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

Great. Thank you, everyone, for joining us today. I'm Chris Kuntarich, part of the U.S. Internet team. Today, very excited to have Ziff Davis with us. Bret Richter, CFO. Thank you again for coming out here to Sunny Scottsdale.

Thanks for having us.

Great. Well, let's just jump right into things. Look, for folks who may be less familiar with the story, can you just kind of frame kind of the high level at this point?

Sure. So to the extent it's an introduction of Ziff Davis, I think we can think about it in a number of different ways. But one way I think about it is -- we have a number of different historical legacies. Our brand name goes back 100 years. We own some of the assets from the original Ziff Davis, including the historic name, but our company was founded a couple of decades ago, primarily to pursue businesses and cloud fax services. And they built a business called J2 that ultimately produced tremendous amounts of free cash flow that a little more than a decade ago, we're invested to diversify that revenue stream into Digital Media Services. The first acquisition was of pcmag.com and at that time, our current CEO joined the business and built a digital media business by reinvesting the free cash flow of these businesses into a portfolio of digital media assets that essentially represents Ziff Davis today. Our legacy businesses were spun off in the fall of 2021 into a business called Consensus. So Ziff Davis is a portfolio of digital media assets that essentially serves 7 verticals, tech, shopping, gaming, health, cybersecurity, martech and the connectivity business that serves the global broadband community. Our focus is on generating profitable cash flow, profitable growth through a total growth model that combines both organic growth and growth through acquisition. It's important for us to consistently achieve tangible economics in all of our businesses, producing cash, which can then be recycled through our investment paradigm. One of the elements of our business, I think that's worth and we'll talk about a little bit today is our resiliency, which we achieved through diversification. A little more than 50% of the revenue we generate is advertising and performance marketing. More than 40% of the revenue we generate is subscription and licensing. We've been able to consistently produce adjusted EBITDA margins in the mid-30s and significant free cash flow, which we then recycle through a robust M&A program that we use to generate a significant portion of our expected growth.

Got it. Very helpful. So maybe we just fast forward to this year. Just talk to us about the key events in '24 for Ziff Davis and really what's changed the most here?

So I joined the business 3 years ago. I'm about to hit my third year anniversary. And I think one of -- in listening to that question, one of the things that I think about is very little has changed in that -- if we look back to the fall of 2021, when we spun off Consensus. And we look at our business today, our core philosophies have not changed, our approach to generating shareholder value has not changed. Our mix of assets and the verticals that we serve has not changed. What 2024, though, represented was really return to our robust capital allocation program. So we think of capital allocation as essentially 4 pillars. We can take the investable capital, the free cash that our businesses generate and reinvest in those businesses, that's through OpEx and CapEx, and we believe our businesses do get the capital they need to pursue their marketplace opportunities and pursue their growth plans. We can continue to strengthen our balance sheet, both through paying down debt and generating cash, and retaining that cash, we can return capital to shareholders or we can invest externally. Our priority is to invest externally. And if you look at 2022 and 2023, I would say the most significant element of capital allocation was probably to the continued health and strength of our balance sheet. We paid down debt. We generated cash from the middle of 2022 until the end of '23, beginning of '24. We were very selective in the M&A market and didn't deploy much capital in M&A, and we bought back a little stock. 2024 was really a return to robust capital allocation for our company. We've utilized all the elements of that strategy. We strengthened our balance sheet by paying down almost $140 million of an outstanding convertible. We bought back 3.5 million shares, over 7.5% of our outstanding -- of our shares outstanding. We invested hundreds of millions of dollars in M&A, and we continue to invest in our businesses for them to achieve their growth. So in hearing that question and thinking about that question, I think it's 2 answers. Very little has changed because we're consistent to our beliefs in our pursuit to shareholder value. But what did change is we returned significantly to our capital allocation program, and particularly in M&A, having deployed a significant amount of capital on a number of deals, in particular, the CNET deal, which we closed in September and the acquisition of TDS, which we closed earlier in the year.

