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

Okay. Great. Let's get started. So I'm Cory Carpenter, an Internet analyst at JPMorgan. And joining me this morning is Vivek Shah, CEO of J2 Global. For those newer to the story, J2 Global for now owns a portfolio of 40 digital media and cloud services brands, including IGN, Mashable, Everyday Health, eFax and many others. Vivek has been CEO since 2018. And prior to that, served as CEO of Ziff Davis, which JCOM acquired in 2012. So with that, thank you for joining us and taking the conference off today.

Cory, it's great to be here. Thanks for having me.

So I'll ask questions. I have plenty on my end, but if anyone in the audience would like to ask one, please click the blue, Ask a Question button. You can type your question in there, and we'll get to as many as we can. Okay. So Vivek, I want to start with the upcoming spin. For those who are newer, JCOM is in the process of splitting into 2 public companies with its cloud fax business spinning off in 3Q. So a couple of questions here. But to start, Vivek, you own -- as we mentioned, you own 40-plus brands. So there's really a lot of ways you could have chosen to split this up. So I think 2 questions here are, one, what was the thought process behind this structure and kind of spinning off the cloud businesses specifically? And then two, why now?

Yes. So Cory, look, the way we think about it is we've got 2 great companies inside of J2 today. So we've got the Consensus business, which is the Cloud Fax business that is the SpinCo and then the Internet business, which is the RemainCo. And look, I think by splitting them, you'll get focus, you'll get dedicated management, you'll get dedicated balance sheets and capital structure. I think that's going to create a ton of value, and they are distinct. I mean an HCIT business, which is really what the Consensus business is, Health Care IT business, and the Internet business. And so I think you're going to see different shareholder bases. I think you're going to see different uses of capital. I think you're going to see the RemainCo business continue to be very M&A driven. While I think the Consensus business is probably going to be more focused on some capital expenditures. And look, the other thing that I would say is that this is -- the Consensus business is probably the largest most distinct asset inside of J2. There's very little synergy between Consensus or really any connection between Consensus and the rest of the portfolio. So it's -- from a separability point of view, I think the most separable. I'd also say that if you look at J2 today at its current valuations, if you just look at RemainCo and take even the most conservative group of peers, the implication in it is that the SpinCo really isn't getting much value of any inside of J2. So I think there's a value creation element to this as well. And then when I think about RemainCo and what the remaining verticals, which are the tech and gaming vertical, the health vertical, the shopping vertical, cybersecurity and martech, we do see connections between many of those verticals. We see them sort of independently doing very well, but also collectively doing very well. So we see a lot of connection between what's left. Hi, Cory, I think you are on mute.

Off to a good start this morning. So we'll definitely begin those 2 segments more. But I think at a high level, one more question is just, you kind of mentioned it too, different capital structures, different uses of capital, how should we think about kind of the growth and the margin profiles of these 2 separate companies?

Well, so the RemainCo business, generally a mid-30s EBITDA margin and revenue growth in excess of 20%. And I'd say, generally speaking, half of that is organic and the other half is through our acquisition program. As we've talked about in the past, we have a very much a total growth mindset. And so at different points, depending on where we see the most promising -- where we see the most potential, you're going to see differences in that ratio. I will point out, and this is one of the aspects of the separation, historically, if you -- or if you'd ask me that question, previously, I'd say more mid-teens. So I think you're going to see higher growth rates at RemainCo. The SpinCo business, you're looking at about a mid-50s margin with mid-single-digit revenue growth and largely organic there. And so when you look at it, I know in the software, on the SaaS business, people talk about the rule of 40 where you're adding your growth rates and your EBITDA margins, and you want to add up to 40. We try to meet a rule of 60. And if you look at what I just described in terms of the RemainCo margin and growth rate and the SpinCo margin and growth rate, they're both trying to achieve or be in excess of 60. They're just doing it with different ratios, which, again, I think, goes back to your original question, too, I think you may have either different investor bases for those or different parts of your portfolio for those? But so they both get to that 60 just in different ways.

Yes. Okay. That makes sense. So let's start with the RemainCo, which you will, of course, continue to be CEO of. So these consist of your Digital Media -- your our Digital Media segment today. You're also including the cybersecurity and martech cloud business. So a couple of questions, but I think to start, and you kind of talk about growth in excess of 20%. Well, this quarter, you grew -- Digital Media grew an -- grew at 40%, including low teens organic growth. So my question for you is what's working so well within the Digital Media segment? And how do you view the sustainability of this?

