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

Thanks, everyone, for joining. Ygal Arounian on the Citi Internet team. I'm really pleased to end off today with Ziff Davis CEO, Vivek Shah. We've got Dan Stone, President of Health and Wellness joining us today, too. So we'll dig into that segment a little bit more. Thanks for being here with us today. We'll have some Q&A also at the end for anyone that wants to ask a question. So thank you for being here. It's great to be here.

I think usually, the way we do this is to kind of let you kind of kick off the story and walk through the Ziff Davis story. One thing that may be different this time, a couple of quarters ago, you resegmented the business, give some new segment breakouts. So maybe let's start from there, why you did that, what you want investors to know from that and helping understand the story and just kind of like the key drivers of the story for you.

Yes. No. So as you know, Ziff Davis is a serial acquirer of Digital Media, Internet and Software Businesses. And so like over the last 10 years, we've done a little over 70 acquisitions, but all of those acquisitions have been integrated into 1 of 5 operating divisions. So those 5 operating divisions each has a President. Dan Stone is the President of the Health & Wellness operating division, which is our biggest division. And so the idea here was really we wanted to give to the investment community insight into how we run the business and in terms of how the business is organized. And what we're hoping is that investors will take some time to study each one of these businesses in some depth. They have differing growth characteristics and margin profiles and opportunities. They're in different market spaces. There may be different valuation dynamics. With the hope that what ultimately happens is as you assess each of these, you get to a really clear view of the intrinsic value of the company. And when we think about these 5, and I'll talk about each just for a second and just to level set, I'll start with the Health & Wellness segment. It's an HCIT platform that does pharma commercialization and Digital Health and Wellness. It's an exciting business. Dan will talk about it. But I think from the outside, until you spend time looking into the dynamics, you may not get a full appreciation of what it actually does. We have our Connectivity division, which is anchored by the Ookla Group. And this is a data and analytics business that sits really at the center of the broadband world. So cellular networks, wireless networks really do rely on the solutions, the data and the tool set of the Ookla business. We have our Tech & Shopping business, which has CNET and RetailMeNot as the anchor brands. Think of that as really a driver of e-commerce and driving a ton of affiliate sales. We have our Cybersecurity & Martech business. And the Cybersecurity & Martech business is a collection of software businesses, high recurring revenue, great margin profile and particularly on the Cybersecurity side, some interesting emerging growth characteristics. And then last but certainly not least is our Gaming & Entertainment business anchored by IGN, which I would argue is the leading brand in Gaming and Gaming is the fastest-growing segment of the Entertainment industry. So similarities, but a lot of differences. And so I think one would be rewarded spending time kind of looking at each of the pieces. And so -- the other thing that we're committed to doing, and that's why Dan is here with me today, and this is the first time we've done this, is to bring out the various executives that we have. They're a world-class team, introduce them to the investment community and have them tell more of the story.

We'll rotate one per year for the next 5 years. Is that the -- I don't know [indiscernible] that long. But okay. So you had a good 2Q, nice improvement in 2Q. Revenues were up 10%, adjusted EBITDA was up 12%. Really the strongest quarter you've had in a little while. Can you talk about the drivers of that and the outlook into the second half, kind of the sustainability of that improvement.

Yes. So we talked about the 5 segments. 4 of the 5 grew. That's important. The fifth that didn't grow was essentially flat, which is Cyber & Martech. So we need everything pointing in the right direction. So 4 out of 5 was good for us just given some of the more recent history. Two of the segments were sensational. Dan grew 16% in the quarter in Health and Wellness and Connectivity grew 14%. Now that's not new. These -- if you look back and we've disclosed a fair amount of historical financials at the segment level, you look at the multiyear CAGR, these are been good growers. This was a particularly exceptional quarter for both of them, but these have been consistent growers. So this hasn't been just a single quarter for them. But -- so they help drive a lot of the growth we saw in the quarter. EBITDA was great. Everybody was up, 5% to 20-ish percent EBITDA growth across each one of the segments. So as you know, we have very much a bottom line orientation and a free cash flow orientation. So in many ways, I'm prouder of that dynamic organic growth, which, as you know, we are a total growth mindset. We look for growth organically from the businesses we own. We look for inorganic growth through acquisition. We look to create value and unlock value through those acquisitions. And so that combination, I think, came together really nicely. So it was a great quarter.