Got it. Maybe to move along to just kind of think about the EBITDA growth drivers here. How do you think about key drivers in '24? And maybe as we look out to '25 at this point? Like how could those potentially be differing on the margin?

Yes. There are really 2 elements to the story again. I mean one is stabilizing the top line organically and continuing to feed the top line inorganically. We -- as I just said, we believe that there's been somewhat of a return to our inorganic investment and our acquisition of revenue-generating and shareholder value -- long-term shareholder value generating assets, assuming we do good deals, and that's obviously core to our philosophy. But also, we've experienced low single-digit organic revenue declines in 2022, 2023 and to a degree in '24. And what we're seeing is a reduction in that pressure. We came off the 2020, 2021 COVID period where certain of our assets probably benefited from that unique dynamic in the marketplace, which, of course, was tragic in so many ways, but there was some benefit to certain digital businesses. We saw organic decline in 2022, a smaller rate decline in 2023 and a further reduced rate of organic decline in 2024. So to the extent we can flatten that out and return to organic growth, to the extent we can continue to acquire what we believe are attractive assets at attractive prices and feed that top line, that's part of the EBITDA equation. The other part of the EBITDA equation is managing our costs and managing our investment. And what we've been able to do even in this period of a modest degree of top line and organic pressure is maintain margin. The business, while it's not a hard and fast target, has consistently generated mid-35% -- mid-30%, around 35% adjusted EBITDA margins, and we've done that through selectively determining where we spend, where we pull back and how to allocate our capital to the income statement in addition to allocating it to the balance sheet. So balancing those 2, the top line and the bottom line, again, is core to our value equation, and we've consistently produced real economics. And I think, again, widening the lens for those that may be new to the Ziff Davis story, is those simple -- the most simple element of finance are those 3 statements. We have a strong income statement, significant revenue, strong margins, producing adjusted EBITDA and real profit. We have a very, very healthy balance sheet, hundreds of millions of dollars of cash currently levered at less than 2x gross and less about 1x net with significant capacity in the balance sheet to pursue capital allocation alternatives, particularly M&A. And we have a very healthy cash flow statement where we produce significant amounts of after-tax free cash flow, which we can recycle through our capital allocation program.

Got it. And maybe just on the cost side of things for a second here. Can you just talk about the efforts that you took to rightsize the expense base in 2Q? And should we be expecting to see the full benefit of those efforts starting to show up in 4Q this year?

Yes, when we think about that, and we talked about that on our Q2 call because it was -- we had a couple of pressures in the first part of 2024, some in our shopping business, some in our health business that were a little unexpected. And we did make certain adjustments in the spring, in the late spring of 2024 on the cost side. And we continue to do that throughout 2024. In fact, selectively, it's done at different points in time in almost any year. You did see some of that benefit even in the third quarter, where if you looked at our adjusted EBITDA margins year-over-year, they were improved. And again, it is a balance amongst our various businesses about at any given point in time, when to push forward, when to pull back, when to invest in the income statement, when to pull back some of that OpEx investment in order to continue to achieve our margin, our profit, our cash flow goals even in periods where the top line might not be meeting our expectations.

Got it. And then maybe just moving on to investment priorities. Can you just talk about the key investment priorities in '24? You've talked about M&A, maybe just as you think about that balance of investing in organic versus deploying capital for inorganic, how should we be thinking about those maybe potentially differing in '25 as we look forward?

Maybe a common theme, maybe not differing at all. In that, it starts again with that healthy balance sheet, but we have more -- we believe we have more than enough capacity to support all these programs. This is the time of year where you start finalizing plans for 2025 budgets, whatnot. So we'll work with our various management teams to ensure that we have a plan that allocates capital to them -- for them on a budget basis to achieve their goals. We will prioritize the acquisition of what we believe are businesses that are both accretive financially, but also strengthen our presence in various verticals to continue to allow our businesses to meet, if not exceed their long-term business expectations and business plans. So M&A will be a priority. And when and where we see what we believe to be a disconnect between the intrinsic value of our shares as they're trading in the market versus what we believe they might be worth, we'll allocate capital to buy back those shares, which we did this year in a significant way.