Well, look, I do think that the forces of digitization, as I've referred to them, are really strong. So when we think about changes in how we shop and how we consume content and how we use broadband and how we stay well, all of those things really do map really well to the digital media portfolio and the broader RemainCo portfolio. So I do think that we've got real market-based tailwinds that I don't think are temporary because that's often the next question, which is how much of this is a onetime bump and how much of this is ongoing. I think a lot of what I'm describing that's been favorable for our business has been the accelerations of pre-existing trends. E-commerce was growing prior to the pandemic, it just grew faster because more people who might have been sitting on the sidelines, either out of habit or enough facility with shopping online, everyone became an online shopper. And conversely, if you're a merchant and you are more focused on brick-and-mortar, there's a period of time where you could only be really an e-commerce seller. So I think those things have -- those things are going to be permanent, and I think they're going to be long lasting. Within the portfolio, I'll highlight our broadband businesses, which are Ookla and Ekahau, they grew 30% in the quarter, and it's very simple. Individuals and companies want better Wi-Fi and better broadband. The demands on broadband are extraordinary. You have more devices, trying to do more things every day, and that's putting a lot of strain on these networks. And what Ookla and Ekahau really do is help network providers and broadband companies provide better services to their customer bases. The Everyday Health Group has been really a great performer for a number of quarters now, continued into the first quarter. We saw 15% top line growth, all organic. And that is the ongoing, and this sort of goes back to what I was talking about in terms of the shift, pharma is changing the way it's marketing. So we've talked about how pharma looks to market to patients and to providers. On the patient front, pharma used to be very heavy television and print. We've all seen the television ads. We've all seen the long disclosures in print publications. The pandemic really accelerated, and they were slow to move to digital, really accelerated the shift to digital. On the provider side of marketing, historically, the number one way in which pharma would reach providers, meaning physicians and prescribing individuals in health care, is through what was called detailing where you actually went and made a physical sales call. In person, a sales rep going in to see a physician. That also has shifted digital, and that's where our MedPage asset does really well. So you've had all of these changes. And then the advertising market, which underpins IGN and PCMag and Mashable and Spiceworks, so our tech and gaming content assets, the ad market has been really strong. And I think it's -- I think those businesses grew over 25% in Q1. I think the advertising market has been strong for a number of players. Not everyone. I will tell you that I think that the scale players seem to do better. They're seeming to do or faring better than the non-scale players. So look, I think that -- I think -- again, I think these are really positive signs and make us optimistic for the balance of the year.

I think you're being a modest, but40% stacks up pretty well against scale and non-scale players. But let's talk about RetailMeNot for a bit, a business you acquired about 6 months ago. I think one of your second or third largest acquisitions ever. Could you give us an update on how this business is performing? And what your key learnings have been thus far?

Yes, so when we acquired it, we reiterated what we generally view as the hurdle for our M&A program, which is within 12 to 24 months, the run rate -- we achieve a run rate of EBITDA that is equal to 5x the purchase price. And so in the case of RetailMeNot, that's basically $80 million of EBITDA. And what we said on our last earnings call is that, that time line has accelerated quite a bit. And we believe within calendar 2021, we will achieve $80 million of EBITDA. So that's a run rate of $80 million was the original concept, right? And that could have been a run rate towards 2 years in. So really not achieving it to the third year. We're achieving it essentially in the first year. So what I would say is, just on that basis, it will qualify as one of the best deals we've ever done in terms of the speed at which we are achieving our hurdle. And so we're excited about that. And so you think I've got a few things going. I think one is, again, the macro trends around e-commerce are really great. And so I think our timing was pretty good. And I think as you have more individuals looking to shop online, looking for deals and discounts in that shopping process, we're going to continue to benefit. So I think that, that is a really, really important aspect of this. The other thing that I would say is that the cost synergies and what we are trying to do in consolidating that business with our existing businesses, that's performed ahead of expectation as well. And so I think the combination of having favorable trends in the market and achieving our cost synergies faster than we had expected, have put us in a position where the business is performing, it's performing really well. And a big part of our first growth phase.

Yes. So within RetailMeNot, we kind of talked about the consolidation in the expense side. But I think you have Deal Finder, which is growing more MAUs, I think north of 100% in the past few quarters. Could you talk about the opportunity you see with Deal Finder? And then maybe more broadly, just your ambitions for it going forward?

