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

Good afternoon, everyone. Welcome, again, to JPMorgan's High Yield Conference. Again, I am Tom Egan, JPMorgan's analyst for telecommunications and technology. If you're listening to this session this afternoon for J2 Global, you'll have the pleasure of listening to the very last session of this conference. Before I introduce the folks from J2 Global, I'd just like to point out that there is a ask a question button on your screen. [Operator Instructions] So with that, it's my pleasure to introduce J2 Global. Today, we have Alan Steier, Vice President of Corporate Finance. So Alan, take it away.

Thank you, Tom, and it's a real pleasure to be here. So as Tom mentioned, my name is Alan Steier. I'm the Vice President of Corporate Finance for J2 Global. I've been at the company for just over 2 years. One of my roles -- or one of my primary roles and responsibilities is, as the title implies, optimizing our capital structure, which is something we've made significant progress on over the last 18 months. The presentation I'm going to be giving today, so it's kind of a lengthy presentation. There's a core part that we'll be covering now and to the extent that with any of the questions that come up, if there's anything germane, we'll pull up the supplemental materials. Otherwise, it can be found online j2global.com. So if you don't mind, we're going to go first to the safe harbor for forward-looking statements, which is the second slide. We will be reaffirming our guidance, our 2021 guidance. So we have included language on the safe harbor for forward-looking statements. The slide that it's currently showing is the risk factors, which is a sampling of some of the risk factors that you'll find in greater detail in our various regulatory filings, including our 10-K that we published on Monday. Skipping ahead to J2 Global's success story, this is Slide 5. These are 5 key themes that are really core to our philosophy, both internally and externally at J2. So the company has been around for 25-plus years. And in that time, we've really been able to build a diversified portfolio of Internet information and services brands that are really principally linked to the transition from analog to digital. And this shift has really been accelerated as a result of the pandemic. The second point I want to make clear is all of our businesses have recurring revenue components within it. So these characteristics, you can see not only within subscriptions, which is about 60% of our revenues, but also on the advertising side. So we'll cover this a little bit later. But the advertising revenue comes from customers that typically spend consistently year-over-year. So even if you take 2020, the advertising revenue, 93% of it comes from customers that spent in 2019. So we've been around for 25 years. We've been public for over 21 years, and we've had 24 consecutive years of revenue growth. And if you think the last 6 years, and the compounded growth rates, both on a revenue and earnings standpoint, we're in excess of 15% for both of those. So you can see that we've been both consistent and sustained in terms of our revenue and earnings growth. We have a total growth philosophy at J2. So part of that is organic. So if you talk about the compounding growth rates, part of this would be derived from organic growth. The other piece would be the inorganic, which is through what we call a programmatic M&A system. So we've been say we've done almost 200 deals. Our first deal was about 20 years ago. The first 10 years were mostly of the tuck-in variety. And the bulk of our capital has been over the last decade. So both in terms of the quantum of deals and also the dollar spend, it's been heavily biased towards the last, really, 9 years since we made the acquisition of Ziff Davis in 2012. These transactions are financed through what we call our virtuous cycle of free cash flow generation. So all of our investments, whether at the income statement or balance sheet level, are geared towards producing and maximizing our EBITDA and our free cash flow. That free cash flow then comes up and rolls up to the parent company, which we then reinvest into the businesses through either M&A, CapEx or out to shareholders through share repurchases, which is something we did to the tune of 300 -- excuse me $260 million last year. We bought back 3.6 million shares, an average price of $73 a share. So flipping to the next slide, which is our what we call our tile slide. These are aggregate statistics on the company through 2020. You'll see that our revenue was nearly $1.5 billion, at a 41% adjusted EBITDA margin, was translated to $616 million of adjusted EBITDA. You'll notice that the CAGRs, I think this is important. The CAGRs for our revenue and EBITDA are fairly close in terms of parity, which is important because a lot of companies grow, but what J2 has been able to do is grow in the mid-teens but not do so at the detriment of our profitability. So if you look at the center slide, and it's not a coincidence that our center tile is our free cash flow conversion of 66%. This is important because when we