Let's go ahead and get started. Welcome back, everyone. My name is Rishi Jaluria. I cover enterprise software and digital media here at RBC. Delighted to have with me both Vivek Shah, who's the CEO, and Bret Richter, who is the CFO of Ziff Davis. Welcome, gentlemen.
It's great to be here.
Maybe let's just start a quick overview of Ziff Davis and maybe what's changed since we were last in this room a year ago.
Okay. So just those who may be new to the company, the Ziff Davis brand has been around for about a century, but the business as we know it today essentially formed in 2010 when I acquired PCMag with a private equity firm for $22 million. So that's where we started. And we started then with this fundamental thesis that digital transformation platform shifts create great investment opportunities. And so we, for the last 14 years, have systematically been acquiring internet and digital media businesses across a range of verticals, which we'll talk about. Today, the company generates about $1.4 billion of revenue, $500 million of EBITDA. It's about a 55% advertising business, 45% subscriptions. The verticals we operate in, there are seven of them.
So tech anchored by CNET, gaming anchored by IGN, health anchored by Everyday Health, connectivity anchored by Ookla, cybersecurity anchored by VIPRE, the marketing technology business, which is anchored by a combination of Moz and Campaigner. So a bunch of different verticals, very much an acquisition-based story, capital allocation story. In terms of what's happened in the intervening year, things are fundamentally improving in the company, but I'm sure you've got questions on that.
Yeah, maybe let's jump right into it. So Q3, obviously nice stock reaction. We saw a return to growth overall, organic growth kind of trended better than expected. What's been happening? What's been changing beneath the surface?
Yeah, I mean, we've got a few things. So one is, you know, since 2021, so 2022, 2023, and for year to date in 2024, you know, the advertising market, at least for the verticals in which we operate, has been challenging. So we are seeing improvements in a number of those verticals. And so the organic melt that we were experiencing is starting to diminish. And we're getting to the point where we're feeling bullish about where organic growth can be within the advertising business. The second thing I'll say is that our subscription businesses, particularly on the digital media subscription side, so we have subscription businesses that are more software in orientation, cybersecurity and MarTech, and then our digital media subscription businesses, Lose It and Humble, et cetera, Ookla.
Those businesses have had some pretty good organic growth, growing roughly 7% on a year-on-year basis, at least year to date, so we had some improvements in the subscription business and then acquisitions, so as you know, and as I said, this has been an acquisition-based story. That is what we do. It's our competitive advantage. I think our approach to sourcing and diligencing and transacting and creating value out of the assets they acquire is fundamentally what we do. 2022- 2023 were pretty inactive years for us. The deal market was not benign. We chose to kind of sit out for most of it, and now, I would say in 2024, I think we're back. We've done a few acquisitions, CNET, Gamer Network, FullContact, and a gift cards business called TDS, so we feel like that's normalized.
The combination of those things has had the business improve.
Yep. All right. Maybe let's drill into the CNET acquisition. Maybe number one, walk us through how did the deal come together, but maybe more importantly, you have this new strategy where you have the new CNET group. You're taking ZDNet, PCMag, Mashable, I think some other assets in there. How do you think that kind of change in packaging is going to impact the overall tech vertical?
I'll tell you a little bit of the history of our relationship with this because I think it's instructive in terms of really just an indication of our patience and how we're willing to hang around hoops for a while. This is an asset that we had identified as an acquisition more than five, six years ago. A process was initiated to sell the business really out of our interest. We ended up being outbid significantly. We said, "Fine. Look, we had a sort of threshold for what we were willing to transact at." We stayed close to the business, stayed close to the management team and to the new ownership of the business, and then presented ourselves again as being interested in it. That was earlier this year. Same thing, our interest probably invited a little bit of a process.