Yes. So look, Deal Finder, I view it as this crown jewel inside of RetailMeNot. It will double. It's on pace to double. It has been double. It will double this year in revenues. It's still small. So in the scheme of RetailMeNot and J2, I would still refer to it as a nascent business. But what gets exciting here is when you look at some of its competitors, its #1 competitor at 6x the install rate and 3x the merchant coverage, we believe we can close the gap on both. On the merchant coverage side, it really is just blocking and tackling and programming. It is not a sales process per se. Merchants want to be in the platform. We just need to put in the resources, and we are putting in the resources to get to the level of coverage, which is really important from a user experience point of view. The way Deal Finder works is it's a browser plug-in that as you're shopping on the Internet, it's quietly working in the background. And if it finds a deal on something that you're shopping for, it presents that deal. Obviously, having more merchant coverage allows you to have more instances where you'll see that drop down, that slide down come into effect. So closing the merchant coverage gap, I think, is very, very important. On the install side, we're probably going to be and have been more focused on using the fact that we reach hundreds of millions of people per month across all of our content brands to introduce them to the Deal Finder app and to promote and encourage our current audiences, including the RetailMeNot audience itself. What's unique about the RetailMeNot proposition with respect to its Deal Finder app versus its competition is the competition doesn't really have a website that has the kind of scale that RetailMeNot has. So we think we can leverage the web traffic at RetailMeNot to drive installs at Deal Finder. So we're super excited for it. We think there's a ton of potential and that over the next several years, you're going to see some interesting compounding where it does become a meaningful part of the RetailMeNot equation.

Okay. So moving on to your gaming businesses, IGN and Humble Bundle. Imagine you're seeing a nice tailwind from the console cycle refresh, we've heard a lot about. But you're also investing on the publishing side, more Indie gaming. Could you talk about how these businesses are performing? And then just curious how you're progressing with the game titles as well?

Yes. So the ad market -- well, the ad market generally has been strong, meaning multi-category. The streaming ad market has been really good. So streaming services. That offset the loss of theatrical advertising, movie advertising. So that -- those are -- the movie advertising category is a very large category for IGN. Remember, IGN is both gaming and entertainment, and that audience typically skews really well for large releases with large budgets. But the gaming console refresh creates a bunch of IP, new games, that the industry is looking to market. So we have seen the benefit of that. The benefit showed up really starting in Q4 of last year. We had a really, really strong Q4 at IGN. We had a very strong Q1. And so that will continue, we think, for the balance of the year. These console cycles are -- they're not every year, they're every handful of years. And so there's some good runway in terms of the momentum that they create. On the Humble piece, you're right, the part of the business that we continue to be really enthusiastic about and continue to invest a fair amount of capital into is the game publishing piece, where we operate as an actual publisher of games. Now to be clear, our sweet spot are Indie games. And those are well below AAA, large franchise titles that you see from the large players. Typically, our games are retailing for $40 or lower. Many of them are PC games originally, but then they move into consoles and into other platforms. This year, we'll launch 44 SKUs. Just to define SKUs, SKUs are new titles. So completely new IP as well as existing or previously launched titles that we're moving on to new platforms. The business is growing over 30%. We've had 3 games. And look, we launched the games business as a publisher of games in 2018, and we have 3 games that have sold in excess of 1 million units, which is a pretty good benchmark and threshold for us. So we continue to be excited about that. We think that it's highly strategic because it's not just being a publisher and generating revenue and income from being a publisher, it's having the ability to take those games and also offer it into our Humble Choice product, which is our subscription business. And then ultimately, as you have more and more of the bigger players battling for gaming subscription service supremacy, we actually become a library, and we're building a little library that we can start to license and have started to license to some of the larger players in the space. So we can be a little bit of an arms dealer by being a games publisher.

Okay. Interesting. So the Cloud businesses or the 2 businesses in the cloud segment that are staying with RemainCo, cybersecurity and martech, why are those staying? And how do you see them fitting in with the rest of the portfolio?

Well, look, I think there are 2 answers to this. I'll give the answer from the Consensus point of view, and I'll then give the answer from the RemainCo point of view. Consensus is an HCIT business focused on the secure transmission of documents and records. That has nothing really to do with cybersecurity and the martech businesses. So in terms of a clean perimeter for Consensus, it really wouldn't have made sense to add those to those. But really, and I think more importantly, speaking from the RemainCo point of view, if I may, is we think those businesses are tremendous businesses with great growth potential that, as I said, have nexus to the existing businesses. We got into the VPN business because in our tech media business, we started to see a real surge in consumer interest in VPN and consumer interest in privacy solutions. And we, on the tech media side, PCMag and Mashable, principally are a large producer of customers for VPN companies, including our own. So the fact that we are a customer generator of VPN puts us in a position where, at least with respect to our VPN, we get 100% of the pie and 100% of the LTV. You also see instances where speed test, for instance, which is in the Digital Media segment, has a VPN built into its app and that VPN is actually powered by the VPN business in the cybersecurity business unit. So you have that kind of nexus. When you go to martech, if you look at the customer base of martech, it is -- it maps very closely to the retailer base at RetailMeNot. And so now as we start to think about how do we create more value for merchants and for online sellers, we start to get really excited about the potential between those 2. I will also tell you that they have the opportunity to match the kind of growth profile that I talked about, right? We're talking about in excess of 20% revenue growth. We're talking half of that organic. These businesses aren't there yet. They were really managed for profitability. And so while we still run and manage for profitability, there is a more balanced growth and profitability equation that we think these businesses can really start to pursue. So we're excited for the organic growth potential as well as the inorganic potential. Both of these areas present, we think, compelling M&A opportunity. So that fits our profile, too. We are always looking to be in businesses where we see a combination of organic and inorganic potential.

