My name is Rishi Jaluria. I cover software, and as Vivek likes to remind me, also digital media-
Correct.
here at RBC. So I'm delighted to have both Vivek Shah, who's the CEO, and Bret Richter, who is the CFO of Ziff Davis. Thank you, guys, both for being here.
Great to be here.
Thank you.
All right, maybe let's start with a little bit of a high-level overview of what Ziff Davis is for the generalists in the room, and then we can start diving deeper into some topics.
Yeah. So Ziff Davis is a vertically focused digital media and internet company. We operate roughly 40 brands in 7 different vertical categories: tech, gaming, health, cybersecurity, marketing, technology, connectivity, shopping. Very acquisitive company, so I'm sure we'll talk a lot about our serial acquisition programme. About a 60-ish%, advertising-based business, and the balance in subscriptions. And really, the company, while it's about a century old, started as a magazine publishing company by Bill Ziff and Bernard Davis.
It's really undergone a fundamental transformation, really starting in 2010, when I had acquired PCMag, which was the last remaining original Ziff Davis brand, and again, in 2010. And from there, we've acquired everything that's in the portfolio today. 100% internet, so there's no more print inside of the business.
Yep. No, I think it's a great place to start. Maybe let's start with the number one, your kind of programmatic acquisition strategy, right? How you go about identifying the right targets, the right fits, and any updates in terms of just what does that M&A pipeline look like today, especially as we've been in this kind of macro uncertainty for the past 4-6 quarters?
I'll start, and then, Bret, you know, fill in some blanks.
Absolutely.
So, from a sourcing point of view, that's probably where I would start. So, across the seven various verticals we have, we have general managers and deal sourcing teams at each. So we look for each one of our operating units to identify acquisitions that they feel would fit within the business, where we can extract some kind of value that we think is actually unique to us, and whether that's a monetization element that we can bring, whether there's a cost synergy, hopefully some combination of the two. We're looking for assets within each one of those verticals, so there's a fair amount of sourcing that goes on there.
On top of that, at the corporate level, Bret and I and our corporate development team are looking for opportunities that may be new vertical opportunities for us, and we've had a few of those, obviously, in the course of our history.
What I will say is that, we're very much a disciplined buyer, so we're looking for businesses where digital transformation has created, we think, a value creation opportunity. And that's one of two things: either the business has struggled with digital transformation, and we see an opportunity to help the business, or it's a business that has done well, but we think we have a path to accelerating their growth.
Very much, cash-on-cash returns in orientation. As you've heard me speak about in the past, we look for, at minimum, a 20% cash-on-cash return. In this interest rate environment, I'd argue we're looking for more than that. So we often look at a, you know, 3x multiple on our average cost of capital, and so obviously that creates a higher hurdle rate in this environment.
Which probably answers then the second part of your question, which is: how are we thinking about the current pipeline? And because our hurdles are elevated, I think it makes it a little harder, so I'll start there. And so we have. We've been even more disciplined. We've been more focused on seeing better returns, just given the interest rate environment. But also, I would say that there's still a disconnect between buyers and sellers. The bid-ask spread is narrowing, in my opinion, but it's still wide. And I think that has... And that, by the way, that's not just us.
I mean, I think that's anyone who, you know, is very active as an acquirer will tell you a similar thing. I think a lot of that has to do with letting the current reality settle in. We're coming on now two years in terms of this macro, and I think it's beginning to settle in.
I think the reality, too, is that for businesses that need capital, they're finding that difficult. And so if that's the right business for us, in which we think we can, we can put the business in a position to be generating free cash flow, that'll be the kind of opportunity that we look at. Bret, what did I miss?
No, I don't... You certainly didn't miss anything. But the only, the only thing I'd add is that M&A is a core tenet of our overall capital allocation strategy, which really starts with a business philosophy of ensuring that we're creating value within the businesses we own. So we're not seeking growth for growth's sake. We, we run our businesses for profitable growth.
Overall, if you look at our P&L, our Adjusted EBITDA margin's in the mid-thirties, we produce real after-tax free cash flow that we can reinvest in our business. When we think about capital allocation, it all starts with a healthy balance sheet, and our balance sheet is healthy. We have a, a metric we use, say we won't lever the balance sheet at more than three times gross leverage. We're at two.
Our net leverage is less than 1.7x, even less if you count some of our, non-cash investments. And we look to our businesses to generate that after-tax free cash flow that we then cycle back through the system. First and foremost, we make sure our businesses have the capital that they need to pursue their growth opportunities, whether it be OpEx or CapEx, and, we try to fund our businesses to the extent we see opportunities in the market. And then the balance of our capital allocation is M&A and shareholder returns. We will use capital for shareholder returns and even stakeholder returns.
