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

All right. Great. We'll go ahead and get started. I'm Cory Carpenter, Internet analyst, JPMorgan. With me today is Vivek Shah, CEO of Ziff Davis; and Bret Richter, CFO. So thanks for joining us. I'll kick off with questions. [Operator Instructions]

So just to kick off, Vivek, a lot has changed over the past year when we did this virtually via Zoom both in the real world and with company. So new company names. [indiscernible] We have Bret on the stage. So maybe just could you go through -- first, do you feel like you accomplished what you hoped with the Consensus spin? And then for those newer to the story, maybe give a 1- to 2-minute quick overview of your portfolio today.

Yes. Great. Well, it's great to be here, and it's great to be back in person. So from when we announced the Consensus spin to the actual effectuation of the spin was 6 months. So in terms of speed and execution, it was really fantastic. And I think what we have today are 2 great companies that do different things that have different business models and different markets and increasingly different shareholder bases. And so I think for those reasons and others, the -- we're thrilled with how that's turned out and Consensus just had their first full call, and they had a nice call and some great results. And so what we now have are 2 companies, Consensus and Ziff Davis. And talking about Ziff Davis, digital media and Internet company operating in a handful verticals, technology, gaming, shopping, cybersecurity, health and marketing technology and advertising and subscription-based business model, fairly balanced and very much a capital allocation story. As you know, a lot of what we do is generate free cash flow from our existing portfolio, deploy that capital in acquisitions that ultimately, we think we can unlock incremental free cash flow and shareholder value. And look, I think that the renaming of the company really was just to recognize what the company has become. And for those who don't follow closely, really today's Ziff Davis and everything that you see at the company and all the brands and all the verticals in which we operate, we're really architected through acquisition over the last 10 years. So about $2.8 billion of capital deployed across dozens of acquisitions that form the basis of what the company is today.

Great. Now Bret, maybe turn to you. So you've been here, we were talking about, 3, 4 months roughly?

Coming up on 5.

One earnings call in. What attracted you to Ziff Davis? What are you most excited about?

Yes. Thanks, Cory. So in starting this journey, I really took an approach like any investor would take an approach because being part of this leadership team, which is a privilege, is really an investment of my time and energy. And the first thing that I did is, I watched the September 2021 investor presentation that really provided a broad overview of the company, its place in the marketplace, the products and services that it provides, the communities that it serves, the brands that it develops and the people that it employs, and I was attracted by the underlying businesses. And I'm going to sort of approaching 30-year journey through the media business, largely through distribution in cable and broadband. But these businesses are characterized by the classic elements of the media model, advertising and subscription businesses, revenue streams that I understand, great balance between the two. They both have different characteristics, and, from a corporate finance view for the company, serve different purposes. And I just was attracted to a company that steward these brands. But the other part of the equation, which also fit distinctly with my background and my mindset was the approach to capital allocation. And the fact that while you create value in any company, in any business bottoms up with products, with services, serving communities, growing, but in our case, growing profitably and with a deliberate approach to ensuring that the businesses contribute investable capital, both back into their businesses, but to the overall corporate. And that core philosophy of let's create value bottoms up was coupled with the philosophy of how do we allocate capital from the leadership team to ensure their pursuit and their creation of shareholder value on an ongoing basis. And those 2 combinations of things has been sort of a strength through my career, and to find an entity that thought about their businesses in the media business, in the -- continuing to develop part of the media business, which was the digital business, was just a bundle of points of attraction. And then I met the leadership team, and it would be unfortunate if I didn't highlight that once I started to spend time with the leadership team, I just wanted to be part of it.

Great. So Vivek, you mentioned advertising subscription. Let's start with advertising, about 60% of your revenue today. And one of the themes from 1Q earnings season is the impact the current macro environment is having on ad spend, not just you all, but everyone. What are you seeing today? And how is this impacting your business?