Where -- and I think last one on RemainCo, then we'll do want you to talk about Consensus and M&A and capital allocation, all that stuff for a bit. But where do you -- where are you investing the most? I mean, I think one of the themes that's changed is you said last call, I mean, the organic -- on the organic side of the business is doing totally very well, your total growth story, but you raised your guidance, not because of M&A, but because of the organic business. So where are you investing the most across these businesses?

And again, we don't -- and I know that puts us at odds with the market, we don't value one more than the other. Again, we view growth as growth, we put capital to work, either we're doing it through an acquisition program or we're doing it through OpEx and CapEx, everything is held the same return on invested capital. The truth is we can put more capital to work in our acquisition program. So maybe there is a bias towards acquisition in that sense and that we feel confident in our ability to move more capital and generate great returns on larger amounts of capital. Having said that, when you have the organic opportunity sitting in front of you, you have to go after those two. And we're not doing it in a way where we're putting a significant amount of capital to work. We're really opportunistic about it. So it's almost undetectable because while we're investing, our margins continue to just expand, don't they? So it's -- we have the best of all worlds where we're able to put capital to work, we're able to see that capital generate organic growth, and you're actually seeing margin expansion. So we think the opportunities are pretty balanced across the portfolio. But going back to what I just said about cybersecurity and martech, I think they've been the most underinvested in, and they've been the most focused on managing for profitability, and that's where we're stepping up largely the marketing spend. What was happening in those businesses is that the mindset was to basically manage for stasis. In other words, for every customer you lost, you acquired a customer, and you only spent to basically maintain that customer base. You aren't spending in excess to build that customer base because, look, you spend the marketing dollars upfront and you recognize the benefit over time. And so they were very focused on what I view is just sort of arbitrary margin target. And so we're changing that mindset. We've got some new team members in there, particularly on the marketing side that are saying, listen, as long as we can manage an LTV to cap ratio that is compelling, that's all you should look for. Don't worry about the calendar year. Think more about lifetime value and CAC. CAC is, you hit today, LTV, obviously, is, over time, manage LTV to CAC. And that, I think, is going to make a profound difference. It takes a while. Just the day you decide to do this, it takes a little while for this to compound and show up, but we believe it will.

Okay. So a few on Consensus SpinCo, which includes your corporate and consumer fax business. But I think, look, what seemed up to me is this isn't a company that you're just planning to manage for cash and you see a real opportunity to expand beyond the core. I think what most people think of as the core fax offering and more into health care interoperability. So I think the question I had is just, could you talk about the health care interoperability market and kind of how you think you're well positioned to expand into that over time?

Well, let me tell you what's changed. When I took on the CEO role in 2018, and we started to really think about what we were looking to do at the Cloud Fax business, I do believe the mindset there was to run it for free cash flow to basically fund the rest of the company's capital needs. And that really was the mindset. And when we studied the business, we very quickly saw that there was an opportunity in the health care industry and other industries, too, but principally in the health care industry, where you have a growing volume of medical information, that is largely in the form of documents that today still are -- continue to be transmitted via fax. So you have 9 billion faxes a year and growing. With that, a vast majority, 90%, probably at the time even higher, we're still faxes done with on-prem solutions. An on-prem solution is either a fax machine or a fax server. So we said, look, we think the shift from on-prem to cloud, which is happening in every sector and in every vertical and in every category will play itself out here. We need to make sure that our cloud solution is built to exceed all expectations in the health care industry. And that's what we did. And so over the course of several years, the amount of product investment that went into the cloud solutions for health care, along with a couple of strategic acquisitions, put us in a position that really with the pandemic if you thought you needed to go from on-prem to cloud before the pandemic, the pandemic forced you into that. So the near term, just on, Cory, the shift from on-prem to cloud, there's a ton of runway, and you're seeing it show up in our numbers. So we're really enthusiastic about that. And that's going to play out over multiple years. The interoperability opportunity is on top of that. So I don't want to conflate the two. I view the first as on-prem to cloud. And I view us as being the primary beneficiary of that shift and having put ourselves in a position, I think, to benefit from that shift. The longer-term is that I do believe health care sees merit in going from a document-centric view of medical records, where records right now are entire documents, to a data-centric view, where very specific numbers or very specific panels can move around freely. And that, which is OCR, NLP, that set of technologies is where Consensus continues to invest, has been investing in, will invest to provide that level of movement and capability within health care. And if it unlocks that, I think it's a very, very valuable company.

