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

We're going to get started. Thanks for coming, everybody. My name is Ross Sandler. I run the Internet team here at Barclays, the U.S. Internet team. Very excited to have Ziff Davis here for their debut appearance at Barclays. So, Bret, thanks for coming.

Thanks for having us.

Maybe just to start, since we're relatively new to the story, I think folks in the audience here are relatively new to the story, just kind of a high-level view of what the business looks like, post the spin and, yes, the major divisions and then the different assets within. Just a quick 60 second elevator pitch.

Yes. I think it's important to look at Zip Davis in a number of different ways. Sometimes I say that it's a company that has a 100 year history, which is how far the brand goes back. But of course, we are not the publisher that built a business over those 100 years. What we are is a home of their sort of last remaining asset, which was PCMag, which was acquired by a company called J2 Global, which is a 20 year old company. We're actually that legacy entity little over a decade ago. So, little over a decade ago, J2 started investing in digital media assets and built up a portfolio of digital media assets serving several verticals, which I'll take you through in a moment. And little over 2 years ago, that spin-off that you mentioned was a spin-off that our company did in spinning off those original legacy assets of J2, which left a company which we renamed Ziff Davis 2 years ago. I joined the company at that time. And what we do is, we serve 7 healthy verticals with advertising supported and subscription-related services. And when I look at our business and I look at those verticals, I see verticals that are important and healthy to the global economy that we want to be in. Technology, we've been both B2C and B2B, and we can break that down a little bit. E-commerce, where our principal sites are RetailMeNot, and we have other sites, Offers.com, blackfriday.com. We have a gaming business, which is one of the most vibrant gaming communities under the banner of IGN and video gaming communities as well as a site, which is primarily a commerce site in Humble Bundle. We have a connectivity business that many consumers know under the brand Ookla, but we also have a business called Ekahau, which serves wireless networks and wireless service community. We've a health and wellness business which serves both the consumer portion of the health and wellness marketplace, the professional portion, and the subsector of pregnancy and parenting; a marketing technology business, which provides both e-mail connectivity for SMBs to connect with their customers as well as SEO expertise serving that community under brands like Campaigner and Moz; and a cybersecurity business, which is the primary bench VIPRE, which is offering cybersecurity services just to primarily small and medium-sized businesses, but also privacy services to consumers, which is a VPN service. And all those collectively create a business which is about $1.4 billion of revenue, give and take nearly $500 million of EBITDA, producing mid-30% margins and real after-tax cash flow, which we reinvest in our businesses to support what we call our total growth strategy, not only driving growth in our individual businesses, organic growth, but also acquiring companies that we're excited about holding and developing and building those businesses over the long term, feeding back into our overall portfolio of earning assets and fueling our growth into the future.

And you guys -- you mentioned a bunch of the different consumer-facing businesses. You've got some on the advertising side, you've got a few on the subscription side. So I guess starting with that, as we sit here at the end of '23, there's been jitters in the advertising market at the start of the fourth quarter. Those seem to have subsided. We've also gone through the Cyber-5, which RetailMeNot and Offers has quite a bit of visibility. So, how would you characterize the macro as we sit here in the last few weeks of 2023?

