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

Formerly known as J2 Global, following the spin out of the Podtrac business early in Q4. I'm Jon Tanwanteng, the covering analyst, and we're pleased to welcome Vivek Shah, the CEO of Ziff Davis for Conference. We're going to skip the Cam presentation today and go directly for fireside chat format. [Operator Instructions]

So to start off, Vivek, thanks for being with us. It's great to have you here as not a new company, but someone who we're familiar with, with a, I guess, leaner and meaner name and story to tell investors. Maybe to start. For those who are new to the story, can you discuss the motivation and the benefits of the spin-out of the Cloud Fax business for Ziff Davis and if things have played out as expected so far.

Well, sure thing, John, thanks for having me here today. It's great to be here. What I thought I might do is just take a little step back and kind of talk a little bit about the history of the company and how we then arrived at the decision to spin off the Cloud Fax business, which is now called consensus, say, 10 years ago, J2, which was largely a cloud fax business, decided to acquire Ziff Davis. And that was my way into the company. So I arrived at the company through the acquisition of Ziff Davis. I was the CEO of Ziff when it was private and private equity backed. And really, the decision by J2 at the time was an understanding that there was an opportunity for the company to diversify beyond its core business, which at the time was Cloud Fax. And in the preceding decade or so prior to the acquisition of Ziff Davis, the company have had a great deal of success in an acquisition-based growth strategy in building out that Cloud Fax business and saw parallels in doing something similar in the digital media space, which is why they decided to acquire Ziff Davis and how I arrived at the company. In the intervening 10 years, in the last 10 years, the Ziff Davis or the non-fax portion of the company, deployed about $2.8 billion in capital for acquisitions. And the revenues of the Ziff Davis business, the non-cloud fax business grew sevenfold. At the same time or about 3 years ago, we also saw an opportunity for the Cloud Fax business, largely in health care. We saw an opportunity to leverage our position in the industry to help solve interoperability issues, ways to transport medical information records and data in a HIPAA-compliant in secure fashion, and we started to really see some traction in that initiative. Fast forward to 2021, we found ourselves with really 2 great but distinct companies that we're trying to do different and interesting things. You had the Cloud Fax business, which was really an HCIT business trying to solve problems inside of the health care industry and seeing great traction. And then the Ziff Davis business, which was -- which has grown to an at-scale successful and strong growth, digital media and Internet platform. And so we made the decision and announced in April of 2021, the idea that we would separate the companies, that they would have their own management teams, their own balance sheet, focus on the areas I just described, their own investor bases. And so we made that decision, made that announcement and the execution was phenomenal. We went from announcement to effectiveness of the spin within a little over 6 months, which, as you know, is pretty incredible when you start to think about transactions of this size and complexity. So very efficient, I think, very fast. CCSI and has traded well. That's the consensus business, that is the Cloud Fax corporate name. ZD came out strong. There have been some sector headwinds, which I'm sure we'll talk about when the market has some concerns about ads businesses. I think concerns that don't really apply to our ad franchise, but nonetheless, I think to probably attach themselves to us, but we view that as temporary. But overall, I mean, look, a shareholder of J2 saw an aggregate return of 33% in 2021, which obviously compares favorably with any of your preferred benchmark. So a lot's gone on. We're excited for both of the companies. I should point out that we have a retained stake at Ziff Davis in the consensus business, a little under 20% of the consensus business. We're excited for where they're going. We're very excited for where we're going. So we view this as an important event in the company's history, and we think 1 that's going to create a lot of value.

Great. And maybe now that you don't have to talk about facts except for the legacy shares that you own. How should we think about the new and improved Ziff Davis? What excites you the most about it? How should an investor who didn't really care for the fax business. Think about you guys now, now that you're free of that, I guess, the responsibility of explaining how that business works to people. Tell us about the RemainCo and just what excites you the most?

Listen, it's a great portfolio of digital media and Internet brands that operate in some of the most robust and fastest-growing verticals within the Internet sector, where we have a fairly nice and balanced monetization model between advertising and subscription, a real track record for revenue and earnings growth, an exceptional capital allocation track record and approach to systematic and programmatic acquisition in an area that we think is robust and fertile with opportunity. And so from our point of view, I think it is 1 of the more underappreciated and not understood businesses in the space, but I think this transaction and the renewed attention on -- or the new attention, frankly, on the company, I think, will be -- will be a real strong positive for us. So it's got a lot of great growth dynamics. It's got a lot of opportunities for both organic and acquisition-based growth and there is -- when you look at the pro forma information that we've provided a pretty impressive track record as well.

