmaceutical companies are marketing. So in the case of direct-to-consumer marketing, where they are targeting patients, they're shifting out of television. And this shift was happening prior to the pandemic, but like many of these shifts, it just accelerated. For a variety of reasons, including it's just not an efficient vehicle by which to reach target markets at this point. So we're seeing a DTC shift from television to digital. I think we're also seeing a DTP shift. So this is direct-to-provider marketing, which, by the way, is larger in pharmaceutical -- in the pharmaceutical marketing mix than DTC. Why? You have 1 million prescribing physicians sitting on hundreds of billions of prescriptions. They are, I've said this before, by definition, the most valuable media market in the world. Historically, the way pharma marketed to them were employing sales reps who went into offices. And so that has shifted fundamentally, where they're now looking to engage physicians digitally. And so that's where properties like MedPage, which is our anchor property at the Everyday Health Group really factor into it. So I think to me, it's -- this will last long, past the pandemic because I think these are permanent changes in the way in which pharma is marketing. The other aspect of this year that shouldn't be lost in terms of Everyday Health Group's success is there's been great execution at BabyCenter. So we've owned BabyCenter a little over a year. It is operating ahead of plan. And the team has done a very nice job in that particular acquisition. So I think that combination is why we're seeing very significant organic and inorganic top and bottom line growth at a particular division.

Got it. Got it. Scott, maybe for you, kind of staying on that segment. Or just broadly on the Digital Media segment. One of the things that really surprised me this past quarter was EBITDA margins there coming in at over 40%, which you typically don't see until that seasonally strong Q4. We actually saw it here in Q3. Open ended question, but what do you think drove that outperformance from a profitability perspective?

Yes. There's a few things, I think, that are important that drove that outperformance. One of them is, and Vivek just touched on, when you've got sort of the BabyCenter acquisition, even though it's only a part of Everyday Health, performing so well, contributing ahead of schedule. Those are high-margin incremental revenue dollars of floating EBITDA that were not totally anticipated. Two, if you look at the whole media segment in Q3, as you know, there was an outperformance on the top line, and it's not uncommon that when there is a beat in revenues, there's a very high flow-through of that revenue to EBITDA. So the top line performance of both Ziff Davis and Everyday Health and the flows were associated with it is part of the -- a significant part. The other part, though, is the programs that we instituted, and you also saw the benefit in cloud maybe to a more muted degree in Q3 that we did back in Q2, the meaning of the pandemic. And we've talked about it before, but I think it's important to reemphasize. When the pandemic hit and there was the chaos, work from home, what will advertisers do? What will happen to the SMB customer base. So we can't affect a lot of them. And we don't want to do a risk. And we actually think this may be an opportunity to accelerate in certain areas marketing spend. But there are about 35% of our cash cost structure that don't fall into those 2 categories. Now to give you a sense of order of magnitude, that's about $300 million of cash cost of unit that J2 spends outside of employees and sales and marketing. We took a very deep look across the whole company to really debate what was necessary on a going-forward basis. Things that were necessary, how much do we need to consume of those. And then finally, what were there opportunities to renegotiate better contracts. And I think the media had more of those opportunities than the cloud and did a great job taking advantage of it. You saw a partial benefit in Q2, but because that work was being done in Q2, you only got a partial benefit. You've got a full benefit in Q3. And the one thing I would just note that this is all before we've taken any action on our real estate portfolio. And I would just point out that if you look at the GAAP financials in Q3, we did take a $13.5 million charge to abandon and exit certain real estate on a going-forward basis, but it has no current benefit in the Q3 financials that you're looking at.

Interesting. Interesting. I mean, I feel like we've spent a whole session just on that. But I really want to touch on what I think was really the highlight of last quarter, which is the RetailMeNot acquisition. So Vivek, I want to spend a little bit of time on that with you because I think it's one of the bigger deals that J2 has done in some time. And I want to start by maybe thinking about the revenue synergy here, the potential revenue synergy here. And one of the things that you've said is J2's affiliate sites contribute to about $1 billion in retail sales, I believe, right? While RetailMeNot contributes to over $4 billion, right? And so the question is, how is RetailMeNot different than your affiliate sites in terms of types of traffic, you both drive for your advertisers? And relatedly, what are those advertisings willing to pay for the traffic? So there's a lot there, but does that make sense?