Yes. So, a couple of elements of macro. There's -- maybe. I'll call it macro-macro, which is the overall economy and the global economies. In my 2-year journey, nearly 2-year journey with the company, I'd say macro has gotten better and stable. If I take us back to the beginning of 2023 when we thought about what our businesses might achieve in 2023, we were looking towards stability in the economy overall in the back end of the year. I think we've generally seen that. We've certainly seen that relative to 2022 where things like supply chain disruptions, significantly high levels of inflation, rising interest rates as opposed to high interest rates, which we obviously still see a lot of those macro dynamics that we're creating enormous pressures to broad economies are behind us. The economy is not strong. And yes, I think it's still characterized by jitters and it's still characterized by fear that here domestically or maybe globally that there's recessions in front of us and we're not out of this cycle yet. But characteristically, probably more stable. Now, our businesses are not immune to the macroeconomy, and we're not immune even to the sub economy, like the advertising market. But our businesses are very specifically focused on subsectors. So, for instance, our gaming market, which is an advertising business, is very much tied to product delivery to the gaming market. We serve a community through IGN that had over 300 million visitors, but we generate more activity when there's new product in the marketplace. And we generate advertising revenue from the gaming community, but there's also a high correlation and a significant amount, a high correlation between the sector we serve and Hollywood, certain of their products. So when there's Hollywood product, we see -- often see a benefit to our community. And we also have consumer packaged goods, which are largely economically insensitive. Our health and wellness market and advertising market, it's our largest advertising business, but it's more tied to pharma, and pharma principally and other elements of the health community are not particularly economically sensitive. Pharmaceutical sales don't go up typically in a strong economy. They go up based on new products in the marketplace, obviously, prescriptions written market need. So tech, for instance, has not recovered and has not been strong. And we have 2 different tech markets that we serve. We serve what we call the B2B market, where we essentially -- is a lead generation business. We work with large enterprise product, service providers that -- and connect them to their customers. Tech has pulled back. I received a question earlier today about, "Oh, there's been a tech recovery in the Big 7. The Big 7 have recovered in the market -- in the stock market. their communities haven't necessarily recovered. Their communities or the other, some subset of the 393 members of the S&P that the Big 7 aren't. And it's when those companies recover that you see back to tech spending, not necessarily when that first 7 recovers. So, I think we can look at the economy broadly and certainly important to all businesses in our business. We even look at advertising broadly, but our markets behave in their own unique ways.

Maybe we could start with the -- you mentioned gaming. That was a big bright spot in the third quarter and for most of this year. I guess the question is, is that mostly a function of just end market demand? Are there things that you guys are doing within IGN to then drive acceleration or growth rates much higher than the industry? And how important is, you mentioned products in that area? You've got Grand Theft Auto trailer coming out like this week. And how much of the gaming ad demand is tied to product releases versus just kind of steady-state growth?

I think it's very much tied to product releases. It's been -- it's very much tied to what sort of generates the interest in our community to bring them back to our sites and for the content that they're seeking. And we benefit when there's more product in the market. We don't necessarily benefit from each and every game. Obviously, every publisher decides how they want to reach their communities. Some create their own demand necessarily like a Grand Theft Auto. Others, we help them generate demand, but our gaming community is a vibrant community seeking information, often game help. So, that game help product that we offer where the games are reaching increasing levels of complexity, an increasing challenge to the participants in that community. One of IGN's primary products and connectivity to its cohort is providing that game help, so it is -- again, in this micro market, it is product driven. It's product driven also by the overlapping element with Hollywood. Obviously, the writer strike has limited content in that area, but fortunately, that's resolved. So, moving forward. But that community, almost more than any other that we serve, is driven by new product in the marketplace, on the increment and incremental demand, incremental activity, incremental visits.

And you mentioned tech is the sore spot related to the S&P 493. So I guess the question there is, what do we need to see for that to rebound? Is it reinvestment on your level? Is it just the end market demand picking back up? And as we look into '24, like what are your expectations around tech?

So, first, we have 2 different tech markets. We serve the enterprise tech market through our primary brand in that market, a company called Spiceworks, and we serve the consumer tech market under brands like PCMag and Mashable. Those markets are behaving differently. Starting with consumer tech. Consumer tech has been soft, but it has not been quite the drag on our business that enterprise tech has. I think that is us winning in the marketplace; strong content driving demand to our sites, but also product refresh, product lifecycle, increasing consumer spending. There was obviously a large refresh cycle that happened broadly domestically with COVID and lot of purchases were starting to phase out of that. We have new products being brought to the marketplace. We do -- we facilitate commerce in those sites. I mean, we do a lot of affiliate commerce. We drive our visitors to sites to purchase equipment. We get percent of cart in our relationships and whatnot. And that has been soft, but not the drag. The real drag on tech for us has been the B2B business, where we generate leads for the sales organizations within large tech companies to go out and sell their products. If you just look at some of the bellwethers in tech 12 months ago, significant pullback of spending in the marketplace, significant layoffs, layoffs that maybe hadn't been observed really in the history of tech, $10,000, $15,000. There was a pullback. There was also a pullback in marketing spend. I think those companies -- the biggest companies are starting to speak to stabilization, if not recovery. And then, when their customers recover, maybe you start to see that pickup in lead gen. There are other entities that serve this marketplace that have public figures that I think you see the pressure there, too.

