Yahoo Finance Ziff Davis, Inc. (NASDAQ:ZD) Q1 2024 Earnings Call Transcript
Ziff Davis, Inc. (NASDAQ:ZD) Q1 2024 Earnings Call Transcript May 9, 2024
Ziff Davis, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day ladies, and gentlemen and welcome to the Ziff Davis First Quarter 2024 Earnings Conference Call. My name is Paul, and I will be the operator assisting you today. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] On this call will be Vivek Shah, CEO of Ziff Davis; and Bret Richter, Chief Financial Officer of Ziff Davis. I will now turn the call over to Bret Richter, Chief Financial Officer of Ziff Davis. Thank you. You may begin.
Bret Richter: Thank you. Good morning, everyone and welcome to the Ziff Davis investor conference call for Q1 2024. As the operator mentioned, I am Bret Richter, Chief Financial Officer of Ziff Davis and I am joined by our Chief Executive Officer, Vivek Shah. A presentation is available for today's call. A copy of this presentation is available on our website. When you launch the webcast, there's a button on the viewer on the right-hand side, which will allow you to expand the slides. If you have not received a copy of the press release you may access it through our corporate website at www.ziffdavis.com. In addition you'll be able to access the webcast from this site. After completing the formal presentation we'll be conducting a Q&A.
The operator will instruct you at that time regarding the procedures for asking questions. In addition you can e-mail questions to investor at ziffdavis.com. Before we begin our prepared remarks allow me to read the Safe Harbor language. As you know this call and the webcast will include forward-looking statements. Such statements may involve risks and uncertainties that could cause actual results to differ materially from the anticipated results. Some of those risks and uncertainties include but are not limited to the risk factors that we have disclosed in our SEC filings, including our-10 K filings recent 10-Q filings, various proxy statements and 8-K filings as well as additional risk factors that we have included as part of the slideshow for the webcast.
We refer you to discussions in those documents regarding Safe Harbor language as well as forward-looking statements. Now let me turn the call over to Vivek for his remarks.
Vivek Shah: Thank you, Brett, and good morning, everyone. Our first quarter financial results are some of the company's strongest since the second quarter of 2022. After six quarters of flat or declining revenues, we're happy to report revenue growth of 2.4% in the quarter. We're particularly pleased that subscription and licensing revenues continue to grow on a trailing 12 month basis. Subscription and licensing now represent over 42% of the company's revenues, providing valuable diversification, predictability and growth. It's a good start to what we expect will be a rebound year for the company. We see very encouraging signs of organic growth in a number of areas in our business as well as increasingly interesting, capital allocation choices.
While we still have businesses facing headwinds, they are largely isolated and navigable. Last quarter, I said I believed 2024 would represent an inflection point and were now clearly headed in the right direction. With the exception of our shopping business, every one of our digital media verticals grew in Q1. Overall, the Digital Media segment grew by a little over 2%. Most notably, our tech media vertical grew by high single digits in the first quarter, which is a sharp turnaround from the large declines we experienced over the past two years. I wanted to single out Mashable with traffic up 56% over the last year. At the same time, PCMag affiliate commerce revenues were particularly strong in the quarter and our Spiceworks B2B business stabilizing.
Our gaming and entertainment vertical had a nice quarter, growing mid-single digits and an indication of IGN's leadership in the gaming industry. We announced, we will be holding a three-day fan an industry event in LA called IGN Live to help fill the void created by the cancellation of E3. The industry and fan response has been terrific, further cementing our position as a leader in the gaming and entertainment industry, notwithstanding, a pause in marketing from a major pharma advertiser. Our health and wellness vertical had another solid growth quarter and it's worth remembering that this part of our business has had a strength of consecutive growth quarters. In January, the Cleveland Clinic launch the Cleveland Clinic Diet app featuring what we believe to be state of the art food and fitness tracking in partnership with our FitNow development team the producers of our Lucid app.
The Lucid app itself achieved record Q1 revenue bookings. Our shopping business represents the sole blemish in our Digital Media segment. We experienced a mid single digit revenue decline even with the benefit of an acquisition in the quarter. While traffic decline at our shopping sites including RetailMeNot, the major challenges relate to adverse changes with two important partners. One is a distribution partner who has reduced their distribution of our coupon codes. And the other is a large merchant, who has cut their commission rates. The former is likely to not improve, but we expect that at some point the latter will. The performance and difficult near term outlook for shopping are contrary to the expectations we had for the business this year.