Yes. No, it does. So RetailMeNot fits more into the category of affiliate publishers who are viewed as conversion drivers. In other words, you are considering the transaction, you're in the cart and the application of a coupon or a code is a conversion driving event to essentially eradicate cart abandonment, which is a huge issue for online retailers. So it is valuable. It just earns a different rate, on average, around 4%. Whereas the properties that we have been operating within J2, Offers.com, or Black Friday sites and then our content sites, PCMag and IGN and BabyCenter, they are more considered demand drivers because what they're really doing are product reviews and buying guides and deal curation. And that -- the merchant views as you're introducing a buying opportunity to someone who wasn't in the transaction at that moment, and we're going to pay a higher rate, and that's around [ 10 ]. We believe the combination is very powerful. I think you're able to do both for similar merchants, and we're able to leverage merchants, we may have deeper relationships with RetailMeNot for them and vice versa. But also, we believe that RetailMeNot has the brand permission and the audience to also be a demand driver in introducing deals and introducing products you can consider within their app, within the mobile app, within the browser extension and with the desktop site. So our plan is to really focus on helping them improve their take rate. And what's great is we -- November is a big, big month, obviously, for all of our properties, given that it's the peak holiday shopping month, and the early results were better than what we had expected. We were up for just RetailMeNot year-over-year in gross merchandise sales as well as in take rate and therefore, overall revenue, which was a nice surprise because while those are things we're anticipating doing, we didn't anticipate it happening within the first month. So we're pleased to see that we've kind of broken their trend. They didn't have this experience last year when you were comparing '19 to '18. So that's a really -- it's a good, nice green shoot for us, not really built into our expectations. As you know, our expectations were near term, shrink to grow, focus on core, exit some non promising aspects of what they're doing, and then over time, help to start to drive GMV and take rate. So seeing those this early in the experience was a really positive sign. So we're thrilled with the acquisition. We think it fits really perfectly within our portfolio and fits perfectly around one of the core themes of J2, which is, we believe, in the explosion of e-commerce.

That's interesting. That's a great data point to hear that they're off to seeing growth a lot earlier than expected, really just very early on in the integration process. So a nice little tip there. Scott, and maybe we've touched on this in some of the prior questions, but just to come back here. I mean if we think about the evolution of JCOM's guidance, right, through the pandemic, frankly, a lot of my company's guidance, right? Like a lot of companies, we withdrew our guidance here during the depths of the pandemic and then subsequently reinstated it in the next quarter. I think we just revised it up again, such that -- and correct me here if I'm wrong, right? But I think the bottom end of the latest EBITDA range actually is ahead of the top end of your pre-COVID guidance. So first of all, correct me, is that correct? And then secondly, what's sort of driving that? I mean you don't expect to be -- is that one-time in nature? Or is that some of the things we've talked about before, talk to me a little bit about the evolution of the guidance?

So I think on the EBITDA basis, it's equal to the low end and then higher, of course, as you migrate above it. It's higher across the board on the bottom line. So a lot of the drivers we've talked about, which are the incremental revenue we've seen in Q2 and Q3 that flow through at very high margin. The tight cost control, all that's driving the EBITDA. What's further benefiting the share count or the EPS is a reduced share count. As we talked about in the Q3 earnings call, particularly in Q2 and Q3, we traded at ridiculously low multiples. We took advantage of that. I mean we told people, we said these are all-time low multiples for J2 within the last 10 years. And the stock was anywhere in the high 60s to mid-70s. We will take advantage of that and buy 2-plus million shares. So that's aiding the EPS, at least partially this year as we get the benefit in Q4 or that will carry forward to next year. We'll get a full year benefit of that. I'm happy to see the stock has now responded, is in the 96, 97 range. Not still where we want to be, but it's getting better. But all those things are helping to drive our confidence to raise guidance. Also, of course, the inclusion of RetailMeNot for a couple of months as that deal closed in late October.