And this time we were able to succeed and to transact at a price that was less than what we had originally offered and far less than what it had traded for originally. And so we felt very good and we feel very good about our entry price. And by the way, I am of the view that a lot of the value gets created as a function of what you pay upfront. With respect to what do we do and what are we doing and what did we see and what excites us, so we are putting all of our tech media businesses into one group. So that would be CNET and ZDNet, which came through this acquisition, then PCMag, Mashable, Lifehacker, and Spiceworks. So these are all tech media businesses, consumer, SMB, enterprise audiences monetized largely through advertising, lead gen, and affiliate commerce.
Number one, I would say that from a content point of view, each will have its dedicated resources. We'll have some shared services around like copy desk and things like that, but each will have their voice and you want to maintain voice and you want to maintain what will give each of them the opportunity, frankly, to rank well in search and social. And so we want to sort of own the front page of whatever, wherever you're looking for tech news. But on the sales, monetization, marketing, product engineering, and other central functions, finance, legal, et cetera, those are getting integrated. So in that process is a fair amount of cost-side synergy. I would say that we have already realized those in the sense that we have accomplished them and now they'll start to show up on a go-forward basis.
So the cost-side opportunities that we saw, we've been able to extract. And then on the revenue side, there's a really simple proposition, which is as the tech industry, look, the tech advertising world has been difficult for the last few years because the large spender, Cisco, Intel, IBM, HPE, they've been under pressure as businesses. And so when businesses are under pressure, the first thing that often gets adjusted is the marketing and advertising budget. We fundamentally believe that's cyclical, that these businesses will continue or will return to more robust ad spend. And when they do, I think they're going to see a singular entity that can really eat up a big part of their budget. I think search social will always be there, but advertisers will want an endemic partner. We will be that endemic partner. We are that endemic partner.
So look, I think we're bullish about where the ad revenues can go and what that can mean. We are patient in terms of how the market will cycle in terms of just tech spend in general and tech industry. And then the cost side is already extracted. So when we look at this in 12 months, in 18 months, we expect to be at our five times purchase price over EBITDA target on our acquisitions.
Post-synergy EBITDA, right?
Post-synergy.
Yeah. Okay, then maybe on the B2B tech side, that's been an area that's been a little bit weak, and you've talked about more of a shrink-to-growth strategy, and this isn't the first time you've used those words. Maybe can you talk about what that entails and what, as you've tried to embark on that shrink-to-growth strategy in the past, what lessons can you bring here?
Yeah. So Rishi, what you're referring to is really the Spiceworks business inside of that portfolio, which we refer to as the B2B business, is that it's really focused on an IT audience and IT spenders. That business has been difficult for us. It's been difficult for the last few years. I think similar businesses have shown that. There's one or two public names. You've seen kind of the challenges that are in that space. What we've decided to do, and by the way, just orders of magnitude, this is under $50 million of revenue in the context of $1.4 billion. And so it's smallish, which in our world, but it doesn't make money. And so from our point of view, every one of our brands needs to be profitable and needs to reach the margin and free cash flow targets that we expect of those businesses.
Our view is that there's a smaller business in there that is cheaper to run, that will yield mid-single digit EBITDA, so a margin of, call it 30% or 25%-30%. We're going to go after that. And the way we're going to do that is we're simply going to reduce the SKUs. All of the different products that are available within that business have become very complex. It's frankly built for a business that was in excess of $100 million of revenue. So a lot of our organic melt, when you look at it, so over sort of three years, the melt was about 10%. That's in total over that period of time. This is half this business. So in our view, it's time for us to get it to where we know there's going to be that profitable core.
On your question of the history, I mean, this is what we do when we acquire businesses all the time. We know that businesses independently have a growth imperative and often pursue diseconomic revenues, right? And all of a sudden, they're spending a dollar to make a dollar or worse, spending a dollar and making $0.90. And all in whatever ownership construct they're in, it's because we need to grow. And so often when we see that, we're like, "Okay, but you know what? We want to get to the profit-making because we're free cash flow in orientation. That is our north star." And so we're okay with whatever that organic revenue melt will be. It's okay. Let's say it's $50 million next year, but I reduce expenses by $22 million. I'm okay with that.