We bought back debt last year, we've bought back stock, but our preference is to deploy that capital through our M&A program, and we will, you know, travel through this current environment, which is depressed for all buyers and all sellers.
Every metric that you see in the market, 2023, another down year. We're not alone in this environment of not transacting. Ultimately, we think our patience will be a premium. And, you know, as we approach and enter 2024, we're ready and to act with conviction when we see opportunities.
You know, Bret said something that I just wanna add to that's important. The way the company's organized, we have about 4,300 employees, and about 60 of them are in corporate, so the rest are in the businesses. So a highly decentralized company. The businesses really have a fair amount of autonomy. They own their P&Ls.
However, the cash all comes upstairs and all capital allocation decisions are done corporately. It gives us the benefit to really choose amongst the various businesses and the various ideas that come forward for capital.
Yep. Maybe alongside that, how do you weigh the decision of deploying capital into an existing business unit and kind of adding on to existing areas you were in, or doing like what you did with Everyday Health, and maybe to a lesser extent, RetailMeNot?
RetailMeNot, yeah.
- and going into what is relatively a brand new-
A new vertical?
Yeah.
I prefer the former, to be perfectly—I think it has less risk, right? Because if I'm within an existing business with an existing team that has a playbook that we can apply to acquisitions that are tucked into or part of that operating platform, much better.
And so generally, you've seen historically over the 80-some-odd acquisitions we've done, nearly all of them fit within the profile of within a platform. When we look for a new platform, it's gotta be really, I think, kind of priced to perfection, and it needs to be something that we have an extreme amount of confidence in. And really, over our history, it's really been those two. It's Everyday Health and RetailMeNot, the larger transactions, both of which have worked out exceedingly well.
So in those, I think we have to see a lot of the elements that we see in our businesses, the ways in which we generate audience, the ways in which we extract monetization, the ways in which we can diversify revenue streams, the way it can be a platform for future acquisitions, right? As if those characteristics are in place, then we'll go do a platform deal, but my bias is towards the former.
Yep. No, that, that makes sense. Bret, you talked a little bit about... alluded to the macro environment. Maybe let's dive deeper into that. Outright, are macro trends getting better?
Compared to when? So 2022 was extremely challenging, and, fortunately, you know, we're past things like, or we appear to be past supply chain disruptions, high inflationary environments, rapidly rising interest rates. We're all monitoring what the next action might be of the Fed, if there's another uptick or when's the first downtick.
But 75 basis points a meeting doesn't seem to be the environment we're in. 9% inflation is behind us, so the macro has gotten better. When we looked at 2023, both on a comparative basis and absolute basis, we thought the back half of the year would show some stability relative to the front half of the year. The quarter we reported last year, our top line validated that assumption.
That being said, I think we're still short of good, and also it is specific to certain verticals. Our tech business continues to be pressured, while we've seen strength in certain of our other businesses. So on a relative basis, macro has gotten better, and we can't ignore, you know, the crises that are happening around the globe, the tragedies that are happening around the globe, and what impacts those might have if they continue or they spread. But on a relative basis, Q3s look better than many of the quarters that are behind us.
Yeah, and look, I'd zoom out a little bit, right? I think the last two years we've been essentially flat, where we've had, you know, sort of mid-single organic declines in the existing portfolio, offset by some acquisitions. Generally speaking, considering the ad macro, I think that's actually outstanding. Prior to these two years, we were growing in excess of 20% a year, compounded top line at a 35% margin.
I like to believe that's the company that we are, and I, and I think when an environment cooperates... And two things, it's the advertising market that's been challenging. Within the advertising market, Bret said it, the tech, if you look between 2021 to now, if you take this kind of seven quarters, I believe tech's about 500 basis point headwind in revenue for the company.
So it's been a significant challenge, that particular one vertical. The rest has kind of offset that. So again, I think it's been concentrated. And the second piece is we've done very little M&A. So again, as you know, you've heard me, our target growth is 15% top line, half organic, half inorganic, mid-thirties EBITDA margin, you know, 50-ish% free cash flow, true free cash flow over EBITDA yield at a gross debt, you know, cap of 3x EBITDA.
So, you know, we've got a lot of flexibility and room in a lot of that. I think, if the environment cooperates, you know, this quarter being organically flat after, you know, 6 quarters of not, I think is an important sign for us. And to me, I always focus on slopes, and the slope is good.