I mean, look, it's an uncertain environment. That's for sure. There are a range of issues, and so maybe I'll talk about some and how we think about them. So this all really started late last year through Apple's decision relating to ID for advertiser, IDFA, and some of the byproducts of that decision, which was really a sort of dismantling of the interest-based advertising framework that's come to dominate Internet advertising for the past decade, which is, we're going to run ads based on your past browsing behavior and actions, not run ads as a function of what you're consuming. That's not us. So our business model has entirely been a contextual advertising business. Advertising relates to what you're doing at that moment. So we're trying to match the content experience and the advertising experience, not trying to match the advertising experience with prior browsing behavior, but that had a major impact in the advertising industry. So it's worth understanding it. We don't view this as a headwind for us. In fact, we view it as the opposite that over time as advertisers are looking for solutions, they're going to look for contextual, particularly performance-based contextual solutions. I think the second thing I would say is that this is very much category specific. So what we're experiencing in gaming and in health is different than what we're experiencing in retail and in technology, which are our 4 major categories. So there's very much a category-specific dynamic to this. The other thing I would say, too, is that different advertising businesses are characterized by different customer sets. Our advertising business is very much an enterprise advertising business where we have a couple of thousand, a little over 2,000, advertisers, who are spending hundreds of thousands of dollars a year with us. Other advertising businesses have millions of advertisers spending smaller amounts. We do not have a long tail, and again, that -- there are different implications about how those businesses are doing and how willing are they to advertise. So we're very indexed to the big players. Now, look, we have supply chain issues. And so there are inventory issues, and there's no sense in advertising to create demand when you don't have supply. So you're certainly seeing dynamics like this, and if you look at some of the retail names, as we've talked about, they've had some challenges, but those are our customers, right? So we start to fill those. Inflation, I think, other macroeconomic drivers, obviously, geopolitical instability. I got to tell you this is probably as unclear an environment as I've seen in the 28 years I've been in the media business. At the same time though, I would say that my own experience in this business is that if you've diversified set of verticals, if you have larger-scale advertisers who are relying on you for customer generation and performance, you generally weather these storms well. I think where you can get really hurt is where you have non-endemic advertisers who view you as a like to have and not a need to have. If you're a brand advertising platform where it's about not necessarily a direct return on ad spend, these environments can be crushing. And I've been in media businesses like that. We created this media business to not be that because I've seen how that can get very, very, very lumpy. So look, it's hard. I'd love to tell you that we know exactly what the future is going to look like, what the second half of the year is going to look like. We tend to have some positive dynamics, which I'm happy to explore in some of our categories, but it is an uncertain environment. And the last thing I'll say is, remember, my revenue is someone's marketing expense. And if their core business isn't performing, there's going to be expense management. That's natural.

So let's talk about the categories a bit. So you mentioned e-commerce type properties. I mean I think the message we heard from Walmart and Target last week was certainly surprising. Curious where you think -- are you seeing any improvement there? Are things getting better or things getting worse? It certainly sounds like we still have ways to go. And then maybe on the flip side, can you talk about what's working in the gaming, which I think you had your best quarter ever in IGN. So what's working on the gaming and health side?