talk about the free cash flow flywheel, our free cash flow conversion is very important in our capital allocation activities, which includes, of course, M&A. So we've done 193 acquisitions since inception. When they look at our spend to adjusted EBITDA, you'll see that we are in at 5.3x our total spend over our denominator of $616 million of adjusted EBITDA, which is just a hair over our targeted 5x ratio. I will caveat that this is somewhat skewed higher because with RetailMeNot, which we -- the acquisition we made in Q4, that was a $420 million investment, which will be in the numerator, and of course, we only have less than 1 quarter's worth of EBITDA in the denominator. We have 40 -- or we have over 40 brands. Our revenue is driven by 40 core brands. The information brands are our media assets and our services brands are, of course, on the cloud side. The next slide is a sampling of some of our core brands. So we operate -- excuse me, I should say, we report in 2 segments. We actually operate in 3 divisions. Four, if you include the parent company. So looking at the J2 Global emblem, that is an overlay above the operating divisions, which is where I sit, or Vivek sits, or Scott sits. And actually, probably importantly for this audience, is where our debt sits. Digital Media is a segment, but we actually operate in 2 divisions. So we have health care division, which is through our Everyday Health Group assets. And then we have tech and gaming, which bubble up to Ziff Davis. On the cloud side, we really have 3 groupings. There's our cybersecurity businesses, which you can see some of the represented brands here as IPVanish, VIPRE and Livedrive. We have an SMB enablement or an SMB solutions business, which is comprised of iContact, Campaigner and eVoice. And of course, we have cloud fax with the primary brand being eFax. The next slide is something we've already touched upon but I wanted to reiterate it, is the recurring nature of all of our revenue. So out of the $1.49 billion of revenue that we had in 2020, 58% is of the subscription variety, 42% is advertising based. But as I mentioned, 93% of the advertising revenue comes from customers that spent in 2019. So the characteristics of recurring revenue exist within the entire J2 portfolio. We're going to skip ahead a couple of slides and talk about our acquisition strategy. So here, you'll see at the core form our free cash flow flywheel at the center of the screen. This is kind of a busy slide. So I'll just highlight a few of the areas that I view as really important. One is, you can see that we've deployed over $3 billion of acquisition capital over the last 12 years. To give a little bit more color on that, about $2 billion of it -- so about 2/3 is -- of capital was spent on the media side, 1/3 was on the cloud side. The actual inverse of that is true in terms of the number of deals. So media deals tend to skew a little bit larger with the cloud deals tending to be more of the tuck-in variety. Secondly, if you look at the bottom right, I think we've actually been able to distinguish ourselves in that J2 is a nice hybrid between a PE firm and a strategic acquirer. And I think that helps us because although we are effectively like an investment firm, we have the operational expertise with in-house. And to the extent we don't we tend to acquire that leadership in talent. So if you look at the bottom right, you'll see leadership, that's effectively talent. So we've onboarded a lot with our acquisitions, we onboard talent. We brought in Doug Suttles from Ookla. And we brought in Vivek, who is now our CEO, who was formerly brought in through the Ziff Davis acquisition in 2012. We also acquire customers in traffic. And lastly, we do make platform acquisitions. So if we flip to the next page, you'll see that about 30% of our M&A spend is on, what I'll call, platform acquisitions. So that could be either driven by corporate or divisional professionals as opposed to the business units, which are usually championed by one of our general managers, which is where the bulk of the spend occurs and has occurred for the last couple of decades. Those are usually bolt-ons and tuck-ins, but not always -- that's not always the case. As RetailMeNot is included in that number, and it's clearly not a tuck-in, but was led by one of our business unit general managers within our Ziff media group. Flipping 2 pages to talking about our business. On the left side of the screen, you'll see our Digital Media segment. So that business has grown exponentially. So you'll see that on the revenue front, it's growing about 30%. And on the bottom line, it's growing 34%. And our margins have similarly improved over that time. So when we made the acquisition of Ziff Davis, the thought process is that we want to get those 2 businesses. So our Ziff Davis ultimately became our Digital Media business to be equal, roughly equal size with our cloud services division, which is something we've been able to do, both organically and inorganically through material acquisitions. On the right side of screen, you'll see our Cloud Services segment. That's more of a steady grower, so high single digits, very profitable. So about 50% EBITDA margins. So significantly higher than media. Although media, we think, is best-in-class margins, right? 