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

So that's my next question. As we do often get asked, does it make sense for Ziff Davis to have digital media and subscription businesses under the same umbrella? How do you think about this? And what types of synergies do you see between the two?

Well, I think -- so, some of the subscription business, our Digital Media businesses, but put maybe advertising and subscription, I certainly like the balance that they bring together. And you can have some choppiness in the advertising business and certainly a fair amount of stability in the subscription business. But they're also very common skill sets. We find that traffic acquisition or building audience is not very different than customer acquisition particularly as a lot of our customer acquisition is online-based anyway in our subscription businesses. So we see a lot of overlapping, the skills and our expertise and how we can either generate traffic to support advertising or we can generate customer acquisition to support the subscription business. And then there are adjacencies, right? So when we got into -- when we acquired Ookla, which main brand is Speedtest, which is on 600 million devices worldwide all organically installed. That is the basis for the data that becomes the subscription business. But the thing that you have to figure out is how to get that level of install base. So yes, it's a subscription business, but it requires an install base right? So that, again, very much aligned to the tech media audience that we have, when we buy Lose It!. Great opportunity for us to leverage the Everyday Health audience to drive subscription acquisition for Lose It!, but also we've incorporated advertising in Lose It!. So in each one of these, we find an adjacency, we find a reason for them to be connected but look, I think at the same time, we're a portfolio company. And I think we have different parts of the portfolio that, particularly in markets like this that have been really challenging for advertising businesses, I'm grateful that we have the subscription businesses in the fold.

So if you -- well, the capital allocation, then we have AI, a few on financials, Vivek and Bret?

Throw capital allocation on this one...

If you do have any questions in the audience, we'll open it up in about five minutes or so, we haven't forgotten. So let's start with share buybacks. Just you turn those on in 2Q for the first time I think in about a year. Why now? And how aggressive could we expect you to be?

So why now is really -- I mean, share buybacks are a core element of our overall capital allocation strategy. And capital allocation is one of the primary things we do at corporate leadership. Running straight through the DNA of the company is a focus on profitable growth and focus on each of our entities contributing cash on cash returns on a quarter-over-quarter basis. I think that shows in the significant free cash flow that the company generates. We generate over $80 million last quarter alone. And we allocate that capital top down. When we think about capital allocation, we really think about four primary activities. We can reinvest that capital in our businesses, We do that. Our businesses get the capital they need to grow, pursue their growth opportunities, maintain and improve their customer experiences. So when talking about capital allocation. It's almost after that first category because we're giving them the capital they need. We can then strengthen our balance sheet. We're in a very fortunate position to have a stronger balance sheet this company has had in its 20-plus year history with our net leverage approaching 0.5 a turn and an enormous amount of flexibility. So on the margin, the balance sheet probably doesn't need an excess dollar capital. So our two other alternatives are return of capital to shareholders or external investment in M&A and the company has a strong bias towards allocating capital to M&A because we believe that we could attractively acquire profitable companies, make them more profitable and/or and particularly and grow them over time. That has been a little bit challenging in the last year plus. Our M&A activity is at a much lower rate of close than we would anticipate. And then stock buybacks have always a portion of that strategy. But the simple answer leading up to it is that these levels were a significant investor in our stock. So in Q2, we reinitiated that alternative. And as we said two weeks ago on our call, we anticipate being a buyer at the levels of stocks at now and even at higher levels.

So like you've alluded to this a few times, but on the M&A front, you have been quieter. And Bret, as you just said, your cash position is about $900 million, which is the highest it's been in a while. So I think the question is maybe a quick overview of your philosophy in M&A and just your strategy, but then also what verticals do you find more interesting right now. And I'd be curious -- sorry, this is a mouthful now. I'd be curious this we'll get to AI, but does the risk of generative AI to online publishing, does that impact your appetite in that space at all for acquisitions?