It's healthy for us to look at businesses in our portfolio the way we look at acquisitions, right? It's very healthy for us to put our own businesses through the same paces that we put businesses that we're looking to acquire through.
Yeah. That makes sense. And you hit on something that I would love to explore a little bit more about, which is the cash flow generation side. And really, how should we be thinking about maybe free cash flow per share now and growth in the free cash flow per share as kind of a KPI for gauging success of the business going forward?
Because I want my friend Bret here to have something to say.
Oh, happy to take it. Because I think one of the things that you're hearing is a theme, whether it goes all the way back a decade plus in building this company or today, is we own established businesses in healthy verticals that run profitably, have the ability to generate cash, and can win in their marketplace. We don't always win, right? And sometimes we find ourselves on the plus side or the minus side of a little bit of an organic growth trend. But we are focused on the ability to not only serve our communities and our customers with the products and the services that we provide, but to do it profitably and produce cash.
We use an overall metric when we look at the company as a portfolio and say, "We believe we can generate sort of mid-50% conversion of our EBITDA into free cash flow." Now, look, that obviously depends on performance. We have some operating leverage in the business. We have CapEx in the business. We have a balance sheet that has interest expense in the business. We pay taxes in the business. If we perform higher on the EBITDA range, we'll generate more cash. If we do a little lower, and we always, because we're an active business to do a variety of different things, have expenditures that are non-core to the business. They could be deal expenses. They could be non-operating expenses, severance expenses, expired leases, and whatnot. And that does drag it in those lapses from time to time, but we produce a lot of cash.
We haven't yet in the last couple of years been at mid-50s, but it's been eking up. We have some working capital that we built up in our balance sheet in 2023. We've been catching up on that. I think you saw a very high degree of free cash flow conversion in our third quarter. We have some seasonality in our business that we didn't have before because of our TDS business, which sells a gift card, collects $100, and sends almost all of that money to the ultimate gift card issuer. We hold it for a period of time. Depending on the cycle and the seasonality, and it has a big seasonal larger Q4 because of the nature of gift cards. There are dynamics.
But if we're converting in the 40s, in the high 40s, in the low 50s of EBITDA to free cash flow, we're producing a lot of economic value for our shareholders. And that's the goal of the company.
Yep. Yep. Okay. No, that makes a lot of sense. Maybe I'll ask you a couple of questions around AI and start to unpack some of that. So maybe let's start. I think a lot of investors get concerned that with generative AI, with systems like ChatGPT and Perplexity, that means that some of the content that you produce may not be as relevant and even from a search perspective may not be as relevant. Obviously, you've looked at stats and seen kind of the opposite. Maybe walk us through how you would respond to that concern that investors have.
Yeah. I mean, look, there's a. I hear it all the time, there's a bear case around content and AI. So I think it comes in a few areas. One is, "Hey, wait a minute, the AI systems are going to produce what you produce." And then when they produce that, they're going to flood social search and all the other channels and deprive you of content, of traffic. We don't see that. I don't see that. I don't think AI-generated content is as good as human-created content. By the way, you have to talk to sources. You have to do a lot of things to actually produce articles. And the platforms, search, social, are really trying to sniff out AI-produced content, are significantly penalizing companies trying to game the system and pass off AI-produced content as human.
That's the first, which is, wait a minute, a system like a generative AI system could produce the same thing. And I don't think they can produce the same thing. And even if they try to produce the same thing, I don't think they can distribute it. Then the second, which is more of the search experience, which is, well, wait a minute, and there's two parts of this. One is the search engine result page. If the search engine result page has an AI answer along with the traditional list of links, what does that mean? What we're seeing right now is the percentage of time that there is an AI overview in Google for our keywords that drive traffic for us is under 10%, is 8% or 9%, something like that. Okay? So it doesn't happen with the frequency with which you imagine it's happening.