So I'll start with gaming and health. So as you said, IGN, which is the anchor for our gaming vertical, had its best quarterly revenue ever and best Q1 revenue ever. And it was a function of what's happening in the gaming environment where the pipeline is very strong in terms of AAA games and titles. And so there's a lot of marketing budget against gaming. And so that's good, and that's something that we think will continue to hold. It may not be as dramatic as it was in Q1, but we view as an overall positive. On the health side, I'd separate a little bit this pharma and non-pharma. So I'll talk about pharma. Pharma was a little bit light in Q1, but that's pipeline specific, and we look at the drug pipeline in the United States in terms of what's coming to market and the likely marketing budgets that will be attached to that. We're excited about that. So we think of pharma categorically as a very good category for us for the balance of the year. In the nonpharma space, there was one notable area of headwind, which is in baby formula. So we know we own BabyCenter and What to Expect, which are the #1 and 2 brands in the baby space. 3 out of 7 -- 3 out of 4 women who are expecting in United States use one or both apps to actually manage and track pregnancy. So we are an important vehicle for the formula market. That market has been a bit challenged. So we've seen that, and we'll see where that resolves, but overall, health, gaming, very strong. The shopping vertical for us, we have some optimism because for us a lot of what sort of drove our first quarter results were unfavorable comps for an asset called RetailMeNot, which we had acquired in Q4 of 2020. And so this was an asset that we had acquired with an express purpose to enhance profitability, reduce revenue, cut costs more, get to a better margin profile, which we accomplished, but the year-over-year comparisons become difficult for us. So we have some comp issues. I think also going into the second half of this year, last year's Q4 retail wasn't very strong, e-commerce numbers for us and for everyone. So we think we've got some favorable comps, but this is an area we're watching, obviously, very closely. Tech has been interesting. I think the degree to which our customers are hardware sellers, chip shortages and overall supply chain have been negative. And I don't know when that's going to alleviate. I'm not hearing a lot of great things on the hardware side. Software is different -- has different dynamics, and so we're not seeing the same set of issues, but it really comes down to corporate IT spend and where is that spend going to result. So I would call it a -- we've got some good pieces. We've got some neutral and maybe 1 or 2 where we're really watching closely, but overall, again, I think that I view Q1 as punishing an environment. And overall, for us as a company, we grew 5% top and bottom line. So if that's bad, then I feel good about how we deal with bad. If it gets worse, I think the things that I've talked about, give me a lot of confidence in our ability to continue to operate and to generate results within our expectations.

Okay. So subscriptions, the other part of your business, about 40% of revenue, that's been growing mid- to high teens the past 4 quarters. What's driving this? And what are you most excited about within your portfolio?

I might have Bret answer that. See, he comes from a subscription background. See, what he says.

Well, I think, first and foremost, the dynamic in the business that subscription plays -- interplays with our advertising revenue in a very challenging global macroeconomic is an underlying element of our value. And I think whether we talk to the health of our balance sheet or we talk to an element of our business that is grounded in subscription revenues, I think in looking at a company that has to weather the same storm that every other company globally is experiencing one form or another, having that subscription revenue as part of our business versus just a pure digital media approach to generating advertising revenue is something I take a tremendous amount of comfort in. And then even then, we have different types of subscription revenue. So one of our strongest underlying businesses are -- and maybe not as visible sort of from a retail perspective is our connectivity business. And our connectivity business is characterized by long-term contracts in many cases with large enterprises with underlying subscription revenue in markets that continue to develop, that we continue to penetrate, that we continue to create new products for both data software products and in our Ekahau business hardware products that allow us to serve customers that are proliferating wireless networks. For instance, in the case of Ekahau. I think that underlying elements of subscription and in that case product revenue are an important part of our business. And then we have one of our challenges is also we believe one of our greater opportunities is being in the cybersecurity business, where -- while our cyber business is in one of arguably the most important emerging economic elements to the digital media ecosystem and sort of protecting customers' data, protecting customer's networks, protecting customers' privacy, being in that business was one of the things that initially attracted me to the company. That said, it is a slightly challenged marketplace because we have competitors in the marketplace that are very aggressive with regards to acquiring customers and by some estimates or at least our estimates, subscriber acquisition costs that we probably don't want to meet or -- and certainly, not eclipse to gain market share. So we continue to sort of navigate that marketplace profitably with a little pressure on topline growth, trying to continue to develop and invest in our businesses, develop products and services that will allow us to maintain, if not exceed, a prominent place in that marketplace. But I think, overall, it is that relationship that subscription revenue has to the overall corporate in an environment where there are advertising pressures, whether they be advertising pressures that affect our business directly like product rollouts for pharma or advertising elements that really don't affect our business in any direct way like IDFA. Subscription counterbalancing advertising is a core part of our overall story.

The only thing I might add, which I think is important is, and again, we'll talk about this a little bit when we talk about the M&A marketplace and what we've been dealing with over the last decade, but also, from a customer acquisition point of view, we've been competing with growth at any cost companies whose CAC LTV equations are completely upside down. And it's been frustrating for us because we run a cybersecurity business and a marketing technology business, both software-oriented businesses, where we're managed to a very different CAC LTV equation into margins in the mid-30s. And so when you're getting priced out of marketing because you're competing against those who play by a different rule set, it can be frustrating, and it's been what we've been dealing with. I think there's a rotation, and I think there's a change in approach and I think that will favor us, and we will find ourselves now able to compete in marketing channels in a profitable way as others seek to bring profitability to their equation. So that's another kind of characteristic that I think could be beneficial to the subscription businesses.