Well, so let me start with what hasn't changed. What hasn't changed is our system around sourcing deals, our system around evaluating these deals. And the framework and the benchmarks we look for in these deals. So sourcing works in our company, we're a highly decentralized company. We have 4,300 employees, about 60 of them are in corporate, everyone else is in the business unit. We have -- our business units each have a leader. They fully run those business units, their resources are theirs. They manage those businesses. They generate cash. Cash comes upstairs, all capital allocation decisions happen upstairs but all sourcing of deals happen -- sourcing of the deals happen locally, but also centrally. And so we get a huge pipeline of opportunities. And that's important. And that hasn't changed. So the activity around seeing a lot of things, which I think is very important to any acquisition system is vital. When we look for things, we look for opportunities where we can uniquely create value in ways others can't, whether that's an attach, a bundle, leveraging a platform, leveraging a technology, leveraging monetization, finding a cost synergy, something that makes us uniquely advantaged here. It's not just about finding good uses of capital and buying good companies. We do that, but we need to underwrite against value creation that is in excess of what we think anyone else can do. Historically, our hurdle rates have been 20% cash-on-cash returns. I'd argue we are looking for higher than that right now. Largely because of the cost of capital, but also I think that as this market rotates, we've done close to $3 billion of acquisitions during what I would consider a seller's market. And I think we're rotating into a buyer's market, hasn't happened yet. But when it does, I think we should expect better returns than what we've historically seen, but I think 20% cash-on-cash returns are outstanding on their own. So none of those things have changed. Look, the bid-ask spread between buyers and sellers right now is still pretty wide. I think we're close enough to 2021 that you've got individuals who want to be valued on 2021. I'd love to be back at 2021, but that's not where we are right now. And so I think this is a matter of time. I think being patient matters. It allows us to be really focused on the businesses we own that we've always been focused on, but it gives us a little bit of time, and we've had the opportunity, I think, to bring in some new exciting talent as we've seen people dislocated in other places. It's been an opportunity for us to scoop some really interesting people up, attract interesting people like Stephen Bye, who's running our Connectivity Business, who was the Chief Commercial Officer at Dish and now on the Board of Dish, to run that business is, for us, a significant move. And so focusing on talent like that, I think, is really important. You had a generative AI question.

Well, we'll get into AI now actually. So maybe we'll leave them together. And then after I promise, I'll open up for questions. I guess we'll start on the risk side because that's where we were, which I think on the risk side, what we're hearing from our investors is an example, right, when I type in what's the best PC for gaming in Google. The first real that pops up, PCMag.com. It's an organic result. I think the biggest investor concern is that generative AI once that's built into search. Instead, we'll see maybe an AI produced summary that pulled some PCMag content and some other content elsewhere and maybe PCMag no longer gets the chance to serve ads. So how big of a risk do you think this is and how can you address it?

Yes. Look, I mean I don't want to be dismissive, right? But what I can say is that if you think about the search experience, there's the answer engine part of it and then the research engine part of it. So today, 50% of Google search queries end in zero-click, those are called zero-click searches because no one clicks out. That's because they got the answer. And so today, if you need -- if your query has a clear specific short objective answer, you're getting that today. So we've been dealing with that. And by the way, that 50% was 0% a decade ago, so this isn't -- this has happened over time. I think if what you're doing is research, you're having a baby, your A1C levels are high, you're stuck at a certain level in a game. I think you're doing more research, you're doing deeper, you're looking for multiple sources. You're doing travel. I've been looking to arrange a trip this summer and I tried, I tried to build an itinerary, it gave me a lot of great places to start, but I needed it to continue. There are certain things that I just needed to do to get to where I needed to get to. I think it's going to be game changing in a process but I'm not sure it replaces what you're describing. But even if it did, we generate traffic direct. We generate traffic through app. We generate traffic through e-mail. We generate traffic through social platforms. We have a diversified set of traffic. So it's not as if all of our traffic is coming from a singular source. And all media companies and content companies have always had to deal with evolving dynamics in sources of traffic. So I don't view that as new. I also will tell you, I do remember when smart speakers came out. I was asked the exact same question. If we can ask Alexa the question, why would we ever go and enter in a search. And we know that, that has certainly not happened. There's a smart speaker in every room and every house and it hasn't changed those dynamics at all. Having said all that, I see a lot of positives for AI in our business. I put them into three categories. I put them into the content workflow. I think that AI can help us in increasing the velocity by which we create content. There are steps in our process and in all content processes that I think can be made more efficient. So I think either that's a margin gain or a productivity gain or both. I think that's real. In my own work and what I do day to day, and I'm sure for many of you, I find use cases where it helps me with the first draft or helps me rephrase something. I think that's valuable. I think it's like a thesaurus on steroids. I think the second piece is creating experiences, conversational experiences, our experiences are generally one way. And so take our Lose It! app. We have 1 million paying subscribers. They log every day, every meal. And our ability to now use that data set create a nutritionist AI inside of the app to help guide choices, encourage some discussion around choices I think just adds to the experience. I think you can create conversational experiences, particularly trained on proprietary data. And then the last piece is more machine learning than LLM, we're all talking about generative stuff word assembly, which is what this is. But when you think about -- take Ookla and the connectivity businesses, I think the data sets that we collect are beyond any human's ability to find all the signal from noise. And we've been trying. We have team of data scientists, PhDs and data science, and it's just hard. The quantum is enormous. I think against machine learning models, we're going to be able to start predicting very valuable things and providing insights that are very valuable to our customers. So I view this as I look at -- I'm in the category of people that say, this is not unlike when I first saw the Mosaic browser in the early 1990s. This is a big deal. This is not nothing. I just don't think it's going to necessarily develop in the way that I've heard some of these because I think we often just kind of go straight to what might this harm. In the end, the Internet was more of an enabling technology than a destroying technology for the most part. I kind of look at AI the same way.