Okay. Good. And sustainability of that and the outlook for 2H?

Yes. So look, I think -- I mean, if you look at our guidance, we're looking at mid-single-digit growth in the second half. We feel comfortable with at the midpoint, which we feel comfortable with. Q4 will probably be a little bit better than Q3, seasonally the stronger quarter, as you know. So no, we feel good. And it's just that it is that combination of making sure that the businesses we own are performing. And then obviously, the businesses we've recently acquired are growing according to plan. And then if there are acquisitions that aren't within the guidance range, that would represent some upside.

Okay. Great. All right. Shifting to Gen AI, big topic. I think I asked you this probably a little too much, but I'll be forced to keep asking you as long as...

If everyone is asking you.

People are asking me about it. So Gen AI impact -- Gen AI search impact on traffic to publishers has been one of the largest topics we've heard from -- been hearing from investors and Wall Street and really the whole digital advertising space as well. And there's clearly been some impact there. You've given some frameworks for how that's impacted your properties. I'll let you speak to it, but you've got a good amount of non-search revenue organic and how that plays out. So what are you seeing? Maybe you start from kind of the market as a whole and the digital publishing ecosystem for Ziff Davis in particular? And then how do you think this evolves in the coming years?

Yes. So I mean, I think the first thing I would do is connect this question to the first one, which is when you hear what the company actually does, much of it doesn't apply to this question. So that's the thing that I just want to reinforce, which is a business, we have multiple monetization models. We have advertising for sure. We have performance marketing, we have subscriptions, we have licensing and that selling ads on web traffic, which is what everyone is talking about, isn't the majority of what our company does, right? And so as I've disclosed, 35% roughly of the company's revenue, I would put into the category of being web traffic dependent. So that's where this question may reside. Within that, 40% of that traffic comes from search. And so there's absolutely -- so 15%. So there's absolutely no question that there's a bunch of things happening in search, lots of search engine result page, SERP, volatility, some owing to generative AI and AI overviews, others owing to just changes that Google is making in the search UX...

Which has been the case forever.

And the thing that I point out is what we're all talking about is zero-click search, right? So this is where a user enters a query and clicks on nothing. This is not new. 5 years ago, I was talking about this. No one was listening 5 years ago, 65% of search queries 5 years ago resulted in zero clicks. 10 years ago, that statistic was zero. So from 10 years ago to 5 years ago, that world changed. We changed ahead of it with it. And so now that, that 65% is 70%, that's not to me a big change. The big change already happened. And the way that you, I think, react to that change tells you a lot. For us, it was diversification of business. For us, it was the diversification of engagement. So app-based businesses, Ookla, BabyCenter, these are app we Lose It!. These are app-based businesses, e-mail getting into inbox. We're very much an e-mail-oriented entity. Social, what are you doing on Facebook and what are you doing on Instagram and what are you doing on TikTok and what are you doing on Snap and how are you cultivating audiences and monetizing those events. I mean, there are a series of things that we've been doing well before zero-click search entered, I guess, the investment mindset. But -- so I don't view any of this as new. And the fact that we don't have the exposure that you're hearing about and being asked about, I think is really important because I think most don't see that. And I think a lot of the issues that we confront as a company, particularly from a valuation point of view, is the idea that all of those risks that they're seeing have an undue impact and area of concern for us. So look, obviously, there's a lot of change. I think the ruling yesterday is interesting, the Google ruling. In many ways, I think that's favorable because in the end, what was at stake were basically the default engines of the 2 largest browsers in the world, Chrome and Safari. They're not browsers anymore. Those are search appliances. The first thing you do, none of you type in a URL. You type in a query into the OmniBook. And that in the hands of Google to me is better because Google, for all of the issues that publishers may express has always understood there needs to be a value exchange. We crawl this content, there needs to be a value exchange. And so they've always been focused on delivering traffic. Yes, there's volatility. There have been changes. They will tell you the gross amount of traffic they send goes up every year, while the percentage of zero click goes up, which means there are more query volume.

