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

Good morning, everyone. Welcome to Day 3. Cory Carpenter, Internet Analyst at JPMorgan, excited to have Ziff Davis with us, Vivek and Bret. Thanks for joining.

Thanks for having us.

Thank you.

So just to kick off, Ziff Davis changed a lot over the years, we've been following you, but for those who haven't followed the story as closely, just to kick things off, could you talk about the evolution of the company and the state of the business today?

Yes. So, the company is a Digital Media and Internet company for the better part of the last decade, we have systematically been acquiring and growing various businesses, various Internet businesses in different verticals, which we'll talk about. Really look for opportunities to acquire businesses where we see a clear path to value creation generally, it's audience growth, monetization growth, customer acquisition, leveraging our existing tech platforms, leveraging the management team that we have in place and the operators inside of the company. And for the better part of really the last decade, the business had pretty impressive growth characteristics. It grew on a compounded annual growth basis, top line in excess of 20% margins -- EBITDA margins in the mid-30s. And it's really been the last couple of years, where we've seen a real slowdown. The business has been somewhat treading water, flattish in 2022 and 2023. A lot of that has to do with the acquisitions environment that we've been in. And much to do with the advertising environment as well. But I'll pause there because I know there's a lot to unpack.

Yes. So you have -- you broadly break the business across 7 verticals under advertising under subscription. Could you talk just at a high level about the trends impacting advertising and then also the trends impacting subscription? Then we'll go deeper into each.

Yes. So just as a point of reference, about 55% of the company's revenues are advertising. 45% of the company's revenues are subscriptions. So on the advertising side of the equation, I'd say a few high-level characteristics of the business. First is pretty much all of the advertising products are contextual in nature. In other words, we are targeting advertising against the content that a consumer is viewing or content that they're consuming versus a behavioral product where we're collecting data elsewhere or collecting data and then finding audience elsewhere. So very much monetizing the audiences that we attract. The second thing I'll say is very performance-driven. So while the advertising pricing may be a variety of different ways in which we'll price, whether it's served impressions on clicks or a commission basis on sales or leads, in the end, all of the advertising really is on a return on ad spend basis. So not brand, more performance. We will do brand, but again, held to performance metrics. And then the last thing I'll say characteristically about the advertising business is that it's very much enterprise advertisers. So a little under 2,000 advertisers who are spending in the mid-single digits with us on an annual basis. Within the advertising business, we're primarily in 4 verticals. And it's important to understand it from a vertical basis because each of these has different characteristics, headwinds and tailwinds. So in the tech advertising category, tech and telecom, we are in the health and pharma and wellness advertising categories, gaming and entertainment and then in retail. And then did you want to talk about subscriptions?

Subscriptions, yes.

So then on the subscriber side of the business, it's about 2/3 B2B subscriptions, 1/3 B2C. So on the B2C side, we have properties like Lose It!, which is a health app subscription basis, Humble Games, Humble Bundle, which is in the video gaming space ties to our IGN asset and then IPVanish, which is VPN. And then on the B2B side, it is primarily Ookla, which is our connectivity business. which has as a consumer app speed test, but we collect a ton of network data that is packaged into a data subscription service to telcos, and to broadband providers, et cetera. We have VIPRE, which is endpoint security, e-mail security and security awareness training. And then we have our MarTech division, the Moz Group, which is e-mail marketing and SEO analytics.

So sticking with subscription for a bit, this segment has grown pretty steadily through the macro choppiness. What's driving this? And you mentioned all the businesses. What are some of the key ones that you would highlight?

Yes. So look, I think this is important because whenever I'm having conversations with shareholders and prospective shareholders, we spend 95% of the time talk about the advertising business. And in fact, nearly half of the company is the subscription business, which has been growing at a sort of mid-single-digit CAGR for the last 3 to 4 years, held up very nicely in our last print our Q1 print. So it has been a source of real stability and growth for us. Inside of that, we have businesses that are growing quite nicely and then some that I think are on sort of coming around to being in positive territory. So I think when that starts to happen, we'll see some nice acceleration in growth rates. But on the positive side, the Ookla business is a fantastic business. We are easily the worldwide leader in network analytics and network data. Broadband is really everything. And so within the broadband economy, the position that we have with our data subscription business is quite strong. That's a -- it's a great business for us. The Humble and Lose It! subscription businesses are very strong as well and really tie in nicely synergistically to the media properties that they sit inside of, leveraging audiences to drive customer acquisition, leveraging our advertising sales infrastructure to monetize free trial subscription before they turn to pay. So a lot of good things are happening there. Our email marketing business has been very strong for us. In the category of businesses that I would say are -- have been facing headwinds or, frankly acquired with a view towards establishing profitability, and now we're in growth mode. Our Moz business, which is SEO. We bought that, it was a money-losing business. It is now quite profitable. We've got to that profitable core and we're now in a growth orientation with that business. Our VPN business, which was growing and then we had some customer acquisition challenges getting priced out of some channels where we typically go to acquire VPN subscribers, that has now put itself in a position where I think by the second half will be in positive territory. The Cybersecurity, the VIPRE business is similar in that vein. It was run for profitability. And now we're getting to the point where we think we'll have both profitability as well as organic growth. So the subscription side, I think we'll continue -- we'll certainly continue to grow. And I see some scenarios where it begins to really accelerate in growth.