Got it. And just to mention what that is, I mean, as far back as we care to look, it's been approaching a 30% growth rate. How should we think of growth heading into the future? Given the assets you have left number one and number two, you don't have the cash flow from facts to help assist you with that growth? I know that you're your business has long eclipsed that the cloud cash flows, but it still was a contributor. So you have a little bit of cash from the spin out. But how should we think of the ability to hit a growth target going forward?

Yes, great question. So look, our goal is to double earnings every 4 to 5 years. And when you look at the past 10 years, we've doubled earnings 3x in those 10 years. So we have a high degree of confidence that we can continue to do what we have been doing. The implication is a 15% to 20% compounded annual growth rate in EBITDA. And we get there through allocating our capital as we've been doing for both acquisitions and organic growth. Now this isn't linear, right? You're going to have years where our overall earnings growth are above. You're going to have years where they're below that range, we take a long view. And we do that because the capital allocation effort and the capital allocation strategy shouldn't be informed by needing to deploy capital in any sort of periods of time, but in fact, deploying capital when the opportunities present themselves. And I think we've been very good about being disciplined that way, and we're going to continue to be that way. In fact, whenever we talk about our businesses and we provide some of the growth rates, we generally are talking about the growth rates with the assets that we own, with the idea that we will come to own more assets just when and at what size this will be determined by what's available to us in the marketplace. From a financing point of view, from a funding point of view, I'll say a couple of things. So first is in the transaction and the spin-off of consensus, there was a onetime distribution from consensus to Ziff Davis, of the order of about $0.75 billion. So we got a fair amount of dry powder immediately at transaction that I think, mitigates what you're describing, which is the loss of the future free cash flow. We got a bunch of free cash flow upfront. The second is, as part of the transaction, we also have a valuable stake in the consensus business that we have the liberty and in order to do it in a tax-efficient manner would need to liquidate that within the first year of the spin. So there's that incremental opportunity. But then it's also important to recognize that you're looking at a RemainCo Ziff Davis, that has annual EBITDA approaching $500 million a year and a free cash flow over EBITDA conversion in the low 60% range. So we are -- ourselves are pretty strong free cash flow generator. And that combination, plus there's still room on our balance sheet. As you know, we like to maintain a sort of a ceiling of debt over EBITDA -- gross debt over EBITDA of 3x. So we've got some room there. And obviously, as our EBITDA grows, there'll be even more borrowing capacity there. So I think the combination of all of those factors has us I think as well capitalized as we've ever been from an M&A point of view.

Great. And just for those again, newer to the story, can you talk a little bit more about your acquisition strategy, number one, it's had a great track record over the years, number two. You haven't done that many since you announced the spin of consensus. So help us think about the pipeline and the bandwidth to do deals going forward. Obviously, you mentioned the leverage going down on capitalization. Just help us see what you're seeing right now in the pipeline ad invest.