So yes, we've touched on -- kind of touched on the uses of cash, investment priorities here. Maybe just as we move along to the advertising business, which as you called out, makes up the majority of revenue here. Obviously, that Advertising segment has been the primary benefit, I think, kind of the sole beneficiary of acquisition activity this year. Can you just talk about the ad vertical? And I guess kind of the level that you've seen year-to-date, like what could we be thinking about as this returns -- as the potential for this to return to organic growth?

Yes. I think the ad market overall in 2024 as compared to 2023 and 2022 has not been a headwind. I think we've -- if you go all the way back to when I joined the company in January of 2022, there were significant global economic headwinds that relate to supply chain, inflation, rising interest rates. I mean, obviously, there's still tremendous instability and risks throughout the market, global conflict and it certainly should never be -- these regional conflicts shouldn't be ignored and fears of inflation and what happens with interest rates, but the advertising market has become a little bit more benign. Our exposure to advertising is in very specific subsectors of the overall market. So I wouldn't say that Ziff Davis' expected performance should map the overall digital advertising market because we're more exposed to subsectors. Our health business is about 40% of our advertising business. Our health business is -- the largest source of advertising revenue is pharma. We have one pharma advertiser early in 2024 that essentially retreated from the market. And that is probably -- that's a dynamic that we would expect to lap going into 2025, and therefore, that specific element wouldn't be a pressure. We participate in digital e-commerce in a meaningful way. It's about, call it, roughly 20% of our advertising business. And digital e-commerce is a robust market, but we saw 1 or 2 hiccups early this year with 2 large partners of ours. Again, not a dynamic that we would expect in 2025, so we sort of lap that. Gaming has been a healthy business for us. Gaming is a business that, though, is very product-dependent and ebbs and flows with introduction of product to their respective marketplace. It's been a solid, if not strong area for us. And we see opportunity for that business going forward. And then our technology business has really been a tale of 2 businesses. We have a B2C business that PCMag, Lifehacker, Mashable or our primary brands, we've just significantly invested in that business through the acquisition of CNET. The combination of CNET and our existing B2C technology assets, we believe, further strengthens our presence in that marketplace and bringing those 2 brands together, actually under the CNET banner and CNET brand name, we're using that brand name across our businesses, we believe, strengthens our position in the marketplace and allows us to further serve the advertising community that we were already serving. They have a B2B element of the business which we picked up. It's a smaller element, ZDNet, actually goes back all the way to its extended history of our Ziff Davis name. But that will be part of our B2B approach to the marketplace. And where we've seen the most pressure in the 2022, '23 and even '24 period is our B2B technology assets. Our primary brand in that space is Spiceworks. We're a lead generation business, primarily other lead generation businesses serving enterprise tech have had pressures in the last couple of years. We have not been immune to those. And in fact, while we were relatively -- we were flat, I believe, in the first quarter year-over-year 2024 in that business. It was a pressure in Q2. It was a pressure in Q3. And with regards to that business, one, it's becoming a smaller part of the overall hole. So as we look at lapping some of the dynamics in '25 against '24, it shouldn't have a significant impact, but we are finalizing plans to more streamline the product set that we use to approach that marketplace and actually employ a strategy that we use often in our M&A program, which is [ shrink to grow ]. So that combination of factors, healthy markets that we serve, lapping a couple of unique elements in 2025 relative to 2024, we believe can continue to move us down this path of improving the organic performance of the businesses.

Very helpful. Maybe moving along kind of sticking on the advertising side, though, but Gen AI has often been in the conversation with Ziff Davis here. Maybe just thinking about it on the content creation side. Ziff Davis is always kind of prided itself on the premium nature of its content. So I guess my question here would be, how do you think about the evolution of Gen AI for content creation over the last year how, and how has that impacted how you think about its place within Ziff Davis and its content creation process?