But when it does happen, in some ways, it's actually a good thing if you rank within the AI overview. So again, most 90% of the time, the page is unchanged. 10% of the time, there's an AI overview. In that AI overview, our citations and sources, those sources tend to be less SEO-able, gameable than the blue links. In other words, the AI in its overview is taking the highest quality domains. So if it's a tech question, it's CNET. If it's a gaming question, it's IGN, so forth. The baby question, it's BabyCenter, right? So in that sense, I would say that at least what we're seeing with AI in the search experience, that it is neutral to positive. Then there's another thing, which is, well, what if search is dead? People stop going to Google and they go to ChatGPT, and what will happen then?
There's no evidence that query volume has gone anything but up. I think they're companions. I find in my own experience, I use ChatGPT. It gets me, it hones me in some places, and then I go to Google. Yeah. And so I think they're actually complementary in many ways, and one may spur the other. So this idea that the query volume and that human behavior is going to change, I think is very, very difficult. Another thing I'll say is that much of search isn't actually you typing in google.com. You go into the Omnibar of whatever browser you have on your phone and you type something. That's search. That's where a large quantum of the search is going. That's a human behavior. So look, I think that with respect to all of these things, these are all the arguments that I hear.
Obviously, it'll all get played out, right? We'll know. We'll know as the weeks and the months and the quarters and the years go by. But this is not, in my view, it's, I know, been the discussion, but it's not what we're focusing on. We're focused on how do we leverage AI for our business, not AI as threat.
Yeah. Maybe let's talk about that. Now, you have talked about a few ways that you're actually integrating AI into the actual products that face the users, right? The gaming, healthcare. Can you maybe walk through some of those? And then taking it maybe one step further, how does that translate to ultimate monetization, whether it's direct or indirect?
So we're using, I mean, think about, we're doing two things internally. So AI for product development and speeding the pushing of code. So AI for coding. Because in our view, coding is a language where I actually think AI is very important. Because tone doesn't matter. It's binary. Does it work? Does it not work? Right? And so our ability to speed programming and development is meaningful. You've heard larger companies talk about the percentage of their code base that is now AI-generated. It's pretty astonishing how quickly this is within the context of what our developers are also doing. So that's a speed, that's an efficiency statement, right? So presumably, if we can push more product, push more code, more releases, more features, everything gets better. So that's one. Then the other is the, but that's not consumer-facing in a sense, right? That's not AI to the consumer.
AI to the consumer is what? In any of our experiences, can we make better through artificial intelligence? And so a great example is we have an application called Lose It. Lose It is an app that you use to count calories and it's a nutrition tracking app. It's super popular. And you have to log. You have to do food logging. Now, through both voice and image, you don't actually have to type in. You just take a picture of what you're eating. Inside of that is a good degree of AI that is trying to understand what that is. And it has a degree of high accuracy, but you might have to make an adjustment and that type of thing. So there's an example of, and by the way, we don't call it AI. It's just improving its image and voice logging instead of manual logging.
But that is an example. There are multiple. We own a business that helps Wi-Fi installers design and deploy their wireless access points in spaces like this hotel. Historically, you had to do a manual walk around a space to actually get a blueprint and a floor plan. We're now using AI that's basically drawing it for you based on all sorts of inputs and data and all the different blueprints that are already inside of the system. So that's an example. We have help desk. Spiceworks has a help desk software that helps like ticketing, like a ticketing system. So a ticket gets submitted and a user says, "Here are all my issues." Before an IT admin even has to respond, the system now is looking through every ticket that ever had this and what were the solutions and what is the likely solution.
Then the IT admin looks at it and adjusts it and says, "All right, you know what? I'm going to replace this. I'm going to replace that," and then sends out instructions to the end user. Again, it's ways to just, I think, make things better. To answer your question, like when does that show up? Who knows, right? But I think it's all, in my mind, it's just about making all of these experiences better.