Sure. So maybe I'll start by talking about how the company is organized and some of our management philosophy and then how the acquisition system kind of is built into that. So we run a highly decentralized company. We have about 4,700 -- 4,800 employees today at Ziff Davis, only 62 of them are in corporate. So nearly all of the human resources and the expenditures are happening at the business unit level. And we do that because we believe that we can get the best talent to run these businesses when they have control of their resources and they have control of all of the levers inside of their business. So we run these businesses in a highly decentralized basis with business unit general managers, and they're responsible for their P&Ls. They're responsible for generating cash, but then we hold the cash centrally when we start to think about capital allocation. And in our process, it's a competition for capital. We have the general managers at the various business units who are sourcing deals and making their pitch for their deals. Our business units are organized into 3 operating divisions with 3 divisional presidents, who are also sourcing deals to look at ways to add to their divisional portfolios. And then at corporate, at my level, I'm also looking at acquisitions to expand the divisional components of the company. And so what we have is a fairly robust and widespread deal sourcing apparatus. We also have a widespread organization of people, who are equipped at transacting, integrating and unlocking value within those deals. So it is systematic. It's built into what we do. It is our DNA. We see a huge volume of opportunities because of the system that we built in the various ways in which we source things and are in a very privileged position to say no nearly all of the time so that when we say yes, we have high conviction about what we can do. In terms of the areas that we're looking for, we're looking for businesses where the forces of digitization are strongest the vertical categories we're in, tech, shopping and entertainment and health care and cybersecurity and martech, these are all spaces where we see the shift from analog to digital most pronounced where we have strong positions and where we see investable opportunities. So we're looking in these verticals, and we're looking for business where we can leverage generally our ability to monetize the audience better or in different and unique ways. And that's been a big part of what we've done, where we're acquiring businesses that we can bring into the portfolio where we have a revenue model, a monetization model, a platform that we can place -- that we can leverage in the case of a business to unlock value. So it is part of what we do. It is built into the very operating mindset of the company. And yes, last year, 2021 was quiet. That was, in fact, as we've talked about, I think we were fairly well consumed by the consensus spin-off. That was a major transaction as you can imagine for a company like ours, but I think for any company and for having done it, in about 6 months, I think, is pretty extraordinary. And it tells you that at the end of the day, we're only going to transact when we have high conviction around success. And I don't think we would have been able to be a successful if we were trying to do too much. And so as I said earlier in our conversation, we don't look at capital allocation with sort of -- with time frames in mind. We look for opportunities. And right now, I would say the opportunities are robust and they have been. And we've done all of this, the whole $2.8 billion, the whole last 10 years and what might be the most frothy M&A market ever. I mean, we've been able to succeed where valuations have been extraordinary, particularly in the Internet and digital media space. So we're used to operating in a frothy environment. But imagine, I think what we might be able to do in a less frothy environment, regardless where I think we're built to put money to work in a smart way to get excess returns for shareholders.

Got it. Maybe just turning to the organic side a little bit. You've obviously had a good track record there. The past 2 years, in particular, have been fairly impressive, just given how much the pandemic has -- at the end of the world. Can you help us understand maybe the secular trends that are driving the organic growth and how they've changed in the last 2 years? And maybe just between your segments like call it between advertising and maybe the cloud business. And also maybe as a subset of that, how much of it was specifically COVID-driven versus conscious shifts in your decisions as to where you pursue the growth where you invested in?

Well, for sure, if we start to talk about tailwinds, there have been almost gale force winds on the digitization side. So we're built around digitization, and that has been very strong. And if you think about how we consume content. It's more digital than analog. That obviously supports a company like ours that's a digital publisher. How we shop, shifting from brick-and-mortar to online, that continues. And so our shopping assets, where we're presenting deals and discounts have done well, how you seek health care and wellness and how you use the Internet to not only identify the care, but to deliver the care, again, fits very nicely with our portfolio. The use of broadband. We have some of the greatest broadband assessment tools in the marketplace. How we protect ourselves, the single greatest threat to person in business is a cyber threat. And so building a cybersecurity portfolio, I think, has been very smart. And then even how marketers market and how that's gone digital and how that supports our martech business. So I think all of that maps really well to our portfolio. I view COVID and the pandemic has been an accelerant, a real step function for sure. But the shifts are permanent. So I don't view it as a bounce. The balance gives the impression that it comes back down. I don't view it that way. I view it as a significant step function forward. And I think it is still along those paths. So I think we've been beneficiaries of that. I think remember also when you look at this, when we find ourselves doing fewer acquisitions and the growth are strong. That means the organic is strong. But as we do more acquisitions, the acquisitions will probably sort of outweigh the organic. And since you know we say this all the time. We're different. Growth is growth. Earnings is earnings, capital deployment and returns on capital deployment are returns. I know the market thinks a lot about organic, it isn't the way we think because for us, profitability matters more than anything else. I think it makes us unique in our industry and then what we do. I'm not sure it's always been the thing in favor, profit making and earnings and cash flow generating, but we're going to stick with that program because it's worked well for us, and I think we'll gain an appreciation more broadly over time because I do think growth at any cost has its limits.

Got it. We -- I think you alluded to this a little bit earlier, but just I wanted to drill down on the advertising side of your business, call it roughly 60% of your revenue. You had mentioned that there may have been headwinds in the industry that have impacted your peers, but not so much applicable to you. I was wondering if you could talk about that dynamic a little bit more, both on the, I guess, how you -- what makes it unique against the heavy hitters in the online ad space, the Googles and the Facebooks of the world and how you attract customers. And number two, how that's actually benefiting you guys in the current environment where you're seeing an increasing focus on privacies and moving away from things like cookies and trackers and technologies of that sort.