Thankfully, the strength of the balance of our portfolio is offsetting these challenges and we believe shopping will be pointed back to growth before long. Our connectivity business continued its steady growth and we launched new SaaS offerings called Ekahau Measure and Measure Plus addressing customer demand. We've seen strong initial results with these new products representing 20% of Ekahau software sales in Q1. We also launched a new Speedtest Insights Portal to help our customers make more informed business decisions based on the depth and breadth our proprietary data collected by Ookla. Our Cybersecurity and MarTech segment was a bright spot in the quarter. After a year when it declined nearly 7%, the segment grew 3.3% all organically.
We did have a few timing benefits in the quarter, but we're confident that for the year we will be flat and more importantly enter 2025 with strong momentum. This is important for the company as this segment, which historically was purely for profitability is now positioned to grow organically and continue to deliver adjusted EBITDA margins in the mid 30s. We think the long term shareholder value implication should be compelling, as we expect to achieve Rule of 40 growth in very valuable software categories like cybersecurity and marketing technology. Our cybersecurity group drove the growth in the quarter for strength in Viper's email security and endpoint EDR offerings and continuing improvements in VPN, which has been a material drag on the business for some time.
As I said in the last quarter, we believe VPN will grow in Q4 of this year. Within our MarTech Group our email business continued its strong performance with double digit revenue growth in Q1. Our growth in email was driven by multiple factors including strong customer retention, growing usage and the go-to-market expansion I talked about in the last quarter. The last two years have been unusually quiet for us on the M&A front. However, the lack of deal volume should not be viewed as anything but an anomaly. Our M&A machine is very much active and focused. We maintain an active pipeline of off-market opportunities that are unique to Ziff Davis and we believe we remain one of the first phone calls with business owners in our sectors consider a sale.
Over the last two years, we have reviewed many opportunities, but we are very disciplined with the Company's capital. We never do deals for the sake of doing deals. And as I look back on the many opportunities we have passed on, I have no regrets. As we look forward, we will continue to prioritize investments in the most durable, high-quality assets in our sectors and we will seek to embrace the situations where we believe we have a unique ability to unlock value. We will not shy away from situations where we see an opportunity to turnaround a challenged asset. At the same time, we will lean into acquisitions that represent growth at a reasonable price. While M&A remains our priority, when it comes to capital allocation, we are conscious of the other options we have including share buybacks.
At our current price per share, we believe that Davis is one of the most attractive buying opportunities in the market. And as a result, we expect to continue to pursue buybacks of our stock to take advantage of the dislocation between our trading price and the intrinsic value of our portfolio. Now let me shift to our AI enablement work. Throughout the organization, we continue to harness the power of artificial intelligence develop new product experiences and create efficiencies across our operations. MAS launched two generative AI powered features; domain search theme and keyword search intent. These features were designed to rapidly decode a website's core themes and strategic keywords providing SEO professionals with instant insights into a site's purpose and competitive positioning.
Together, these tools should streamline SEO workflows, turning routine research into efficient strategic operations that deliver deeper insights faster. Across some of our health properties, we have implemented AI-powered search functionality that should enhance site utility. This advanced search technology should not only improve the accuracy and relevance of search results, but also simplify the process for users to locate the information and opportunities they see. By adeptly interpreting user queries, our AI-powered search was designed to deliver a more effective and satisfying search experience, thereby boosting user engagement and experience on these platforms. Ekahau has implemented a leading AI-powered customer support assistant that enhances support by automating our ticket creation based on user-defined workflows.
The system is designed to intelligently search for and suggest relevant documentation to resolve user issues swiftly. If issues persist, it can transition to generating support tickets, significantly streamlining the support process and enhancing user satisfaction. Our optimism about the transformative potential of AI across’ Davis remains steadfast. At the same time, we maintain our firm stance that AI companies must fully respect and adhere to our copyrights. This is essential to ensuring a mutually beneficial relationship between AI companies and publishers. In this regard, we are actively exploring licensing frameworks that effectively manage the utilization of publishers content. Additionally, we are monitoring the volume and frequency of our content being scrapped.
