Great. Thank you everyone for joining us today. 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 Scottsdale.
Thanks for having us.
Great. Well, let's just jump right into things. Look, for folks who may be less familiar with this story, can you just kinda frame, kinda at the high level at this point?
Sure. So to the extent it's an introduction to Ziff Davis, I think we can think about it 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 a hundred 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 were invested to diversify that revenue stream into digital media services. The first acquisition was of Ziff Davis of PCMag.com.
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. Ziff Davis is a portfolio of digital media assets that essentially serves seven verticals: tech, shopping, gaming, health, cybersecurity, MarTech, and a connectivity business that serves the global broadband community. Our focus is in 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 achieve 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 here. Just talk to us about the key events in 2024 for Ziff Davis and really what's changed the most here.
So I joined the business three years ago. I'm about to hit my third year anniversary. And I think, 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 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 a return to our robust capital allocation program. So we think of capital allocation as essentially four pillars. We can take the investable capital, the free cash that our businesses generate, and reinvest it in those businesses. That's through OpEx and CapEx.
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. 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 2023, beginning of 2024. 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 shares. 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 two answers. Very little has changed because we're consistent to our beliefs and our pursuit of 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 early in the year.
Got it. Maybe to move along to just kinda think about the EBITDA growth drivers here, how do you think about key drivers in 2024 and maybe as we look out to 2025 at this point? Like, how could those potentially be differing on the margin?
Yeah. There are really two elements of the story again. I mean, one is stabilizing the top line organically and continuing to feed the top line inorganically. We, you know, as I just said, we believe that, you know, there's been somewhat of a return to our inorganic investment and our acquisition of revenue-generating and long-term shareholder value-generating assets, you know, assuming we do good deals. And that's obviously core to our philosophy. But also, we've experienced, you know, low single-digit organic revenue declines in 2022, 2023, and to a degree in 2024. And what we're seeing is a reduction in that pressure. We came off the 2020, 2021, you know, COVID period where certain of our assets probably benefited from that, you know, unique dynamic in the marketplace, which, of course, was, you know, tragic in so many ways.
But, you know, there was some benefit to certain digital businesses. We saw, you know, 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, you know, 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, you know, managing our costs and managing our investment. And what we've been able to do, even in this period of, you know, a modest degree of top line organic pressure, is maintain margin. The business, while it's not a hard and fast target, has consistently generated, you know, mid-35%, mid-30%, around 35% adjusted EBITDA margins.
And we've done that through, you know, 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 two, the top line and the bottom line, again, is core to our value equation. And we've, you know, 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 list, the most simple element of finance of those three statements. We have a strong income statement, significant revenue, strong margins producing, you know, 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 two times gross, and less, you know, about one times 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, you know, 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 right-size the expense base in Q2? And should we be expecting to see the full benefit of those efforts starting to show up in Q4 this year?
Yeah. I when we think about that, and we talked about that in our Q2 call because it was we had a couple of, you know, 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 and the late spring of 2024 on the cost side. And we continued to do that throughout 2024. In fact, selectively, it's done, you know, 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, you know, they were improved.
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, you know, 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 expectation.
Got it. And maybe just moving on to investment priorities, can you just talk about the key investment priorities in 2024? 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 2025 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 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, you know, we'll work with our, you know, various management teams to ensure that we have a plan that allocates capital to 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, you know, 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.
Got it. So yeah, we've touched on kinda 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?
Yeah. I, I think, you know, the ad market overall in 2024 as compared to 2023 and 2022 has not been a headwind. I think we've, you know, 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, you know, it certainly should never be, you know, regional these regional conflicts shouldn't be ignored and, 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's expected performance should map the overall digital advertising market because, you know, we're more exposed to subsectors.
Our health business is about 40% of our advertising business. Our health business is largest source of advertising revenue is pharma. We had one pharma advertiser early in 2024 that essentially retreated from the market. You know, that is probably that's dynamic that we would expect to lap going into 2025. Therefore, that specific element wouldn't be a pressure. We participate in digital e-commerce in a meaningful way. It's about, you know, call it roughly 20% of our advertising business. Digital e-commerce is a robust market, but we saw, you know, one or two hiccups early this year with two large partners of ours. Again, not a dynamic that we would expect in 2025, so we sort of lapped 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, you know, a solid, if not strong area for us. And, you know, we see opportunity for that business going forward. And then our technology business has really been a tale of two businesses. We have a B2C business that is PCMag, Lifehacker, Mashable, 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 two 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, of the business, which we picked up. It's a smaller element, ZDNET. It actually goes back all the way to this extended history of our Ziff Davis name. But, you know, that'll be part of our B2B approach to the marketplace. And where we've seen the most pressure in the 2022, 2023, and even 2024 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 flat, I believe, in the first quarter of 2024 in that business, it was a pressure in Q2. It was a pressure in Q3. With regards to that business, one, it's becoming a smaller part of the overall whole. So as we look at lapping some of the dynamics in 2025 against 2024, it shouldn't have as significant an impact. But we are, you know, 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.