Yeah. Yeah. No, that makes a lot of sense. Maybe then if we think about the digital media business.
Just one other thing. I think there's going to be an explosion of advertising around AI.
Tell me more.
I just think what's going to happen is everyone's going to get into this cycle of, "I've got to sell my AI thing for whatever reasons," because it's, and we've seen this, right? And there will be a bubble of advertising. And I remember right in the late 1990s and all the dot-coms were flush with venture money. You know where a lot of that money went? It went to printed magazines like Fortune, which I was running at the time. Because you have this money, it's like, "I want to market and get credibility around what I'm doing." They were running in magazines like Fortune. So I think there'll be a moment where AI is actually going to produce, you're going to see AI consumer electronics, you're going to see AI solutions for business. I mean, you're seeing them.
All of you are getting every day pitched on things that have AI in them. There's going to be marketing for that. So I think that'll be good for us.
Interesting. Okay. Okay. So we're probably a little bit away from seeing OpenAI ads on the PCMag or something like that.
But beyond OpenAI, I mean, there are thousands of AI startups and established companies who want to position themselves as AI forward.
Of course. Of course. All right. Digital media business. You've seen kind of a little bit of a turn of a corner there. You talked a little bit about it, but how should we be just thinking about the potential growth in that segment going forward?
Yeah. Look, I mean, I think for the whole, what I would say is we have a target growth rate. Historically, we've said, "Look, we want to be mid to high single digits organic, mid to high single digits inorganic, get to mid-teens, compounding top line, bottom line." That's our goal, right? And in fact, by the way, Q3 EPS growth was 9%. We'll be high single digits for this year. We're getting closer to there. Our hope is to be able to be in double-digit territory next year. And then longer term, get to that sort of mid double digit. But it's the combination of things, right? Because to me, it's the timing of, and when we talk about organic, remember, we have businesses growing. We have businesses that are stable. We have businesses like the Spiceworks business I described that are contracting.
At any given point, that mix can change. We can buy a business and decide, "You know what? We're going to do a fair amount of shrink to grow in that business." That can throw off some of those metrics. But in the end, our view is we want to be a double-digit EPS compounder. That is our expectation. And prior to this 2022, 2023 period, we have well over a decade of having accomplished that and at much higher rates, actually. So I believe we can return to that. I feel good about where things are directionally. The trends are good, but there's still work to be done. We still have businesses with headwinds, and we want those headwinds. We want to manage those headwinds well. We want to accelerate some of the tailwinds.
But I would say most importantly, the deal cadence really ought to return to what historically was. Right? And so you know we generally would spend 100% of the free cash flow generated in a year back into acquisitions to compound growth. And I believe we will be there.
Yep. All right. You hit on two questions. I want to add on, but maybe first, with interest rates coming down and future cuts on the horizon, what do you think that does to the M&A environment?
I think the M&A environment, at least where we are right now, is normalized. I have been reluctant to say that for like three years now. I now feel like the conversations we're having are productive. They are rooted in where the market really is. I think people are willing and looking to do deals, and transactions are going to get done. CNET is a great example of that. There will be more. I feel good about that. What that is based on, we can all speculate, but my observation, at least in where we sit, because look, like any market, and the market's big, right? There are lots of parts of any market. In terms of what we're looking at, I think there's opportunity. Here's the other thing I'll say. Where I started, right?
This was a company where we see investment opportunities in digital transformation and platform shifts. We're going through a platform shift. And so if there's a conventional wisdom right now that content is going to be under a significant amount of pressure as a buyer often of content businesses, that's good for me. That's actually very good for me. And so when I think about where this company started, when we bought PCMag, a magazine business, I started with, "All right, how do I find magazine businesses that have fallen out of favor and turn them into digital businesses?" That's where we started. I see the same thing of developing again, which is, "Okay, AI is going to have impacts." And so there are going to be companies who are great at managing those impacts and companies who are not. And so we'll buy either, right?