Could you just talk a bit more -- and Bret, you kind of alluded to this, but I think one question we get a lot is just investors trying to understand the benefit of owning an ad business and owning a cybersecurity business. We get the question a lot, why didn't cybersecurity go with Consensus.

Yes.

Could you just help draw that bridge on what your answer to that is? And just where you recognize the most synergies across the portfolio?

Look, I think there are a lot of similarities from an operating point of view and strategy point of view between media and software. And so while they may seem different from the outside on the inside, we see commonalities. They're both IP-driven individuals who are producing some form of content whether you're typing for code or you're typing for stories, it is a similar type skill set. It's a similar type organization to manage, very creative in many ways. They both have acquisition dynamics, whether it's traffic acquisition or customer acquisition. They both require an understanding of really purchase journeys and how people use search and how people use social and how you can use e-mail and how you can use other vehicles to acquire, whether it's traffic or customers. There's domain expertise. So what -- we're not just in any subscription businesses. We try to be in subscription businesses that align with the content verticals we're in. So take cybersecurity. We're in the tech content vertical. There's probably no bigger subject right now than cybersecurity. And so some of the understanding we had and our ability to leverage our audience for customer acquisition, which hasn't happened as much, that's more theoretical still than been realized, but we view our content assets as bringing audiences that can be converted into subscribers. When we look at martech, marketing technology and advertising are cousins. That's not really further afield. I think people see that connection. What I will say on cybersecurity is that I view cybersecurity a little bit like Consensus, which is, it's a really, really good business. We need to execute better. We need some environmental things to come in our favor, which I just alluded to. And when we get there, I think it provides us some optionality going forward where I do think it's a business that could be on its own and could be independent and thrive in that way. So I view it as -- I'm actually -- I view it as the way I viewed Consensus when I took over this role in 2018, and I said, there's a really interesting business here that we need to get right, and we need to invest in and then put in a position to possibly be on its own. So I see a lot of similarities between our VIPRE group, which is our cybersecurity business, and what Consensus has proven to be.

Sometimes I find with portfolio companies, which I don't know, I guess, is a fair characterization, but sometimes things get lost, don't get a lot of attention. What's the one thing -- before we move on to M&A, just curious that what business you have that no one is really talking about today, maybe not a part of the narrative, but you think is overlooked and could be a bigger part of the story in a few years.

At the risk of confusing people, I'll tell you about all 7 entities that we have. I mean -- and sometimes I'm shy to do this because it can overwhelm, and people feel like, wow, that's a lot for me to understand and know. But I think at the same time, they're each platforms that I think could be of significant scale. So we start with our shopping platform. It's the RetailMeNot group that includes RetailMeNot, Offers.com, our Black Friday sites. This is an entire business around shopping, enabling e-commerce, discovery, enabling discounts and savings. It could be that in an environment like the one we're in and projected to be in that could be very valuable, right, as individuals look for savings. So we're excited about the shopping business and what it means. And the overall shift from analog to digital, which is still a real thing, there's still far more offline sale than online sale, and we think that continues to shift. The connectivity group, so that is the Ookla group. This is an entire company, fastest-growing part of our company that is about better broadband, better broadband for individuals, better broadband for companies. I look at broadband as oil. Nothing works without high-speed Internet, nothing. Your lives -- when your internet goes out at home, it's a problem. Your Internet would go out at work, it's a real problem. Internets going out at hospitals is life threatening. So we're the company that helps ensure better broadband. So I think the Ookla group is fantastic. The Everyday Health Group, I just think all the trends around patient -- digital -- the intersection of patient care and digital tools, how pharma is looking to reach patients and providers, it's been a home run for us and been an engine for growth really for the last several years, another great vertical to be in. I talked about VIPRE Group cybersecurity. There's the martech Group, which is the Moz group. Just to be clear what this is, it's e-mail and SEO for small and medium businesses. If you want to create e-mail lists, you want to e-mail your customer database, you want to understand how they're responding, if you want to rank well in search, you want good business ratings on Yelp and Google reviews, the Moz group, which is our martech group, is the group to come to, and I think very exciting. And I think as small business creation is digital business creation, I think that works really well for us. We're not trying to do everything. We're trying to do a very specific thing in that world. And then ultimately, the tech media group, which is what a lot of people sort of associate with the company, but it's really now a small part of the overall piece where we have Spiceworks and PCMag and Mashable, there, tech is one of the largest categories around. So we're aligned with a great category where we have both consumer and business penetration. So look, I love all our children. I think they all have potential and they all have really interesting, both organic and inorganic, opportunities in front of them. And as I've said, I think cybersecurity is one that could stand alone, but any of these could stand alone. They're building at that scale. I mean, on average, they are $200 million revenue businesses. Some are a little lower, some are a little bit higher. And they're all in really asset-rich spaces, and you know acquisition is a key part of our strategy.