Okay. You're leading me on a little bit. Just on the topic of LLM partnerships, there have been 2 approaches. One is to partner, one has been to not, and you guys have chosen the latter.

No, no, no. We would love to partner.

Okay. So go ahead. I'll leave it there and you -- what your approach has been...

Yes. No. I mean, look, obviously, we're engaged in a lawsuit against OpenAI relating to what we believe is violation of copyright, trademark dilution and violations of DMC Act. That is not though -- that wasn't without trying to at least come to some amicable resolution around compensation for our content. We believe that we should be compensated for all uses of our content, not just for what's referred to as RAG, but also for training. They do the same things. It's just different points in time, but there seems to be this bifurcation in the market of maybe we pay for RAG and we're not going to pay for training. And we believe fundamentally both need to be compensated for. So that's a difference of opinion, and we'll need the courts to ultimately weigh in. But the second thing that we're doing, and we're certainly not alone, and I give Cloudflare a ton of credit. Cloudflare has developed a technology to allow at the CDN level, blocking of AI crawlers and bots. And so we've engaged those as well. And so those -- the garbage in, garbage out phenomenon that's well known in computer science, I think, applies here. I think if the LLMs are deprived of quality content, then that's also going to be, I think, a forcing function to have serious discussions around compensation. So make no mistake, I view this as a business opportunity. I just think it needs to be fair compensation.

Got it. Okay. Let's move on from that, Dan, let's talk a little bit more about Health & Wellness segment. Maybe kick things off with the broader overview of Everyday Health Group and its properties.

Sure. So Health & Wellness is the largest of the 5 segments. Our trade name is the Everyday Health Group. And our mission is to help improve health and clinical outcomes on the back of our trusted brands, content, data analytics, and we serve 2 audiences, health care professionals and wellness-seeking consumers. And as I talk more about our business model, that's really important to do both. And we're one of the few people who actually do both. In terms of size, as you know, we just started reporting and our LTM revenue is about $380 million, about $142 million in EBITDA on that, which is -- so we generated in the 37% plus EBITDA margin range. Our CAGR since 2020 on the top line is about a little over 9% a year. And as Vivek mentioned last quarter, we were happy with the 16% growth for the quarter. We look at the market in 3 verticals, 3 health care verticals. We have pharma commercialization, which is helping pharma bring drugs to market and sell their drugs. We have Digital Health and Wellness, which was generally dealing with consumers in conjunction with pharma or independent of that, getting healthy, which is a booming market. And the third is provider services, which is providing services directly to providers. The first 2, pharma commercialization and digital health and wellness are by far our 2 biggest, and that's what I'm going to spend the most time talking about. And then in terms of the way we're organized, we're organized by market platforms. We have a professional market platform whose job it is to engage with health care professionals. There are 1 million doctors and there are 2.5 million more registered nurses and allied health. Then we have a consumer business, which is general consumer wellness. And then we separate out pregnancy and parenting. We kind of own that vertical with our what to expect in BabyCenter apps and other products in that vertical. So that's how we go to market.

Got it. Okay. And how is EHG positioned to win in the markets you compete in? So in particular, can you expand on pharma commercialization. Vivek, I think you expanded on that on your last earnings call, so it feels still more relevant.