Okay. So one more question kind of before we go to advertising time together. You mentioned -- you alluded to this in Humble and Lose It!. But could you just talk about -- we're often asked, why do you have -- why have subscription and advertising under the same umbrella? Why -- does it make sense to own both? Could you just talk about some of the synergies you see?

Well, look, I think it starts -- I mean we like having a balanced business model. The advertising business has. I mean, I've been in it for 30 years. It has a good degree of it's lumpy, and there's a cyclicality to it. And when it's great, it's great, and when it's challenging, you can see that, and you've seen it certainly in the industry. So we like the balance of Ads and Subscriptions. But I think also there are relationships between some, not all, of our subscription businesses with our advertising businesses. Again, when we acquired Lose It!, it was the idea of leveraging the Everyday Health audience and the baby center and what to expect audiences to drive customer acquisition, very natural. When we bought Humble, same thing how do we leverage the IGN audience, which is quite significant to drive subscription and drive adoption of Humble. So there are clear synergies in some of those instances. And then I just say skill set wise, there is some real commonality between these businesses. We like digitally delivered goods and services. Customer acquisition, search engine optimization, search engine marketing, a lot of those disciplines are actually quite common and consistent amongst the digital media business, which is doing traffic acquisition with the subscription business, which is doing customer acquisition. And then the other thing I'll just say, too, is that I think as a technology organization, I think -- both of these are technology businesses. And so the underlying platforms that we're building, we think have application between and amongst them.

So moving to advertising, about 55% of your revenue. So, we won't spend 90% of the time on it. It stabilized in 1Q after declining over the past few years. What drove the improvement? How do you think about the trajectory going forward?

I was talking about the 4 verticals in which we operate, and it was really vertically driven. So, the tech vertical in 2022 and 2023 is pretty punishing for us. We were seeing some positives in other areas of the advertising business, but significant negatives in tech. Coming in Q1 of this year, that changed. And so I think part of it is just the tech, the tech ad vertical has improved to the point where it's not hurting us, and so that's part of the answer. I will also say that the health and gaming verticals have been and continue to be very strong for us, and we continue to be very optimistic about the dynamics there, which we can explore if you want to, but they are very healthy. The question mark for right now is the shopping vertical. Some of that has to do with things that are specific to our shopping business, in terms of some distribution partnerships that we have and some challenges we have with those. I talked about them on the last call and then a very large retailer who has changed their commission rates, not just for us, but really for the industry. Now, what happens when you have that is, and we've seen this before, is you cannot capitulate. You need to punish the customer that cuts those rates. And so it's a double whammy, it's lower rates and then you're going to produce lower volumes for them, to encourage them to restore their rates to get those volumes back. We have to take that pain, I think, to maintain integrity of our pricing. So we're -- that's a factor we weren't expecting coming into this year, and so that's something we've got to look at. But generally speaking, the retail and e-commerce space is a good one. And being a driver of digital traffic to retailers is a good position to be.

Maybe I'll just jump in here and add some, Cory, there's also a little bit of overlapping dynamic between the discussion that we just had about subscription and licensing revenue in our advertising base. We have a highly concentrated advertising base. We essentially across all our businesses historically serve on the order of 2,000 advertisers in the last 2 years. We've seen some pressure. It's been slightly lower than that. We target a retention rate for advertisers about 100% of revenue year-over-year. Again, maybe a tick below, but still in the 90s. So there's almost a subscription aspect because we have a high concentration of advertisers. We have a limited number of advertisers. Some of those advertisers are big. We're not just selling ads into the market at a bidded rate. And therefore, when you see the dynamics of an advertiser pulling back from the market we're pushing forward, it can impact our business, but there's almost a recurring subscription nature to certain of our advertising revenue versus other digital media companies.

And so you talked about the 4 verticals, maybe I think what could be helpful would be, could you just frame the relative size? You talked about the growth maybe there also size of those verticals and then a few of the key properties within each?