Well look, I think there are 3 distinguishing and key aspects to our advertising business worth knowing. So the first is that our ad products are contextual versus behavioral. And the delineation there is that when we try to match an ad to a user. That matching mechanism is the very content or tool or experience that, that user is using at that moment. So if you're reading about a specific health condition on Everyday Health or if you're reading about strollers at BabyCenter or you're reading about a deal at RetailMeNot, we're monetizing you in that moment because of the activity that you're doing. By the way, that is traditionally how advertising has worked. It's been the adjacency model and using what you're consuming at that time to inform the ad. What has exploded in our industry is behavior, which is to take information and data that you've done in the past, searching data, whatever data it is that they can be collected, and using that data to inform the app, that's behavioral. We don't do that. And a lot of the changes going on, whether it's at the mobile operating system, which would be Apple essentially crimping IDFA or at the browser level with the deprecation of cookies within leading browsers like Chrome or at the regulatory level, with legislative action like GDPR and CCPA, privacy laws, they have added up to a fairly meaningful reordering of behavioral advertising and what can and cannot be done. And I think as those forces started to show up in other companies' earnings discussions, I think it created a lot of concern in the marketplace. But we view the contextual business is not having the issues of the behavioral business. So that's 1 key differentiator. I think the second is that our advertising business is enterprise and orientation. 2,000 large customers who spend in excess of $300,000 a year with us. That is different than many of the larger platform businesses, who have millions of advertisers and therefore, have a fair amount of SMB exposure in their ad businesses. That isn't ours. And as you know, SMB spend, particularly during many periods of the pandemic were affected. And then the last differentiator really is what are we really delivering, we deliver performance solutions more than we deliver brand solutions. So our advertising is designed to generate a transaction. Our advertising products are designed to generate a sale. And I can tell you through my 28-year history in the advertising business, it's always better to have a clear return on ad spend and a clear performance element versus brand, which is harder to measure and harder in tough economic environment for marketers to justify because they can't quite say what is the revenue or returns value of that spend. So I think all of those things are important distinctions. I think they help describe our advertising business well and why we feel optimistic about it.

Got it. You recently hired a new CFO, Bret Richter to replace the loss of Scott, who went to the Consensus business and was obviously a fixture at the old J2. Can you just talk about what made them your top pick and how his role might differ from how the old JCOM business has run?

Well, listen, I first should say I'm excited and thrilled for Scott. He is just a sensational executive and to see him in the CEO role now at Consensus is fantastic. And I know he's going to crush it and the team there are sensational and we root from the sidelines. As we think about how to replace Scott, I really did want somebody, who had a great acquisition, capital structure, corporate finance mindset, someone who understood technology, digital media, the Internet space, the ad model that is a principal part of what we do and somebody that just reputationally was strong, that the kind of person that no matter who you call, they had great things to say. And that's exactly what we got in Bret. As you know, when we announced this in April, my search started in April, and there was no shortage of really viable and great candidates. But I just -- Scott is a tough person to replace that kept holding and holding and holding. And the good news is we have such a great organization underneath the CFO role, I could do that. I had the luxury of time to identify the right partner and Bret is absolutely one, and I'm looking forward to having the market get to know him. He's about 9 days in. So he's getting up to speed, but an outstanding choice for the company really, and he's hit the ground running, and I'm just beyond excited for him and for us.

Great. Maybe as it pertains to just the current environment that we're in, you don't have the exposure as much to, I guess, the supply chain issues and all of these logistics and inflation of materials and things like that. But you do have employees that will -- that you need to pay and labor inflation is a thing. Help us understand how you maintain that [ 35% ] EBITDA margin target that you've been talking about. In this environment, number one, while investing for growth, which I think has become more of a focus for you guys, especially on the organic side in the past 2 years or so.

Yes, look, I mean, I think it's always a challenge, right? This is a competitive marketplace. And there's no doubt that this is an inflationary environment, which obviously also connects to wages and to compensation. But we've been historically disciplined. We're always looking for ways to eliminate waste and drive productivity. We've got a really good track record of doing both. So we're always examining and evaluating everything. And I think that's an important mindset, particularly in an environment like this. We also have some high operating leverage businesses that should yield flow-throughs from revenue to EBITDA that can then be reinvested to mitigate rising costs and to help fund initiatives. So I feel confident in this environment that we can maintain these margins. But look, I think that we recognize that this is a different environment. And so we are being preemptive in some places, and we're being really thoughtful about any sort of new long-term commitments right now as we try to have a better understanding of exactly where this market is going to head. And 1 thing on the supply chain is and I don't think anyone is immune from supply chain issues because in the end, the supply chain issues means you have less product to sell, well, then you have less product to market and advertise, and that absolutely does impact the company like ours. And so we're watching that. We want to make sure that these sort of more recent and local kind of disruptions on supply chain are not longer in terms because we need our marketers and our advertisers to be able to sell their products through us, right, and sell their services through us. And so we just want to make sure that those issues are also not sort of deeper rooted issues. And so look, I think there are a lot of things to navigate, but I don't view it as any different than the navigating we've been doing really since March, a couple of years ago. So it's been certainly a process by which we have to do a lot of bobbing and weaving, but we've done really well and posted the best results in our company's history during that period.