Yes. Switching gears, you guys made one of the most interesting data points, I think, 2 conference calls ago around the impact that AI is having on downstream traffic to your different content sites. And if I recall, it was like Bing went from kind of old school to Bing GPT in March and you guys ran kind of a test group to see what the traffic benefit or hit was, and because your sites are highly relevant and ranked well and well known, you saw a nice uptick in referral traffic from Bing. So, I guess how has that trended since? And now that we see Google kind of pushing a little bit further with their SGE experiment, how do you see that playing out?

Yes. So this is obviously a big question for any digital publishing company in the current environment, which is, how AI-enhanced search is going to change the way visitors find content and consume content? And it's couple of things. One, it's still early, right? We're just overlapping kind of the one-year anniversary of sort of the broad introduction of large language models and generative AI. And companies like ours have been working both in this environment, but also to use that enhanced technology in effective ways. First and foremost, I think it's important is even the data that you and thank you for noting that we described and we highlighted, is not the output of a controlled experiment. There are so many factors that go into the results of search that the actual, you know the cause and effect, it's not as if this is an independent variable, that is the only element that has changed. But we thought it was important to look deeply into what we were seeing, and we really saw a couple of examples of that. And we spoke about this approximately 4 weeks ago when we announced our third quarter earnings. The data that you're referring to, I believe, we announced in the second quarter, which was, we have seen an increase in Bing search traffic overall, but a much more significant increase in traffic to our sites from Bing since Bing enhanced their experience with generative AI. We thought that was interesting because I think it was contrary to what many market observers believed would happen when AI was integrated into search results. I think the concern, if not the fear, was that a search query would terminate at the AI-generated response as opposed to continue to the publishing site. And we saw that in the third quarter, sort of validate and happen again. Separately, we ran some new data analysis, if you will, not so much experiments, because what we're doing really is just analyzing the data that we see, where we analyzed some of our most significant search terms and solve what the response is, how many of those search terms actually even generated an AI-generated summary in search as opposed to just generated links, you know visual links to our sites. And it was smaller than expected. It was, in many cases, about 20%. And even then, we didn't see the termination of the search journey. So, I think what we're observing here is; one, the initial use and the current use or the expected use of AI-enhanced search has not been a negative for our companies. And what we believe that is pointing towards is that there is a very important relationship between search providers and publishers. And we think that relationship is sort of valued by both sides and will ultimately continue to be supported in form, which is publishers create content and search operators connect the consumers of that content to the publishers. Just like Google has evolved over decades, just as sponsored links emerged at the top of the page, just as snippets emerged in the search box. The process will continue to evolve, but highly valued, highly authoritative, highly editorialized content, we believe, will continue to be valued. And at least initially, the results that we've seen, the data we've seen from the use of enhanced search has been supportive of that.

And there's a theory out there that like some of this Gen AI tooling will create millions and millions of new pages that are made for advertising-type websites. And I would guess, you can agree or not, but that would potentially further enhance your position within the search results and further enhance the stature of your sites relative to the broader open web. Is that fair? Like, do o agree with that statement?

Well, what I'd agree with is that there's been and continues to be, particularly in the digital world, a relatively low barrier to entry for content creation. And what we need to do is continue to create content that is trusted, informative, authoritative and in demand from our end users. So, one of the other things that we're doing is how do we use AI to enhance our visitor experience? How do we create better ways to consume our content? One of the things we did, and we tested this earlier this year and are rolling it out further, going back to IGN, and going back to game help is IGN's communities value the authoritative voice and the information that IGN could deliver with regards to how to navigate the intricacies of very complex games. Historically, that information was provided in relatively long form, articles that you kind of scroll through and skim through and look for the information that you need or videos that kind of walk you through the actual process to achieve the goals that you're seeking to achieve within games. We created a chatbot for the new Legend of Zelda that allows our visitors to ask the chatbot questions. The chatbot looks at our proprietary database to get information, gives the game help solution in response to the direct query, which is an enhanced experience for our customer. The other thing that we did is we put that chatbot while it's presented on our site, the experiences behind a registration wall. So what we've done now is give our visitors that are interested in that content an incentive to share their e-mail, to become a registered user under IGN as opposed to just a visitor. And that allows us to then capitalize on that new relationship, sending e-mails, sending offers, following their journeys, understanding the content they desire. So there's an ability for us to use machine learning, to use large language models to enhance our customers' experience and make our content that much more valuable.