Yes. So the biggest vertical is health and the main properties there are Everyday Health on the consumer side. We also have relationships, exclusive relationships with the Cleveland Clinic and Mayo Clinic, where we monetize their ad inventory as well. So we are in a very strong position with respect to pharmaceutical trying to reach patients. Then on the professional side, we own MedPage, which is a leading source of news and information for physicians. So that allows us to be in the direct-to-provider pharma business, which is as attractive, if not frankly, more attractive than even reaching physicians. We have 1 million physicians in the United States that prescribe something to the order of $300 billion of annual pharmaceuticals. It is definitionally the single most valuable media audience in the world. And then on the last piece of the health business is our parenting and pregnancy business, and that's Baby Center and what to expect. So 3 out of 4 women in the United States who are pregnant, use one or both apps to manage and track their pregnancies. So our reach of that audience is pretty stunning. So overall, very largely a pharma-driven advertising proposition. And we love the pharma ad category. It's got some protections. There are real regulations in place in terms of how pharma can market, particularly to individuals that keep them away from a lot of social media channels. So it's one of the few large ad categories where we have a little bit of a moat and some protection. Then the next largest advertising category is actually retail. And again, that's RetailMeNot as the principal brand, and we own Offers.com and we own VoucherCodes in the U.K., and we own a few Black Friday sites. And really, what we're trying to do here is deliver savings and discounts to consumers. So free for the consumer to use to get cash back, a discount code a promo code. And then we get paid on a commission basis for traffic that we drive to a retailer. And if our user converts, we get a percentage of the cart. And so a big driver of that often is our ability to deliver customers to have them convert, get to a good cart value into a good commission rate, but that commission rate can be a real driver of revenue. So this is very much performance driven. The pharma business, I should have pointed out, has to be by regulation cost per 1,000 pricing, so CPM pricing, where you are charging for served impressions. But on the back end, third-party companies are tracking script lift as it's called. So the degree to which the advertising led to a lift in subscription for the underlying drug. Next is our tech business, and that is both B2B and B2C tech. So on the consumer side, PCMag, Mashable LifeHacker on the B2B side Spiceworks, which is IT community content and networking platform for IT decision-makers when I talked about some of the -- and sort of roughly equally split more on the consumer revenues, given that the B2B sides come down. Combination of CPM advertising and affiliate commerce not unlike what I described in RetailMeNot and then lead-gen. And it's been the lead-gen side on the enterprise side and on the B2B side, where we had a lot of our challenges that I referred to in the last 2 years. And then our Gaming and Entertainment business. That is the flagship brand is IGN. IGN is easily the #1 video gaming site, and it has tentacles in every platform. It reaches on its own 300 million individuals a month across every social platform, you can imagine, across every video platform. It's on OTT real leader in the industry. And there, I'd say the advertising business is very strong, but often dependent on the release schedule for AAA games and what the video game publishers have going in the market. And the other thing is console refreshes. So whenever there is a console refresh, that can be a big driver of activity.

AI. We got a couple of questions, and we got some questions from the audience on AI. So maybe to start just how are you using AI internally? What are some of the specific use cases you're exploring? And then we'll kind of talk about other opportunities?

Yes. So the entire focus at the company has been how to leverage AI and AI to enable our products and services to just be better, easier to use, stickier and more valuable. So I'll use an example, Lose It!. Lose It! is a popular app where you are logging your activity, including your consumption, what you're eating. And historically, the way you would do logging is you would type something in and you type in the elements, and that's how you would do logging and people still primarily do that. Now we use voice AI for you to talk to your phone and just say, I just had 3 slices of pizza and 16 ounces of coke and it through artificial intelligence. It will recognize, unpack and then immediately populate the app with the consumption of items. We also have a recipe importer, where just click on a recipe that you've cooked and that's it. And it will pull in all of the nutritional information so that you can start logging that data. That's an example of -- it just takes what is an existing and popular product and makes it easier to use. What we find is that the more that you use a product like this, the more that you're going to stick with the product. So to me, that is a driver of probably retention more than anything else. Moz is an interface that SEO search engine optimization professionals use to do all kinds of analytics on SEO's keywords and ranks and page ranks and domain authority and how do they compare to competition and opportunity, et cetera, et cetera. It can be sometimes hard to manage and navigate. It could be complicated. Now with a chatbot AI interface that says simply, what are you looking to do? Let me do the work for you and present the chart, present the report, present the table, present it for export, whatever it is that you're looking to do. Again, another example of just making the product easier to use. So across nearly every one of our properties, you've got how do we make AI make the experience better in sort of this on a magic way that you don't quite see it and it's just working. The other part of how we're thinking around AI is proprietary data sets. And leveraging AI yield more value and insight from these proprietary data sets. The best one is our Ookla data set. The quantum of information we sit on through the speed test application, which is on 500 million devices worldwide, all organically installed, collecting all of this network data on a real-time basis overall pretty long period of time, along with our RootMetrics business which does drive testing. So the -- and then a couple of other businesses, too, the combination of data is enormous. And we are trying to find as much signal for our customers out of this data, leveraging AI platforms to really try to get to findings to get to predictions. We think the data can be quite predictive of lots of things of churn of outages. Where you may have customer acquisition opportunities. So I think there's a whole proprietary data plus AI equals new revenue streams and new insights that we're only now beginning to start to unlock. And then the last thing I'll just say on AI is the one that I get asked a lot about, which is compensation from large language models. You've seen some deals announced in the marketplace.