Got it. I was wondering if you could actually touch on the recent acquisitions that you did that you announced on the last week, Wireless Professionals and RootMetrics, what makes them attractive? What are your expectations for them. It seems like they're going to go under the Ookla brand or adjacent to it, which I think doesn't get enough airtime in your conferences and in your quarterly presentations. They seem like fantastic businesses. So I was wondering if you could give a little more color on those acquisitions and the outlook for that specific division, in the digital media business.

You're absolutely right that the broadband and connectivity businesses inside of Ziff Davis, the Ookla Group and family of assets is our highest growing, fastest-growing and some of our most profitable businesses. And we were excited to welcome RootMetrics principally into that RootMetrics is the more meaningful of the 2 that you mentioned. Because what RootMetrics does is it is an absolute complement to what it is that we do. So in the world of network data and analytics and information, there are 2 methods by which 1 can measure. There is crowdsourced data and then there is drive and walking -- walk test data. Crowdsourced data is what we've been doing with Speedtest where the crowd has installed an app or uses our website and does initiated -- consumer-initiated tests, the aggregate data of which we use to analyze networks. That's what we do and we do really, really well. And I will argue that, that is the -- that is the primary way 1 should measure a network. At the same time, networks want to understand, well, how does my network work when you're in motion? How does it work when you're walking down the street? How does it work when you're driving on the highway. And that we didn't have. And the clear market leader in our opinion for that is RootMetrics. RootMetrics drive and walk testing is fantastic. So the combination now of the 2 we think is really compelling to the marketplace, we have the ability to now combine data sets, recombine data sets, create insights between data sets. So we view it as a nice strategic addition to the connectivity portfolio, which also includes, our Ekahau business, our Downdetector business. Solutelia, there's a bunch of nice brands inside of the broader connectivity group that are really performing really well for us.

Great. And I have 1 for the audience here, and I think that's all we will have time for, but maybe just get this 1 out of the way. I think that the thrust of the question is even after the tax spinoff, the portfolio is still pretty complex, and we touched on a couple of pieces there. How do you deal with the different drivers of the business to different customer bases, multiple opportunity sets for M&A? Just how do you spread yourself and have the bandwidth to manage all of these things that are in the air?

Yes. Look, I think it depends on the perspective you take. I think you can understand the view that it's complex when you start thinking brand by brand, which I don't encourage people to do. What I really encourage our shareholders and analysts to do is understand that we make money 2 ways, advertising and subscription and thinking about what I said about the advertising business, I didn't have as much dialogue on subscriptions, but ways in which we believe we can grow our advertising and subscription businesses. And so I think looking through those vectors, the ways in which we make money are more meaningful than thinking brand by brand. So that's my first statement. My second statement is that in the end, what we really are is a capital allocation machine. And I think it's really assessing what kind of capital has been put to work and what the returns have been, which you can see as we've disclosed, what we put forward in acquisitions and CapEx by year. You obviously have the historical financials, so you can get to all sorts of ways of analyzing return on invested capital. So to me, if you can understand our ROIC, if you can understand how we've generated returns put capital to work and then understand the 2 main ways in which we make money, I think you have a very good understanding of the company. And I think that's a more useful way of understanding Ziff Davis than to try to go in and say, well, tell me about this brand, this brand and that brand because there are many brands, obviously, in the company, but they're really only 2 ways in which we make money, and only a few ways in which we're really driving shareholder value creation.

Great. So that is all we have time for Vivek. If you have any closing remarks, we'd love to hear them.

No. Just that we really appreciate our time at this conference, we've had really great meetings. And obviously, we'll be reporting in February. We hope you all join us then and wish everyone a happy and productive new year.

Great. Thank you, everybody.