35% and 38% is very strong. And we're very pleased by the improvement year-over-year. In '20 versus '19 on the media front. Flipping to the next page. Because the media credit -- especially for those in the high-yield community, it's a little bit newer, I wanted to spend a minute talking about how we derive revenue. So looking at display and performance marketing, those are what we consider are advertising revenue businesses -- business lines. So display is really tied to traffic. There's banner ads. There's pop-up videos that you'll see. Performance marketing is really tied to the clicks that are delivered, the leads that are generated and you really get commissions on a percentage and you get a take rate on the percentage of a basket -- in a basket. So the when you think about RetailMeNot, it would actually be in this middle bucket. So assuming no other acquisitions in the next 12 months, you will see this as a percentage rise due to the fact that over 90% of RetailMeNot is performance based. Media also does have subscription-based revenues. These are mainly within our broadband business unit and our Humble Bundle offering, but we do also get some within Mayo Clinic that is part of our Everyday Health Group Division. As for cloud, I'd like to delineate it between the sort of the next slide, the size of the customer. So small office, home office. Those are -- that's about half of our cloud revenue. The other half is larger customers will be enterprise customers who -- when you think -- when we talk about corporate tax, you can find that in the SMBE bucket. And then next slide is where we pull together our consolidated financials. So you'll see, a little over the last 6 years, we've grown over 16%, but we've doubled our revenues in the last 5 years. So if you look at 2015, we're at $720 million. We're now over double that. We've seen a commensurate increase in our EBITDA rates as well. And you can see our margins have been relatively steady over the last several years. Of course, if you go back to 2014 and '15, those rates are higher as if you look at the mix of our segments, it tends to be biased towards cloud, which is higher margin than our media business. So most of that shift in terms of consolidated margins is a result of the mix of our businesses between Digital Media and cloud. The next slide will show not only our adjusted EBITDA, but importantly, our free cash flow. So we had a fantastic 2020. We had over $400 million of free cash flow that was generated. By far and away, our best year in terms of free cash flow generation. And we spend around $500 million. So -- and for those who are newer to the story, I think the best proxy for what we'll spend in terms of M&A in any given calendar year is really our free cash flow. This year was a little bit higher just due to the fact that we had RetailMeNot that was $420-ish million of acquisition price. But generally speaking, we tend to spend our free cash flow in any given calendar year. Now the next page is going to be our guidance. I think as we've stated, we do have excluded assets. That includes some of our voice businesses that are U.K.- and ANZ-based that we divested already as well as our B2B backup business that is undergoing strategic alternatives. So you'll see up top, we've pro forma those out. And then you can see the comparison at the midpoint to those pro forma numbers. So at the -- looking at revenues, they're up 16%, EBITDA's up 11% and our EPS is up nearly 17%. The next slide gives a little bit more of a trend line of those -- of that pro forma and financials. I'll flip through it as we get to what I think most people in this audience care about, which is our capitalization table. So the next slide would be the capitalization table, which really showcases that we've had -- we've evolved our capital structure. We're now -- all of our debt sits at the parent company or Inc. level. So we did a high-yield refinancing in October of last year that brought the debt out of the cloud services level and moved it up to Inc. We also have 2 converts that are outstanding, $550 million convert that we issued in 2019, November 2019. And then 3.25 converts that are first callable in June of this year. What isn't on here, but we will be adding is about $100 million line at the Inc. level, which is expandable up to $350 million on an as-needed basis. So you'll see that we're -- our gross debt is about $1.7 billion, and our leverage ratio is sub 3x. Of course, that does not include the full benefit of RetailMeNot, which would help deleverage us as we're between the full year benefit [ resuming out ] probably adds another $40 million, $45 million of EBITDA. So that's helpful in deleveraging J2. The other thing we don't cover here is our interest coverage ratio. So our interest is around -- interest expense is around $60 million, and our EBITDA is over $600 million. So we're about 10x. And with that, I'll bring Thomas back into the fold as I'm sure there are some questions that I'll be happy to answer.