Okay. Yes. That makes sense. Last one, just on Consensus. I think you alluded this earlier, but one question we get a lot is just capital structures of the 2. I think you're still working through it. I don't think you finalized it, but just be curious to hear kind of what we should expect on the capital structure side or your latest thinking there for both businesses?

Well, look, I think there's actually a lot there that we've shared that if you put together, I think you get a pretty good picture. So let's start with 3.25% converts, which we have announced that we will be calling. Let's also point out that we've announced that the SpinCo will be leveraged at roughly 4x EBITDA, that the SpinCo will maintain a small amount of cash but the balance will be distributed to RemainCo. We will continue to manage RemainCo as we have historically at less than 3x gross debt over EBITDA. We are working through the exact composition of debt at SpinCo. Information will be -- will come as we make some decisions. You should also know that the Form 10 for Consensus is likely going to be filed by the end of Q2. So there'll be some additional information in there for the investment community. So look, I think the way to think about this is that RemainCo will have an ample amount of cash on its balance sheet post spin. It will have an ample amount of borrowing capacity. If it needs to borrow further without violating a 3x leverage ratio, that it has investments that over the course of the next several years, it can begin to monetize and liquidate, including its 19.9% stake that we're retaining in SpinCo, but we have other investments that are promising that we also think will turn into proceeds for us. So if you ask me how do you feel at the RemainCo level, I think we are going to be very well capitalized to continue with an acquisition program that over the last 8 years has put $2.2 billion to $2.3 billion to work within the RemainCo universe. I don't see that level of investment changing at all going forward. If you ask me on the SpinCo side, it will have ample excess free cash flow after its services, its debt to do what it needs to do, and it has its capital allocation choices. I do not anticipate it will be heavy M&A. That is not the program at Consensus. Sure, there will be strategic acquisitions from time to time, but it's not espousing an acquisition based and led revenue and EBITDA growth formula.

Okay. So I do want to hit on M&A and capital allocation. I think we just got our 3-minute warning so I'll try to squeeze 1 or 2 more in. But anyone who knows you, they know M&A is a big part of your strategy. It's something you've had a ton of success at over the recent years. So how are you kind of thinking about your current capacity and appetite, especially as you're working through the spin over the next couple of quarters?

Well, look, again, as I said, the capacity is very strong. So from a dry powder point of view, we feel great. And remember, the RemainCo business, we have a dozen business units who are all fighting and competing for capital. So there's no shortage of opportunities that we look at, that we're continuing to look at. So I don't view the event of the spin, the preparation to the spin as having any effect on our ability to source deals and our ability to put capital to work. We have some interesting deals in the pipeline right now that we're excited about. As we said in our guidance, our guidance excludes any impact from acquisitions that may happen between now and the end of the year. So we feel very well positioned on a number of fronts. And I believe when it's -- I believe when you look back on this, that the capital we put to work in our acquisition program across our portfolio will be consistent with what we've done historically.

Last one, and I'll stick with M&A. Just curious, I mean, on the digital media side, you had a ton of success recently in those verticals. So how do you kind of think about maybe doubling down and kind of leveraging that success with M&A and adding more onto those verticals versus diversifying possibly into other verticals or even beyond digital media?

Yes. Look, I think there's a natural advantage to M&A within the existing verticals for 2 reasons. Number one, we have a group of people who are sourcing and generating their own deals and generating a lot of great ideas. And two, when we're doing deals inside of existing verticals, they can be any size and generally are smaller to medium sized. If we're to get into a new vertical, we want to get in at scale. And so there's just fewer at scale, new vertical opportunities for us. So I just think that probability wise, we're going to continue to do more within the existing verticals, which we think are great verticals. But there are certainly verticals we're not in that if we can find an at scale asset at a -- at what we believe at a price that meets our hurdles, we're not going to be shy about moving in that direction, too.

Okay. Well, that was very helpful. I didn't get through all of our questions. But hopefully, it's helpful to everyone on the line. But I really appreciate you spending time with us today.

Thanks, Cory. I appreciate it.

All right. Bye.