That's the next topic. So M&A, your total growth story, that's always been the focus. You're better capitalized today than I think ever before, about $1 billion of cash and investments. You're a valuation disciplined acquirer, valuations are going down in the market. So I guess 2 questions to start on the M&A side. One would be, how does the current M&A pipeline look? And second, just your view on the private markets and where those are trending? Where you expect those to go?

Look, I think if you reflect on what we've accomplished over the last 10 years in what has probably been the most vibrant seller's market, you can imagine, it's pretty special. We've deployed $2.8 billion of capital, and we have a company that's generating EBITDA in the mid-$500 million. So that's a pretty exciting thing to have done in a time where valuation expectations were really unreasonable. I think we're moving into a very different, quite diametrically opposite environment. So I'm excited about the fact that I think valuations -- valuation expectations have come down and will continue to come down, and as a buyer, that plays into our strategy. Add to that, we've never had this level of cash and investments on our balance sheet. We have it, and we still have room even from a leverage point of view. So that combination of being well capitalized at a time where I believe in our pipeline is supporting what I'm saying, lots of opportunities in both the public and private markets. I think your -- what you're seeing publicly is playing out privately. And so we see situations across the board. We see situations of companies that have not been running for profitability, but probably have a profitable business inside, but are going to be difficult to get new capital. We see private equity and venture portfolio companies where, oh wow, you know what, I don't want to wait another 4 years. I've been holding this for 8 years, I need to move on. You have owner operators, who have really nice businesses, but they really want to be able to not wait. They want liquidity and take that liquidity and redeploy it into a diversified model. If all of your net worth is tied up into the business you've created, this is probably the time that you're thinking, let me do something about that before bad goes to worse. All plays very well for what we're doing. So from my point of view, our target return on invested capital, cash on cash IRR on our deals is 20%. We should aim to do better than that. And so that will be a little bit of our challenge and discipline, which is pacing this out a little bit. All 7 of our platforms plus corporate, which is always thinking about new platforms, all 7 of the platforms want all $1 billion. And so that tells you that there's a lot of enthusiasm, I think, across the company, but we're also going to be judicious. You know we're not -- we don't -- our guidance does not contemplate acquisitions on a go-forward basis. So we either view that as upside or possible hedges against any other challenges. That's good. So we're not forced into doing deals. We'll never do that.

So you kind of answered this question. It sounds like all the portfolio companies are interested. But where do you see the most -- where are you most focused on the M&A side? Could you get more aggressive, from a sizing perspective, just going -- what's going on in the market?