So let's start with what the pain points are for our pharma clients. It's not gotten any cheaper to actually develop drugs yet the way to be successful is getting narrower and narrower. It's harder and harder. They go through all the clinical trials. They spend all that money, yet now they're dealing with formularies and insurance companies that they're either in or they're out. The windows of exclusivity are narrowing. So they have a pretty short window to engage the right customer. And that's what we're good at. So the model goes is we target, we engage and then pharma is very good at measuring. They use third parties to measure the degree of engagement with the right target audience. And then we have deep analytical resources that basically creates a virtuous cycle where we refine our targeting based on the results of our clients and our ability to deliver them the audience they need. So this is -- cuts across a lot of different types of products. We have one in the -- it's called clinical study space for our pregnancy and parenting business. So we reach virtually 90% plus of pregnant women in the U.S. at any given time. It obviously -- it's an evergreen audience. And we have a clinical studies business where we're working with contract research organizations, large publicly traded companies who are asked by pharma companies to identify pregnant women to do what are called pregnancy exposure registries to ensure that drugs post approval are safe for pregnant women, and they're doing this on an ongoing basis. So they came to us to help identify women in different trimesters for them to do these studies on. So we work with them. It's just an example of because we're so targeted and because we know how to engage our target audience, we're very valuable to them. Another trend in the industry is for pharma companies to develop plans to reach -- to link their approach to health care professionals with consumers. So they have campaigns and try to see how it interacts because they need to educate the health care professionals to -- on their drug, on their treatment, and then they need to educate consumers to ask their doctors to use it. And we're one of the few companies that has both of those assets, very strong assets to reach both professionals and consumers. It's increasingly in demand and increasingly separates us. And I'd like to expand on the comment that Vivek was talking about no click search and stuff. It's funny because as you're asking the question, it's something I don't think about because my job is to target an audience and engage them and then have it measured. And there are so many different ways we do that. If it's not one way, it's another, we're really more focused on the goal. So I read about it all the time, but it actually is not the way we think about it every day. The world changes in so many different ways that we just -- we evolve with it.

Okay. Got it. Maybe then just to kind of come back on that on how you're leveraging AI or Gen AI within your business, whether it's customer-facing or internal.

Sure. So I should also mention the second big part of our business is digital health and wellness. So we have the BabyCenter app, the -- What To Expect app, the pregnancy trackers. We had a very successful acquisition in 2022 of Lose It! which is a weight loss app, which, by the way, when the GLP-1 drugs that everyone reads about started to become popular, we were concerned that weight loss was [indiscernible]. But as it turns out for anyone who is familiar with GLP-1 drugs, it's really good at getting to stop eating. It's not really good at telling you what to eat when you do eat. So you can eat popcorn and it will make you full. So that business has never been stronger. And it's a perfect example of the use of AI. So it used to be -- essentially, you're creating -- you're tracking all your calories based on what you eat. So if you have a plate of food, you go to a Mexican restaurant, you have beans and rice and tortilla, et cetera, it takes a long time to log all that and figure out how each of it weighs. AI, you take a picture of it and the AI converts it to a calorie count, which is incredible and which has really just juiced that product and just made it easier for everybody. That's a customer-facing example. Another customer-facing example of a product called Halo. We literally take RFPs from pharma companies and insert them into this AI bot. And then it looks at all the audience across all of Everyday Health and across Ziff Davis, develops -- immediately develops profiles of what the profile is, uses Susan as a profile that describes the target audience. And then we can deliver -- it shows how much we can deliver in terms of impressions at any given time. And that is just hitting the market. We're actually -- there's a first Pharma conference in Boston next week, and we have a luncheon that we're rolling it out. And it's a huge success of a customer-facing product. On the inside, our editorial teams, we don't use AI to write editorial, but it helps us develop headlines. It helps us develop keywords. It helps develop summaries. It just makes the process more efficient. And then we use it, we have internal e-commerce businesses and subscription businesses. And in real time, we can test ad copy to drive purchases and customers to our products and change it out immediately based on its performance using an AI model.

Are you -- is that available to the other businesses also? Or is that...

Yes. So I talked a little bit about this, I think, in the last call. So Halo is the first implementation of the technology. The technology was actually developed corporately, and there will be implementations at...

Thing you guys were talking about...

In IGN Entertainment and then within CNET Group and RetailMeNot...

But Halo is the EHG version. And that's where you're starting with that.