Here I am. I'm back. [Operator Instructions] So while folks are doing that, Alan, one of the questions that always comes up when investors look at your firm, is how do you manage that large portfolio of diverse brands? There was a time I remember when you were JCOM, and then one of the things that was integral to that strategy was to let these brands be autonomous. I know you have separate divisions, and there's probably some synergies that you get through that. But could you just talk about the advantages and disadvantages of running so many diverse brands within that portfolio.

Yes. I think there's a centralized effort within J2 and there's a decentralization. So we tend to let the operators be somewhat decentralized, right? There's a little bit of a pyramid, right? So there's business unit general managers, which -- and we have a really good bench of operating professionals. They are effectively -- in fact, I'd like to say, I mean, they're effectively private equity CEOs, right? They have full P&L control. Then there's divisional presidents that help oversee them. And then of course, there's Inc., which is mostly, when I say centralized, all the capital allocation activities occur at the Inc. level. So Inc. is effectively the bank, right? So free cash flow comes up to Inc., we then decide how to allocate that out either to shareholders or the businesses. And a lot of times, some of our businesses tend to be net exporters, and some tend to be net importers. But the businesses are run -- still run relatively autonomously. Although there's been a somewhat of an evolution recently where we realized that there's good synergies between some of our businesses. So both -- and that beyond -- by the way, goes beyond just interdivision, right, it goes -- a great example is our VPN business. If you look at -- I know one of our -- everyone's favorite J2 businesses is the speed test app, which is Ookla. So if you look at that, there's a button down at the bottom of the screen that says VPN and that leads to our IPVanish brand. So there's really good cross-selling that we're now doing. More immediately, we talk about cybersecurity. We used to have 3 business units. Now we effectively have one -- we still have 3 business units. But effectively, one large grouping or bundling of assets of cybersecurity assets, that there's a lot of harmony between keeping those businesses together, and there's a lot of cross-sell opportunity. Because I think one thing that's not known to the -- or not highlighted enough is the fact that when you talk about security customers, they tend to be somewhat differentiated than our IPVanish customers, which are more of the consumer variety. So there's a lot of upselling that you could do even amongst our existing customer base. So we tend to do a little bit more bundling, a little bit more cross-selling than probably when you were looking at -- or spending a lot of time digging into JCOM.

And the other question that comes up with M&A, obviously, is how do you set your targets? I mean, you talked to -- you showed us a nice slide where free cash flow is incredibly important. And because of the nature of a lot of the brands that you have, there's not an enormous amount of CapEx that's required, so you have some pretty nice -- some pretty nice percentages of margin. How do you -- when you go after brands, are you going after looking at possible acquisitions? What's the game plan for that? How do you sit and think about, like, what are we going -- what are we interested in, in that pipeline of things that you can look at?

Yes. So there are thresholds numerically, right? J2 tends to be fairly mathematical in how we look at things. So we do have thresholds, right? We want to be in it 5x. We have a 20% cash and cash return, which usually, it's pretty close to 2x our WACC. But then there's the broader question of where do we want to be investing, right? I think you're going to see key themes. Now we're not always able to transact as we tend to be fairly disciplined. It doesn't mean we don't pay up for our businesses, but we do want to be in at 5x, which means that either we do that -- and rarely is that because we buy it 5x, right? You have to operationally dig in, sometimes it's more of a turnaround variety. Otherwise, it's buying a platform and doing a bunch of tuck-ins. But we want to be in at 5x within 12 to 18 months. But there are themes overlooking, right? We want to buy subscription businesses, right? We want to be within e-commerce, right? So you'll see us do RetailMeNot. That was within e-commerce. We want to be cybersecurity, like we do, and we'd like to be doing more health care deals. Now valuations are somewhat rich and frothy in those spaces, but regardless, there are, I think, enough opportunities there, especially because as in every 4 years, we do a large acquisition, right? It just happens to be we did Everyday Health, we did Ziff Davis, we did Everyday Health, we did RetailMeNot. Those are transformational type deals that we do, coincidentally, every 4 years. I think going forward, we prefer to do 10 $40 million enterprise value deals, which helps us be somewhat differentiated because those are not going to be heavily baked, right? JPMorgan is not going to be representing a $40 million enterprise value company. Now they will for a $400 million deal, maybe -- I don't know about your bankers, but I assume you guys will. But a $40 million deal is too small for you. And a lot of these, most of our deals tend to be of the proprietary sort. So we do have relationships that exist principal to principal. Sometimes these take years, right? No one wants to transact, and all of a sudden, COVID hits, they don't want to live through it again and they want to sell. So we think we're able to distinguish ourselves. But listen, there are metrics that we abide by. But it doesn't matter if something is 20% IRR, it doesn't mean it automatically gets done. It has to -- there's a bunch of other qualitative factors that are also relevant as we make our purchasing decisions.