Yes, it's -- Gen AI in that aspect of our business is a tool. It's not -- we don't -- we absolutely don't view it as a replacement. Content generation is human-centric and we have incredible talent within our organization, that to create the authoritative content and the authoritative voices that we use to serve our marketplaces with the important information that consumers -- primarily the consumers and businesses use along their purchase journeys. And Gen AI can enhance that aspect of content generation, but it certainly does not replace that aspect of content generation. However, Gen AI is -- has impacts across our businesses. And what we do, do is throughout our portfolio of assets are increasingly using the capabilities of artificial intelligence to enhance the way our customers can interact with our product sets. We see it significantly in our B2B related businesses, whether it be our Ekahau business, which works with entities to optimize wireless networks. There's complexity in our models in the information we provide and Gen AI create some more natural language interface that allows our customers to interact with our products. We're seeing that in our Ookla business, developing products, for instance, in our Downdetector business, where again, your tremendous amounts of data and information that needs to be processed and synthesized in the messages that our customers can consume with regards to the uptime and performance of various networks. And we see it in our consumer products. And one of the great examples of that is using Gen AI to create an ability on our Lose It! app, which is an application that supports healthy living primarily through weight loss. One of the elements of Lose It! is to log the food that you're eating and we created an interface, a natural language interface using a chatbot that allows you to interact with the app by simply telling you what you're eating rather than trying to scroll through menus and icons and log exactly. So I think it's not so much a tool for us for content generation as it is a tool for us to improve the way that our various communities interact and consume the products that we offer them.

Got it. And maybe just kind of the other side of the equation would be how Ziff Davis plays in the search space. So I guess, AI overview, as we think about Google on the 3Q call, you noted that you're seeing less than 10% of your top queries, included in an AI overview. Can you just talk a bit about the traffic trends within those queries versus other searches that really don't include those AI overviews?

Yes. It's a complex question. I think it's almost a wide in the lens moment, which -- which I think it's important to remember that search has been evolving for decades and it will continue to evolve. And search is not a single variable equation at the end of 2024, where the only impact upon it is the introduction of Gen AI either into the traditional search platforms or through the introduction of new platforms. And it's also important to kind of step back and say, we generate traffic in numerous ways and search isn't the only one. We have apps. We have e-mail. There's obviously direct connections. We have communities that we serve that go direct to our sites. But what we've seen -- we've seen a number of things over the last 2 years with regards to the impact of the integration of Gen AI into search. What we have not seen is a massive substitutional effect. And the comments that you're referring to, I think, point to what -- when we query our most frequently used keywords, we're only seeing about 10% of those keywords trigger snippet-based responses. And even then, to the extent that those responses embed links to the underlying sources of that information, you almost see an increase in traffic. And one of the elements of Ziff Davis is that we have brands that are not only have high authority in voice, but they have high domain authority. And these are typically 90 scores of 90 to 100. And in -- within the -- these AI chatbots, it appears that sites with the highest domain authority do tend to rise above. And so we could be a net beneficiary of that over time. But again, this is one element of a complex equation that will continue to evolve over time. And we plan to continue to position ourselves in terms of creating content that rises above the din and finds its way into the search results to benefit from enhancements to search.

And maybe just to follow up on that really quickly. Are you at the point where you're paying to be included? And just kind of thinking about the SEM side of things, like are your competitors paying to be included? Or is that purely organic at this point where folks are being included within the AI overviews?

Within the AI overviews. No, not to any -- name folks, I mean, obviously, paid marketing is a big part of overall search optimization, and we use it to a degree. We actually have a business, our Moz business, which serves the search community and the marketing community in providing solutions and how to optimize results, but that has not been a big factor to date.