No, I don't think we're going to go. Listen, in our history, we've done 2 deals a little in excess of $400 million, and then everything else is quite a bit lower than that. I think that's going to continue. I don't think concentrated bets are what this company does and should do. And while I'll never say no, it has to be perfect, right? Price to perfection. The execution needs to be very clear. So for us, I think we're going to continue to stay in the range in which we've always been. I don't view this as -- I don't view us as changing anything, I view us as just finding far better deals. And I think if we've been able to generate the returns we've been generating at the price points we've had to pay historically, and we've always been disciplined, I think it will only get better. In terms of -- I'll just add one thing, which is we are not averse to being in a new vertical or a new platform. So there are other Internet areas where our model of focusing on audiences that are lower in purchase funnel, turning to the Internet for purchase consideration and execution of transactions, we like that, right? So consumer finance and travel, auto are certain categories that fit. The categories we're in that we're currently in that we would look to acquire to get into. So we would -- we're always looking at new verticals.

Okay.

And I just might add, I mean focus is something we actually have to actively manage because the M&A pipeline is robust. In my travels, I find that M&A pipeline is always robust. It's about finding the right deals, and at the end of the day, our other than IRR and our financial focus, we need to find companies that we want to own perpetually as opposed to, oh, this is a short-term opportunity. And we participate in so many different aspects of the value chain. We participate across our 7 businesses. We participate in size. Even in my short tenure, we've done deals that are sort of low single-digit millions of dollars that might add a sort of micro product or services to one of our existing businesses and maybe or maybe not they're even stand-alone businesses on their own, but they fit better in our portfolio. We've done deals like we did our Lifecycle Marketing deal in January, where it's a business that looks very much like a business we're already in, in a geography that we don't penetrate in as meaningful ways we think we can penetrate it. So it opens up a new market for us. And then we've done similar deals in our connectivity business. We're adding sort of larger products and services that enhance our portfolio that allow us to offer a broader suite of solutions to customers that we already serve. So -- and on top of that are entering new markets, whether they be for our existing businesses and verticals or, as Vivek said, and eighth and a new vertical. So focus is something we manage.

Other capital allocation priorities, just appetite for share buybacks at current prices. Would you ever consider bringing the dividend back as a question we get occasionally?

So look, I think that in the end, we want to put our capital to best use for shareholders. We're very confident, as I've just described, in what we can do in the M&A world and in the acquisition opportunities in front of us. When we think about share buybacks or any other sort of returning of capital to shareholders, it's got to be better than our alternatives, and right now, I would say that we're very excited about putting this capital to work to generate excess returns. As you know, we have bought shares in the past, and that's -- at that time, if we view that's the best use of our capital, then that's the best use of our capital. I would say, right now, I just think there's just way too much opportunity for us in the acquisition market. I know what our track record is. I know we've deployed $2.8 billion to great effect, and I know that in those cases, the price points were very different than what we're considering going forward.

So I think we have time for one more. Actually, I haven't even checked the audience questions, but I'll ask you this last one, and I'll check. No audience question. Great. Okay, so just last question. What does Ziff Davis look like -- in your view, what's your vision for the 3- to 5-year time horizon? And what are the 1 or 2 messages you'd leave us with?

Look, I think that I'll give you a very financial answer. Our goal is to double the earnings of the business every 4 to 5 years, and we do that through a combination of growing the businesses we own. We do that through generating free cash flow that we deploy to buy new businesses that we optimize for earnings and free cash flow. That is what this company has been doing for the last decade. That's not going to change for the next 5 to 10 years. And I think that, look, over time, what we'll try to do is make it a company that shareholders can -- and prospective shareholders can better understand, and so we've been disclosing a lot of new metrics, not trying to overwhelm individuals, but to try to provide more understanding of what we're doing. And that in the end, it's an advertising and subscription-based business with the total growth strategy where we're deploying capital and whether that capital is acquisition capital, CapEx or even an OpEx to generate returns, and we're very optimistic. We've done it a couple of times in our past, the doubling of earnings, and we're optimistic that we can continue to do it with the governor of never borrowing really more than 3x debt over EBITDA. So there's a real equation here that you can play out, and you can look at historically and say, you know what, that's exactly what they've done, and I have a high degree of confidence that we'll continue to do that. We may be able to accelerate it if the environment from an acquisition point of view is as benign as I think it's going to be.

Awesome. Vivek and Bret, thank you very much.

Thank you.

Thank you.