Got it. And I have a question from the audience. We were wondering whether you would get one this late in the day, but look, we did. And this clearly has paid attention to you before. So here's their question. How is the company thinking about cash balance currently? Are you exploring raising more high-yield financing as the initial deal was downsized due to volatility around the coronavirus back in October? And what is the status of the new credit agreement discussion?

Okay. So the answer is, for those who are unfamiliar with our cash generation, first quarter tends to be our most free cash flow generative quarter because of the cycles of M&A -- excuse me, of Digital Media AR. So we ended the year with about $240 million of cash on our balance sheet. I'm not going to say what it is today, but it's clearly gone one direction from there. And I think we feel comfortable with that. Now that being said, we do have a line that we'll be putting in place soon. I would say, in the next 3 to 5 weeks. Maybe even sooner. At which we would have a line in place that would fuel -- allow us to basically cover anything to the extent that none of the -- any of the deals are not completed in a ratable source. So if we typically are going to spend $400 million of cash flow -- of M&A, and our cash flow is about $400 million, not all of that is done at the same time. So we do want to make sure that we're sufficiently protected. In terms of our downsizing, listen, those are unique circumstances. The then President had announced that he had COVID between our marketing and pricing of that. Scott wanted to pull the deal altogether. He wasn't happy with the pricing that we got. He was talked off that proverbial cliff. We did end up refinancing the existing high-yield debt, which brought it up to the parent company which is significant. I do think there's something to be done in terms of the converts that are callable in June. That could be a deleveraging event, to the extent we want to take those out. We've said and maintain that we will potentially, I'm not sure, settle those. The -- it could be a neutral event or could be an opportunity for us to raise additional debt, right? But I think what's important is the $1.2 billion that we went out with, that was purely opportunistic. What we ended up doing was really a pure refinancing and people can see where our bonds are trading today. So there's obviously really favorable environments. But I think we'll reevaluate that as time continues, especially as we get closer to the summer.

And then, I've got a couple of minutes left, so let me slip in a strategic question. I think you recently announced that you're evaluating strategic alternatives for B2B.

Yes.

Can you talk about what the -- what your rationale is here? Is there any update you can give us?

There's no update.

Are there any new products you view as noncore?

Certainly. So as I think we -- part of the rationale was the fact that it's a distraction. So we ended up -- if I'm sitting here with you, Tom, the business is relatively small within the J2 portfolio, yet we spent a disproportionate amount of time talking about the backup business as it's one of the businesses that was a drag, right? We like the business, we think there's underlying characteristics that make it attractive, but we didn't think that it was best within our portfolio, right? We felt there were other areas where we want to invest. So it made sense to consider strategic alternatives. There's no update -- there's no update that I can report today. Nothing's terribly imminent. What I will say is with that excluded, what that leaves us with is businesses that are all growing. So they're growing at various rates. But we're excited that from now on, we'll only be talking about businesses that have growing characteristics. The only one that has somewhat muted growth or declining growth would be our web fax business, but overall, fax is growing for us. But I think when you think about our business, now you're able to focus on the growth within J2. The organic growth within J2, which is not something we could always say. So it's important that we get rid of -- I think the thought process was, let's get rid of what is viewed as a distraction because we just wouldn't spend too much time talking about backup and not enough time talking about some of the other businesses that we think have really strong organic growth trajectories.

Got it. We're right at the end of our time. Thanks for going through everything with us today, Alan.

My pleasure.

That was a terrific presentation. Thanks for taking the time to participate in JPMorgan's conference.

It's my pleasure. Thank you.

And thanks to everybody, too.