Yep, got it. All right, I wanna maybe pivot to a number of generative AI questions. I'll start with, I'd, there's kind of a bear case out there that generative AI is gonna replace search, it's gonna replace content generation, therefore, that's gonna be negative for digital media business. What are your thoughts on this? And I guess, well, I'm guessing you disagree with that statement. Why would you disagree with that statement?
Look, I disagree with the statement, but I'll give the fact-based answer. And so over the last two calls, for those who have listened, we've done a fair amount of analysis and shared that analysis that I think should support my view that this concern is not only overblown, it may be the opposite. So what we did two calls ago is we looked at Bing.
Bing is the only search engine right now in broad release that is a generative search engine, where its results are a combination of traditional search results as well as a generative portion. Our referrals from Bing are up 60% year-over-year, and the Bing underlying traffic growth is nowhere near that.
So Bing has grown in usage as people are using Bing more, but the search traffic we're getting out of Bing is higher. So that was the first thing we looked at, which is, well, let's look at what is a real-world case. This last quarter, we did some expanded research to try to understand how often generative search shows up in Bing, what percentage of queries creates a generative response, a generative AI response.
And we did the same with the SGE experience, which is the generative experience in Google, inside of Google Labs, which is not in broad release, but we can track that. And against our highest value keywords that represent the most amount of traffic we get from search, it was about 20%-25% of queries even generated a generative response.
So the incidence rate isn't what I think people had anticipated, and that's actually going down. Okay, then we said, "All right. Well, when there is a generative search return, what is the click-through rate on a generative search return versus a traditional one?"
Cannot do that for Google right now 'cause you cannot distill the Google Labs based versus the general search, but you can for Bing. And lo and behold, the click-through rate is higher on generative search. All that is, to me, empirical data that supports my view, that I do not believe that the design of a search engine is to end search journeys. I actually think it's to enhance search journeys. Search begets search.
You go down different paths, particularly for, with respect to the type of things that we write about and the content we create. So the con cerns around search is dead or search businesses that get search traffic will be impaired is not something that we're seeing, and is not personally a view that I espouse.
As for the content side of it, which is why do we need humans producing content, if machines can produce content? They're not gonna be able to produce the kind of content that we're producing with our editorial organization. Simple things like our stories all have quotes. You can't... I don't have an AI calling sources to get quotes and to be on the record. So a lot of the basic things aren't there.
And so look, do I think it can satisfy, you know, very kind of fact-based, simple queries of the capital of X state? Yes, of course, that can do that. That's already happened, right? I don't think it's gonna replace what we do when we're helping people deal with, you know, medical conditions or helping people level up in, you know, in a Zelda game. Like, these are things, when you think about what we're doing, I just I don't see it. So I don't mean to be dismissive of it, but that's not the area that I'm concerned about.
Yeah.
In fact, you know, I see a lot of opportunities with AI. I see the other side of it.
You're literally leading into the next question, so I'll jump straight into that one-
Yeah
... which is, with your vertical expertise, domain expertise you have in a lot of these areas, especially healthcare-
Yeah
with Everyday Health, 'cause there's a ton of data there, and there's regulations.
Yeah.
Where do you see your opportunity for GenAI to turn into re tail?
Yeah. I think in, in nearly every one of our businesses, and I'll put them in certain categories. First is predictions. So a lot of our businesses are actually. We provide data to help inform choices and decisions. So Ookla, which is among our fastest growing businesses, is really a data business, and it's in the business of selling network information to ISPs, to carriers, device makers, cell tower companies, et cetera, et cetera.
The telco industry, which is a significant chunk of the global economy, to give them the analytics and the information to help them optimize network and optimize performance. It's a huge amount of data from which to extract insight. Machine learning is going to, and has, enhanced our ability to deliver insight. Customers pay for insight more than they even pay for data.
So I see the opportunity there as being very interesting. We're experimenting in new categories. We are optimistic about our ability to predict KPIs of publicly traded telecom companies. We think we have insight on customer adds, device sales, et cetera. We have a very unique view into the ecosystem. How do we harness that into a now-casting product that may be of interest to people in financial services?
So we're going in other places that historically we might not have gone. So I think data, and we have RetailMeNot, has a significant amount of shopping data. Moz has a significant amount of search data and traffic data. So there are multiple data sets that we think are proprietary, on which artificial intelligence, machine learning, more than generative, can be value unlocking. The second is UI/UX.