And outside of this IGN example, are you guys thinking more holistically about how to use AI in the editorial process, the content creation process? Like there's all these new like video generation tools that can kind of make clips for your website about said topic for next to nothing. Like are you guys looking at harnessing some of that?

It's almost -- the other question would be almost, what aren't we looking at, right? So, I think we've had this sort of discussion, but the other part of the AI discussion is just how powerful these tools are and how there is almost -- you're almost only limited by imagination in what you can do with them. And I'd put the usage into 2 broad categories, the -- well, maybe 3. So one is efficiency, and we do, do that, and that's coming up from our editorial staff. It's not -- it is how do they enhance their workflows? Do they -- they generate ideas. They generate headlines. They search for information in research and data, and it's a powerful tool. It is not replacing the editorial process, it's enhancing the editorial process. I don't think that that's a material story overall for the economics of our business. It's an enhancement, it's an efficiency. The other 2 elements are how we use AI and machine learning to analyze data and how we -- and then, we already discussed how we use AI to enhance the value of our content and the customer experience. And we have experiments going on in almost -- I would say, in every aspect of our business. It's almost if you're not experimenting, exploring ways to improve your business through AI, that is the question, and it's limited almost by imagination. It's what if we did this? What if we did that? And certain of our businesses have huge data lakes, and we may come to some of them like our Ookla business, which is a business that monitors broadband network performance. What do we do with that data? Historically, we've sold raw data. How do we create insights into the underlying activities that are driving that data and sell insights to the broadband community such that they can act on those insights for their own economic pursuits? Our Moz business, which is a preeminent search engine optimization business. Our data lake is enormous, and how do we monetize and utilize that data lake to start to provide incremental insights to the search community, the publishing community, particularly in light of change to algorithms and approaches that are emerging because of enhanced search and AI. So we look across our business in almost every place that we can and say whether it's machine learning, whether it's data analysis, large language models, how can we use these tools to enhance the things that we already do to serve our communities more effectively?

You mentioned the connectivity business. You guys brought in a pretty high-profile executive to run that area or part of that area go-forward. And I guess, how common is that for Ziff Davis? And as you look at that business, just the outlook, I mean, it's currently outperforming the rest of the company, but the outlook for '24 and some of these new product ideas that you're talking about, could you just walk us through that?

Yes. So, Stephen Bye is coming up on his 1-year anniversary with the company. We couldn't be more excited about him being part of our leadership team and the impacts that he's already made. In terms of comment, in my role, one of the things I helped the organization do is allocate capital. And one of my elements, my dialogue is we're not only allocating financial capital, we're allocating human capital. And when we see either the ability or need to enhance a business by enhancing leadership, that is incumbent upon us to do as anything else that we do. That business used to be broadly -- it was part of our -- is part of our Digital Media segment but was run under the presidency of Steve Horowitz, who runs our Tech, Shopping & Entertainment business. And essentially, we just created a new internal division for Stephen to run. We're enormously excited about that business. We're excited about Stephen and his industry insights and his industry connections. We think it was a real validation of that business that he was excited to come help lead it for us. His resume speaks for itself. And I think he's off to a great start in helping bring that business to its next stage of development.

If we look at the rest of B2B, there's kind of this mix Moz, there is cyber, there is martech, like you mentioned a couple of other things. If we look into '24, what are you most excited about within the rest of that B2B segment?