Absolutely, absolutely. And certainly, a good opportunistic share buyback there or use of capital. Vivek, I want to zoom out a little bit on M&A, right? Because I mean, I think that's -- this is unapologetically, right, a core competency of JCOM, I would argue. And I think RetailMeNot was a deal that was almost entirely executed virtually. I mean it was a company that you knew for years and years in the past. But I guess as you think about that M&A engine cranking up again, how does the split of opportunities sort of look between digital media and cloud services? And similarly, how does the split sort of look between, I guess, tuck-in type of deals versus, let's call, it medium to larger-sized deals like a RetailMeNot?

Yes. So before I get into M&A, I did want to touch on something Scott just briefly mentioned in terms of the stock price. And while he's right. We've come up considerably off of our lows, we're still under where we were pre-COVID, and we're well ahead of our expectations at that time. And so we're still under our historic averages in terms of multiples of whatever, however you look at it EPS or EBITDA or free cash flow, and arguably, given the performance of the company, I frankly think we should be testing our highs in terms of those ratios. So certainly, things are moving in the right direction, but I don't think we're quite where we ought to be. And so part of that may be as we think about M&A and the outlook, what I would say is, #1 is -- so the 4 themes that have been influencing our program for a while now are e-commerce and our belief that all commerce will become e-commerce essentially. And that there's a role for publishers like us to drive qualified traffic. In a world where you don't have physical agglomeration, where location brings foot traffic, something's got to bring foot traffic, and that's the role we think we play. So that's going to be a space that we're going to continue to acquire in. We think there are lots of opportunities to do what we've been doing. We've acquired RetailMeNot, Offers.com, the Black Friday site. So it's a space we've been acquisitive in and will continue to be, and we like what we see. The second theme is health care and it's embrace of digital transformation. And again, with the pandemic, we're seeing that acceleration. And so you're seeing that play out in our cloud fax business as we have health care moving from analog to digital solutions in document transfer. You're seeing that on the Everyday Health Group side, and we talked about pharma marketing. You're seeing that in terms of how patients are accessing content. We like the payer market. It's a market that we would love to see ourselves be bigger in. So we see a lot of opportunity in the health care digital transformation space. Cybersecurity. This is -- it's not just an issue of enterprises. But I think a lot of the investment and attention has been enterprise level cybersecurity. Cybersecurity is an issue for any and all businesses, from the smallest businesses to slightly larger SOHO and SMB, and that's our sweet spot. And we like the assets we have there. But again, we think that there are potential assets for us, we just bought inspired e-learning, brings us into security awareness training, which you'll see a lot of the software providers are also providers of content security awareness. And so we felt we needed to be in that. And so we've executed a transaction there, which we're excited about. And then gaming. Prior to pandemic, we were very bullish about gaming. Obviously, the gaming landscape has fundamentally changed, I think, in terms of usage, and attention. And honestly, respect for it. I still remember, we would be in the -- when I would talk about IGN or even Humble, I would have shareholders wondering how relevant gaming really was that it was really just teenage boys, which is completely untrue. And so we feel like there are assets and opportunities for us in gaming. So look, in terms of the kinds of deals, I think most deals will get done at the business unit level as they ordinarily do because that's where we have the most amount of deal flow and deal activity and competition for capital. So I don't think that will change. We'll continue to look for larger deals, platform deals. But look, in the history of J2, the number of platform deals you had Ziff Davis in 2012, you had Everyday Health in 2016, you had RetailMeNot in 2020, so they almost follow either election years or Olympic years, right? So our bread and butter will continue to be more of the deals that get integrated at the business unit level.

Got it. Got it. Guys, I still have a ton more questions that I'd love to ask, but unfortunately, we're at the end of our 25 minutes. Well, listen, I certainly enjoyed this session. I hope to focus on the webcast enjoyed it as well. Thanks a ton. Vivek, Scott, for being with us here today. Look forward to when we could do this in person again out in San Francisco?

Absolutely.

Looking forward to it. Thank you, Saket. We appreciate it.

Appreciate it, Saket. Thank you.

Have a good one, guys. Thank you again. Bye now.