I think the thing that a lot of things are hard to use. Moz's software platform requires some training. Campaigner, as a marketing technology platform, requires some training. VIPRE, as an antivirus platform, requires some training. I think natural language interfaces on top of our experiences will make them easier to use, not just for us, but I think for everyone.
I think what you're going to start to see is how AI actually makes interfaces, UX and UI, easier and better. So I think that's a whole category of opportunity, and I think that just drives retention, just drives customer satisfaction. And then I do think that there are process improvements in any and all companies, ways to do things quicker and faster, that just rhyme with productivity, but I'd put that last.
Yeah.
You know, I look at the first two as real revenue drivers. You know, we run a fairly efficient business, and so when I'm thinking about this technology, we're trying to harness it. I'll give you a great example. I had a demo today. I just thought it was so great, I'll share it. We own Lose It!. Lose It! is a top weight loss and nutrition tracking app.
You do a lot of logging. You log in what you had for breakfast and lunch, et cetera. You gotta type it in. They now have a voice-based AI, where you just tell the phone, "Hey, here's what I ate," and it's incredible. You can sit there and say, "I had cornflakes with oat, you know, oat milk.
Oh yeah, and I also had a bagel, and- but I only ate half of it," and it just brings it in, and it-
It's not a very nutritious breakfast.
No, no, no. It isn't, but... And that's why they're using Lose It! That type of interaction, the more logging we get, first of all, that's data.
Yeah.
So the data set we're sitting on is pretty big... but secondly, that's just a better experience for the customer. So it actually fits one in two of my three areas of opportunity with AI.
Yeah. Yeah, no, that's really enlightening. And I think with Lose It!, you had mentioned on the call that it's getting some tailwinds from the other G that everyone's talking about-
Yeah, GLP
GLP-1 drugs, right?
Yeah.
So-
The one thing I'd add to that, though, is that we could also use it to increase the number of registered users we have our site versus just-
Mm
... visitors. So for instance, in talking about the application that we created, the chatbot for Legend of Zelda, we put that behind a registration wall, and it takes a customer who's active on our site, using our information, says, "If you want to access our information this way, become a registered user."
Now we have the ability to communicate with that visitor, not only through, you know, display and content on the site, but through email and through offers. And, you know, much like television, moving from reliance on Nielsen rating to subscription services with registered users, we start to create a community of which we have direct point to multipoint contact with.
Yeah. Yeah, got it. That's, that's really helpful. And, and maybe just thinking, staying on the generative AI topic before we move on to some, some other things. If you kind of take off your, your CEO, CFO hats, what's the generative AI use case that, that you're seeing that no one's talking about out there?
I actually think the UX/UI one is one, 'cause I don't think we're hearing a lot about productivity enhancers. You know, we're content generation, marketing, advertising optimization, advertising delivery optimization, all these things that are relevant in our world. But I actually just think using it to improve UX and UI is an area that maybe you can't quite do the math on, and so maybe it doesn't elevate for everyone.
But I think you're going to see fundamentally the way you interact with services, with platforms, is going to change on a natural language basis. And so that, I think, is gonna be quite interesting, but I think that's coming. I mean, you know, as you start to look at various examples.
I think the other thing is that, you know, on a lot of these things, you know, I think we have to be careful on cost, we have to think about processing time, we have to think about some of these other things that aren't being entirely thought through right now.
So look, you know, you have a few major foundational models. I think that's how the world is gonna be. I think you're gonna have a few foundational models, and then what are you gonna do with it, right? So a lot of talk about RAG, and to me, RAG is all about what data set is it retrieving from? And I think that's the other piece, proprietary data. So if there's gonna be an arms race, so to speak, I think it's gonna be around proprietary data sets.
Who has them, who doesn't have them, how do you protect them? So we're spending a lot of time in our company making sure that there isn't data leakage, that we're inadvertently sharing data in a way that, that takes what we believe to be proprietary and valuable, and all of a sudden is not, and it's being distributed. I will also say there's another standard that we are, you know, focusing on in the company, which is data that needs to continue to update.
Mm.
If the data has value once, it's actually not that valuable. If the data has ongoing and recurring value, then that's something that I think you can build a business around.
Yeah, that, that makes a lot of sense. I wanna talk a little bit about the Moz Group. So this feels like an asset, at least in my conversations. A lot of investors don't really appreciate that this is real software used by enterprises globally.
Yeah.
I guess number one, you know, how can we think about the potential to grow traction within that Moz Group, especially in this like really competitive space, but maybe more importantly, an opportunity to expand Moz into other areas of MarTech, right? And build it out itself as a platform.