Got it. Maybe switching to the other -- or the other key chunk of the business here, the subscription side. This has been a consistent low to mid-single-digit growth business for -- throughout this year. I guess, can you just talk about the drivers of this growth from either a business consistency perspective and just kind of considering the cybersecurity, martech has been in decline?

Yes. So importantly, our subscription and licensing businesses are 40-plus percent of our overall revenue. And while we're often viewed as sort of a digital media company, digital advertising company, it shouldn't be lost that such a very significant portion of our P&L is represented by businesses that generate highly repeatable revenues through subscription and licensing. We have a number of different businesses that contribute to that. We'll call out our Ookla and our connectivity and broadband businesses. This is businesses that provide solutions primarily to the carrier communities around the world and has been a growing business for us sort of consistently and over time and contributes to that growth. Within our Digital Media businesses, we have a couple of other pockets of subscription revenue. We already talked very briefly, but we talked about our Lose It! app, but also there's -- within our gaming business, our Humble Bundle business contributes to subscription and licensing revenue, and both of those have been growers. Our cyber and martech assets have not been growing. And in fact, we -- that's a separate reportable segment that our results should be clear to our observers. But I think importantly, there are pockets of growth within those businesses, including our e-mail marketing business. But there's also a continuation of the shrink and decline. If you look at the rate of decline from 2022 to '23, '24, there's improvements. We've seen stability in certain of our businesses, including our B2B security business, where we've seen pressure is our B2C privacy business, our VPN business, but even then sort of improvements over this period of time, but not yet to the point of flat and returning to growth. I think going into 2024, we had expectations of sort of achieving flat and growth probably sooner than we're currently on a trajectory to. But again, the trajectory is positive in that the rate of decline is shrinking. It's also a couple of small runoff businesses in there that have a slight drag on growth. But we're seeing contributions to that rate of subscription from a number of different areas. And again, a number of them are growing healthily.

Understood. Let's go back to the inorganic side of things. On the 3Q call, you seem to kind of indicate that the bid-ask or valuations on the deals are moving back towards pre-COVID levels. Can you just kind of talk about what is driving this?

Yes, I think what we're seeing is the potential for activity is moving back to pre-COVID levels. I think what had characterized the M&A market in 2022 and 2023, more than anything else was probably a disconnect in valuation expectations between buyers and sellers. It was relatively easy in 2022 in the digital media market, in particular, in certain other markets that we participate, we're under pressure to almost ignore the current level of business activity, point towards the past and point towards the future to maintain valuation expectations. This was also a period of rising interest rates, rising cost of capital. And I think it took the market a period of time to digest that the impact of cost of capital is not temporary and had to be factored into valuations. As you got past 2022 into 2023 and we might have seen some moderation in pressure but yet to return to healthy business performance. Generally, sellers weren't ready to reset expectations of value. As we moved past '23 into 2024, I think what we've seen is buyers and sellers generally come closer together with regards to a reasonable valuation expectations. And we've been able to execute a number of attractive deals. We've done -- 2 large ones this year, TDS and CNET, a couple of smaller ones. We actually did a very small one in late this year that will impact our subscription marketing revenue. It's -- we believe the market is just becoming more conducive to potential activity. We approach this market in a number of different verticals with an extremely healthy balance sheet, with a perspective that we can generate value creation in a number of different ways by enhancing our ability of certain of our businesses to generate revenue in marketplace, sometimes rationalize the expense side of a P&L, sometimes bring 2 brands together that makes those 2 brands even more prominent in the marketplace and even enter new markets potentially because we -- when we go back that 10-plus years that I mentioned, we weren't in any of these 7 verticals. We entered all of them at different points in time. Having the firepower to affect acquisitions, having the historical perspective on how to consistently generate value through M&A and having a market where buyers and sellers expectations of values coming closer together, we believe puts us in a good position to continue on the success that we had in M&A in 2024 as we enter into 2025.

Well, Bret, I think we are right here at time. So we'll go ahead and wrap it there. Thank you so much for the time, and look forward to doing it again next year.

Thanks for having us.