The former, because others just don't value it and we see it, or the latter because we think we have a path and an approach that they're missing. So I actually think, even in our corner of the world, it's good if the drumbeat, maybe not good for our multiple, but good that the drumbeat as a buyer is, "Hey, this is, there's a bear case on content and advertising.
Yep. And maybe then let's walk through capital allocation. So you talked a little bit about that on the last call. Just between share buybacks, M&A, right? Especially given the commentary that the M&A environment seems to be normalizing. How should we be thinking about your capital allocation strategy from here?
I'll let Bret start.
Yeah. So look, those of you that are familiar with us heard us say this. We think about capital allocation in four pillars. First of all, we are, as we talked about, a generator of free cash. So we create our own investable resources. What can we do with that? We can reinvest it in our businesses, which we do. That's OpEx, CapEx. Our businesses, we believe, get the capital they need to run their businesses effectively in their marketplaces. We could strengthen our balance sheet. Any capital allocation strategies built on the back of a healthy balance sheet, our balance sheet's healthy. Our gross leverage is under two times. Our net leverage is one times. It's less than that when you factor in some financial investments we have.
So we have a lot of flexibility in our balance sheet, both the capacity within it, the cash we have on it, and we have a $350 million undrawn revolver. So how are we going to allocate that cash? It's going to be between return to capital to shareholders and external investments. Our preference, because we believe when we find the right deal and we execute upon it, that we have the ability to create excess returns through M&A, and that's our preference. But when we see the opportunity to buy back our stock at attractive values, intrinsic values, where we look at metrics like adjusted diluted EPS per share, free cash flow per share, what is the intrinsic value of a share of Ziff Davis stock? And can we buy that at an attractive rate? We do. We bought 3.5 million shares back this year.
We spent almost $200 million. We allocated a lot of capital this year. It's my third year with the business. We didn't allocate a lot of capital in the second half of 2022 or all of 2023. Share buybacks, almost $200 million. We paid down almost $140 million worth of debt. We spent $135 million of cash. We spent hundreds of millions of dollars on M&A this year. And so having that flexibility in the balance sheet to act decisively when we see an opportunity to create value per share value for our shareholders, we'll do that.
But if I had to balance it, having bought back 3.5 million shares in the last couple of quarters with the M&A market normalizing, stabilizing with our ability to identify assets like CNET, which we think we have a competitive and comparative advantage owning relative to the next best buyer in the marketplace, we want to take advantage of those opportunities.
All right. Maybe last one. Maybe we want to drill a little bit into the healthcare business. So there's obviously been a lot of maybe headline risk to healthcare and pharma advertising under the potential new administration. How are you thinking about that business and navigating those challenges?
Yeah. Listen, I know there's been some talk in DC around direct-to-consumer pharma advertising. This comes up, and it comes up every few years, and there are lots of very good reasons why I don't think anything's going to change. So it's not something we're concerned about. I actually look at it the other way. I think the FDA is going to start to speed approval of therapies and drugs, which unlock more budgets for us. So I actually think we might see that as a real tailwind.
Yep. Okay. Maybe last one. I'll squeeze one more in. You've had a really good track record growing to new verticals or sub-verticals, right? Healthcare, retail. If you think of maybe going three, five years down the line, where do you think there is opportunity over time to enter a new vertical within media?
Look, I think wherever we're really in between buyer and seller. These are really like marketplace businesses when you think about it. Each of these is connecting those two audiences. The degree to which we can be in the middle and extract great rents, that's what we look to do. There's obviously a lot of other categories: consumer finance and travel and home services, et cetera, that we're not in that fit the characteristics of the verticals we are in.
Yep. All right. I think it's a great place to jump off. Vivek, Bret, thank you so much for being here.
Thank you.
Thank you, everyone.