Yeah, so let me take a step back because I think this is what sometimes you know might create confusion. When we entered into the marketing technology space, through the acquisition of email marketing platforms, platforms that let small and medium and enterprise businesses build email lists, send emails, et cetera.
And then Moz, which is SEO software, which helps you understand how to optimize for rank. In all of those instances, our first order of battle, profitability. The thing we observed with software businesses as digital media operators at our core, is that these businesses shared this characteristic of customer acquisition, traffic acquisition, IP-based businesses. But unlike the businesses we were running, they were growth at any cost, they were not profitable. The KPI was revenue growth, not cash flow. And so our view was, "We're gonna stop that.
We're gonna come in, we're running these businesses for profit." And that was a huge change for the people inside of those businesses, really against who we compete. So job well done, 'cause the profitability of our marketing technology businesses is very strong. Now, step two is driving the organic growth of these businesses.
And to your point, I think they're in the right markets. I would say this, that particularly with SMBs, before they go to paid marketing, they look for efficacy in earned media. Email feels free, social feels free, search feels free. They'll pay for the software to generate what is essentially the traffic-
Mm
... that turns into customers. Paid media comes next. So well before you go into buying your first search ad or your first social media ad, you're optimizing against these sources. That's what we believe we bring. We're certainly, it's certainly a competitive space, but we are gonna do that, and we're gonna do it with profitability.
Yep. Yep. And then maybe let's turn to the healthcare business. There's clearly a lot of regulations around pharma with IRA, State Transparency Act. There's some stuff in Europe as well. How are the regulations that are out there, and maybe the ones pending in Congress as well, impacting the overall healthcare business?
Huge structural advantage for us. So the health business, Everyday Health Group, is the largest business inside of our company. Of our seven verticals, it's the largest one. It's also one of the most consistent growers and, and one that we believe has continued potential. Pharmaceutical advertising, drug-based advertising, is highly regulated, and really isn't allowed on social platforms.
So think about this. This is a large ad category that really doesn't play in social, and it's a large category where the drug pipeline has gone from mass-market drugs, for which television makes a lot of sense from a marketing point of view, to narrower population drugs and treatments and therapies that require targeting. So targeting matters. Then, the other piece of this market, pharma markets two ways: to patients and to providers. You have 1 million doctors. They preside over $400 billion of annual prescriptions.
Single most valuable media audience in the world, definitionally. Our ability to reach and engage those doctors is a big advantage for us. The old way of doing it was called detailing. Pharma reps would go into an office and, you know, bring a squeezy ball and a pen or something like that. That activity was on its way down.
COVID really dealt it a blow. So pharma's ability to reach physicians has been challenged. We think we help address that challenge. On the patient side, it's narrower populations. So all of those things I think are helpful. In terms of recent regulatory changes, speeding of drug approval is great.
Yeah.
The faster drugs get to market in an expedited FDA process, good for us. On the pricing side, which may be part of your question, too, look, the reality is, you know, in the Inflation Reduction Act, it was really insulin, not much else. I think we feel confident that the pharma pricing dialogue isn't going to impede their marketing budgets, which is ultimately what we're focused on.
We believe the GLP-1s are gonna be a huge category, by the way. We believe the advances in oncology are gonna present a big opportunity. So this is space we love. It's space that we've done very well in.
Yep. Awesome. In the minute and a half we got left, I have two important questions. I'm gonna squish them into one.
Okay.
That's, it's a very open-ended one. What's the biggest decision that you as a management team will have to make over the next three years? And what is the single biggest, biggest item that excites you about the future of Ziff Davis?
I think the first is how we're gonna spend this nearly $800 million of cash and, and investments on our balance sheet. I think this is a unique opportunity to put capital to work. We gotta get that right. So that's the answer to the first one.
On the second one, I would just say that, you know, that when we get back to what we've done for more than a decade prior to this, I think a lot of exciting things happen from a, from a shareholder value creation point of view. I'm a large shareholder of the business, I'm a happy shareholder of the business, and I feel like we're poised to, to get back to where we were, and I think we've weathered a pretty bad storm.
What, what gives you the confidence that you can get back to this?
I just see the quality of the businesses, the markets we're in, the teams, the opportunities, the growth, initiatives. We have been really focused on not pulling back our investments, as you know, this year, 'cause we're confident in where we're headed.
Awesome. That was a very efficient answer to a long question. Thank you so much, Bret.
Thank you, sir. We appreciate it. All right.