You know, that combination of factors, healthy markets that we serve, lapping a couple of unique elements in 2025 relative to 2024, you know, we believe can, you know, continue to move us down this path of improving the organic performance of the businesses.
Very helpful. Maybe moving along, kinda sticking on the advertising side though, but GenAI has often been in the conversation with Ziff Davis here. Maybe just thinking about it on the content creation side, Ziff Davis has always kinda prided itself on the premium nature of its content. So I guess my question here would be, like, how do you think about the evolution of GenAI for content creation over the last year? And kinda how has that impacted how you think about its place within Ziff Davis and its content creation process?
Yeah. It's GenAI in that aspect of our business is a tool. It's not. 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, but consumers and businesses use along their purchase journeys. And GenAI can enhance that aspect of content generation, but it certainly does not replace that aspect of content generation. However, you know, GenAI has impacts across our businesses. And what we 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, you know, works with entities to optimize wireless networks. There's complexity in our models and the information we provide. And GenAI creates a more natural language interface that allows our customers to interact with our products. We're seeing that in our Ookla business, developing products for, you know, for instance, in our Downdetector business, where, again, you know, tremendous amounts of data and information that needs to be processed and synthesized into 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 GenAI 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 it 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 kinda 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 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?
Yeah. It's a complex question. I think, you know, it's almost a widen the lens moment, which I think it's important to remember that search has been evolving for decades and will continue to evolve. Search is not a single variable equation at the end of 2024 where the only impact upon it is, you know, the introduction of GenAI either into the traditional search platforms or through the introduction of new platforms. It's also important to kinda step back and say we generate traffic in numerous ways and search isn't the only one. You know, we have apps. We have email. You know, there's obviously, you know, 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 two years with regards to the impact of the integration of GenAI 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, you know, these are typically 90 scores of 90-100.
And within 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, you know, we plan to continue to, you know, position ourselves in terms of creating content that rises above the din and finds its way into the search results to benefit from, you know, enhancements to search.
Maybe just to follow up on that really quickly, are you at the point where you're paying to be included, and just kinda 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?
Oh, within the individual with.
Within the AI Overviews.
Within the AI Overviews. You know, no, not to any meaningful extent. I mean, obviously paid marketing is a big part of overall, you know, search optimization. And, you know, we use it to a degree. We actually have a business, our Moz business, which, you know, serves the search community and the marketing community and providing solutions on how to optimize search results. But, you know, that has not been a big factor to date.
Got it. Maybe switching to the other key chunk of the business here, the subscription side. Just 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 cyber security martech has been in decline?
Yeah. So importantly, you know, our subscription licensing businesses are 40-plus% of our overall revenue. And while, you know, 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. You know, these businesses provide solutions, you know, primarily to the carrier communities around the world and has been a growing business for us, you know, 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, you know, have not been growing. And in fact, we, that's a separate reportable segment that our results, you know, should be clear to our observers. But I think importantly, there are pockets of growth within those businesses, including our email marketing business. But there's also a continuation of the shrink and decline. If you look at the rate of decline from 2022, 2023, 2024, there's improvements. We've seen stability in certain of our businesses, including our B2B security business, where we've seen pressure is our, you know, B2C privacy business, our VPN business.
But even then, you know, 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. There'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 kinda indicate that the bid-ask or valuations on the deals are moving back towards pre-COVID levels. Can you just kinda talk about what is driving this?
Yeah. 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 when the digital media market in particular, you know, and certain other markets that we participate, you know, were 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 was not temporary and had to be factored into valuations.
As you got past 2022 into 2023, and we might've seen some moderation and pressure, but yet to return to healthy business performance, in general, sellers weren't ready to reset expectations of value. As we move past 2023 into 2024, I think what we've seen is buyers and sellers generally come closer together with regards to reasonable valuation expectations. We've been able to execute, you know, a number of attractive deals. We've done two large ones this year, TDS and CNET, a couple of smaller ones. We actually did a very small one in, you know, late this year that'll impact our subscription marketing revenue. It's, we believe, the market's 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 you know enhancing our ability of certain of our businesses to generate revenue in marketplace sometimes rationalize the expense side of a P&L sometimes bring two brands together that makes those two brands even more prominent in the marketplace and even enter new markets potentially because when we go back that 10 plus years that I mentioned we weren't in any of these seven verticals. We entered all of them at different points in time.
Having the firepower to effect acquisitions, having the historical perspective on how to, you know, consistently generate value through M&A and having a market where buyers and sellers' expectations of value is coming closer together, you know, we believe puts us in a good position to continue on this 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.