Any questions in the audience?

I want to touch on AI. You could probably guess I'd be asking on it. But I want to kind of comment on this from the sign of culture maybe at the company. Correct me if you think my framing is wrong, but editorial and the content production teams generally want to write and edit, it's what they do. It's kind of what they're -- that's how they self-identify. And oftentimes, these teams want to grow, right? You don't want head count growing if you're a manager, I think you understand what I mean. But for example, writers kind of want their names embossed on top of an article, stuff like that. So how are you thinking about aligning your workforce with kind of what may be a new reality could be financial incentives or otherwise, where LLM's are becoming a bigger part of content writings -- content writing even if you're not replacing the human element entirely?

No, it's a great question, and it is what we're focused on. Interestingly, it's come through the editorial organization. So when this all sort of developed, I thought this might have to come a little top down, which can sometimes be challenging, particularly with content creators. But they've embraced it from bottoms up and saying, how do we use this to develop headlines? How do we use this to create outlines. How do we use this to check and fact check what we've done. And so I think there's an understanding in the end that the final -- the combination of human and artificial intelligence probably trumps human intelligence alone. Certainly, trumps artificial intelligence alone. So I think there's an embrace of that, that the combination -- and that -- yes, that may affect the nature of who you're employing, right? And who's producing what in that workflow. But I think there's a recognition that harnessing this is critical to their careers, and it's critical to where this is going. And so I've been pleased by how the content creators have embraced this. And we've got about 50 different experiments inside of the company right now of different ways in which to leverage AI. And there's some that you just would never have thought of and that are quite interesting and each has -- it's a dial here, it's a dial there. Look, it's early. That's the other thing. It's just it comes so quickly. We see the adoption. We've all played with it. We feel it's import. We see its power. I still think it's going to be a little while before we can incorporate in a way that's going to really drive outcomes and results. But again, we view it as positive.

We have one minute. Any last question? Otherwise, I'll take the honor. All right. Bret, so you reiterated your guide just a few weeks ago. So I'm not expecting an update today. But just -- could you talk about some of the assumptions you're making? And what could be the bigger swing factor to the upper downside?

Yes. No update today, brand new. I think we are off the conference call in two weeks ago. So if we look at 2023 relative to 2022, there we see the trends in the business coming out of the back end of 2022 and the beginning of 2023. But that covered a number of the elements where we've seen some strength. We continue to see strength in connectivity, continue to see strength in health. We're also starting to lap some of the dynamics that we saw in 2023. Everything from the accelerated pressure on advertising in the back half of the year. As we get into the back half of the year, our comparisons year-to-year are a little bit easier, a little bit more favorable. If we continue to remain in this FX environment, last year, FX was a significant headwind to the business. The portion of our business, which is international could be anywhere from 15% to 20-ish percent, really closer to 15%, but we saw headwinds in that. FX has been more benign. And some of the progress that we've made in some of our properties that post acquisition were in the revenue contraction cost-cutting reach profitability stage that are now turning into stability and into growth. So some of our subscription businesses as we get into the back half of the year, some of the pressure that was on the top line from the end of '21 into '22 starts to abate. We see more strength, so, there's a lot of elements that feed into our confidence. What I will say is that when we look to the back half of '23, we're looking for stability and continued stability. We are not looking for a dramatic improvement in the macro, but nor are we anticipating any significant further pressures in the macro. So any overall change to the macroeconomic environment and any of that, in particular, hits any of our verticals could have an impact.

Awesome. Well, thank you both. Appreciate the time.

Thanks, Cory.