Yes, I think -- so, B2B tech continues to be a challenge, we talked about that. So connectivity, you rightfully talk about. So then we get into cyber and martech; 2 categories. Our martech business, primarily e-mail connectivity Campaigner is one of our principal brands. We actually have new leadership there, business unit level leadership. We're very excited about the trajectory of that business. That business is growing. We think it can -- has a lot of runway in front of us to continue to be a very effective provider of services in its space. Our Moz business is a business that we acquired several years ago. Step 1 was really to fix the cost structure as step 1 to turn what it was a great product into a great business. We're now turning our attention -- not that we haven't been doing this for the last couple of years more so, but towards growth and serving that marketplace and we're really excited about Moz's ability to help customers navigate the changing landscape of search engine optimization, and we're excited about that. The other half of our B2B business, and it all sits within our Cyber and Martech segment is our Cybersecurity and Privacy businesses. So our Cybersecurity business, primary brand is VIPRE. We have endpoint security. We have e-mail security. We have cybersecurity awareness training, and that is a robust marketplace. I mean, one of the things, when I take a step back and I look at Ziff Davis is, if you look at any businesses, some businesses struggle because the marketplace they're serving is struggling. Some businesses are in a healthy marketplace and have to perform, have to win. We have to win. I think the Cybersecurity marketplace is a healthy, growing marketplace. And we've seen -- we took a change almost 2 years ago into the way we sell our services. We've largely moved to a model where we have partners that help us distribute our services. That approach was put in place maybe a little over a year ago. The leadership team was put in place in the spring of 2022. They rebuilt their sales team and their go-to-market approach all along, been enhancing the products, and cyber, in particular, it's a constant product enhancement. And I think we've seen stabilization in that business and we're looking forward to it returning to growth. And then the other big part of our cyber and Martech business is consumer VPN. Consumer VPN is a privacy business. That business, I should note, is great economically, produces significant amounts of cash. But last year was under significant pressure from a gross additions perspective. Some of the dynamics changed in the marketplace to how those products are marketed and distributed. We've seen some stability there. We've actually seen some increase in gross adds. Like any subscription business, you have 2 elements. You have new connects, gross adds and disconnects, churn. We're continuing to manage churn. We've seen stabilization there. It's not quite at the point of flat, but we'll get to flat, and we'll turn it to growth. So I think there's things to be excited about all of our elements of our B2B businesses. And certainly, that mix that our subscription services provide to our overall P&L and our cash flow is important, particularly in my role, because subscription services have a high degree of visibility. They're recurring. Advertising has a little bit more volatility. We've talked about the overall market. We've talked about the micro markets. But subscription services, which are 40%-plus of our business, balancing out our overall P&L relative to our advertising services is the mix we're proud of.

Want to make sure if anybody has any questions, you can chime in, raise your hand, Joey?

Are you guys talking about the impact of cookie deprecation next year, overall thoughts on that?

Question was Chrome cookie deprecation impact to the business.

Yes. So, this is a topic I stepped right into when I joined the company 2 years ago. It is not as big a factor in our business as it is other advertising served businesses because we're really a contextual advertising business. What we do is, we create content that we use to attract visitors to our sites. Our advertising is aligned with that content. So if you're on one of our consumer health sites, looking for information about being a pre diabetic, you will see advertising that aligns with the information that you're looking at. So contextual advertising has always been and continues to be almost a different sort of animal, if you will, than the part of the marketplace that's relied on cookies. And -- so moving forward, really not an impact for us relative to other participants in the marketplace.

Might actually help you guys. And then, to the degree that you get more of those logged in users that probably also helps kind of support that.

Definitely.

All right, last question for me. Do you guys have been historically like divesting assets, buying companies. We've been through like a 0 rate environment. We're now in a higher rate environment. There's like this disconnect between public and private market expectations and valuations. So, how should investors think about the path forward in the next 12 to 24 months from a capital return versus M&A? Are the things that you're looking at related to what you already have? Could you go in a completely new direction with M&A? Thoughts on that?

Yes. So, I think first and foremost, our strategy hasn't changed. We're a total growth company. We seek to deliver our total growth for a combination of organic growth for our businesses. Obviously, we have a mix of different growth rates, and as we talked about transparently, some of our businesses need to return to growth, others are already growing. But the other half is to acquire businesses that we believe belong in our portfolio for the long term and have those businesses contribute to growth. That hasn't changed. Our total growth is roughly half organic, half M&A. The M&A market is relatively inactive, broadly. It's not just Ziff Davis. And I think there's many participants in this market that are looking for that gap to narrow between perceived values, between buyers and sellers. We value the health of our balance sheet. We know how precious capital can be. We're conscious of the current rate environment, which has raised discount rates, which has impacted valuations. And our efforts, I should emphasize, are robust. Our pipeline continues to be full. We're evaluating potential transactions and participating in potential transactions. But clearly, we have not executed very many transactions and very few in 2023. We believe we are the company that many of our shareholders and observers knew for a decade and not the M&A company that they've watched for the last 4, 6-plus quarters. We'll get back to closing deals. We have the capital to do it. We have the conviction to do it, but we are going to continue to be disciplined because we're acquiring assets that we are going to own for the long term, and we have to be very thoughtful about the assets we acquire.

Bret, this has been great. Thanks for attending. On behalf of Barclays, thank a lot.

Thank you.