This data will help facilitate licensing deals and ensure fair compensation for our copyrighted material. Now let me provide you with an update on our ESG efforts. In April, we released Ziff Davis' 2023 ESG report. And separately, Ziff Davis' 2023 DEI report, both of which can be found on our website. The ESG report includes findings from our most recent greenhouse gas inventory. And I'm pleased to report that our 2023 Scope 1, 2 and 3 combined emissions, represent a 38% decrease from 2022. This is a substantial year-over-year progress and confirms that we are well on our way to meeting our validated science-based emissions reduction targets, which effectively commit us to cutting our emissions by 50% by 2030. The report also details, how we've leveraged our platforms to help implement positive change in our communities and discusses our extensive data, privacy, security and corporate governance practices.
The DEI report provides an update on company demographics and our ongoing efforts to champion representation across Ziff Davis. Of note, in 2023, Ziff Davis increased the percentage of both managers and corporate leadership roles held by people of color, and we increased the percentage of senior leadership roles held by women, as compared to the prior year. The report also includes the latest programs, policies and actions we are taking to foster our workplace, in which all can thrive. Needless to say, I'm incredibly proud of the work Ziff Davis has done in this area. And I hope you'll take some time to review the reports. With that, let me hand the call back to Bret.
Bret Richter: Thank you, Vivek. Let's discuss our financial results. Our earnings release reflects both our GAAP and adjusted financial results for Q1 2024. My commentary will primarily relate to our Q1 2024 adjusted financial results and the comparison to prior periods. Please see Slide 4 for the summary of our financial results. Q1 2024 revenues were $314.5 million, as compared with revenue of $307.1 million for the prior year period, reflecting growth of 2.4%. Q1 2024 adjusted EBITDA was $100.8 million as compared with $94.3 million for the prior year period, reflecting growth of 6.8%. Our adjusted EBITDA margin for the quarter was 32%, a 130 basis point improvement as compared with Q1 2023. We reported first quarter adjusted diluted EPS of $1.27, an increase of 15.5% as compared with the prior year period.
Our Q1 performance reflects revenue growth in five of our verticals: Technology, Gaming and Entertainment, Health And Wellness, Connectivity and Cybersecurity all contributed to the quarter's year-over-year revenue increase. Martech was essentially flat year-over-year. As Vivek noted, our core shopping business experienced a revenue decline, which was largely offset by the addition of TDS's results from the date of its acquisition. Slides 5 and 6 reflect performance summaries for our two primary sources of revenue, advertising and performance marketing and subscription and licensing. Slide 5 reflects the company's advertising and performance marketing revenue results. Note that these figures include the TDS acquisition. Q1 2024 advertising and performance marketing revenue was flat as compared with the prior year period, while trailing 12-month advertising and performance marketing revenue declined by 3.5%.
Our net advertising revenue retention and annual trailing 12-month statistic was 91.6% for Q1 2024, which is the highest level seen since Q4 2022. In the first quarter, Ziff Davis had more than 1,600 advertisers with an average quarterly revenue per advertiser of more than $95,000. This reflects fewer customers at a higher average revenue per customer as compared with the prior year period. Slide 6 depicts our subscription and licensing revenue. Q1 2024 subscription and licensing revenue grew 4.8% as compared with the prior year period, reflecting growth at Ookla, Vipre, Lose it, Campaigner and Humble Bundle, among others. Subscription and licensing revenue grew 3.2% during the last 12 months. As Vivek said, we very much value our subscription and licensing revenue for the diversification, predictability and growth it represents.
The table on the bottom of Slide 6 includes subscription and licensing metrics for the last eight quarters. Sequentially, total subscription and licensing customers increased, primarily reflecting growth in Lost it and Humble Bundle subscriptions. Our average quarterly revenue per subscriber was $44.55 essentially flat to the prior quarter. Our overall churn rate increased by 23 basis points from Q4 2023. This primarily reflects the timing and mix of revenues at Ookla. Q1 2024 other revenues increased by 5.7% year-over-year. Slide 7 provides quarterly organic and total revenue growth rates for the last eight quarters. The company includes revenue from an acquired business within the definition of organic revenue for the first month in which the company can compare that full month in the current year against the corresponding full month under its ownership in the prior year.
Similarly, the company excludes revenue from divested assets beginning with the quarter of the disposal of the asset as well as from the prior year's comparable period. In Q1 2024, we divested two small businesses in our shopping vertical that serve the e-commerce marketplace in France. [indiscernible] The results of these businesses are included in our Q1 2024 financial results through the date of the divestiture. However, per the definition, the related revenue in 2023 and 2024 is excluded from the Q1 2024 organic growth calculation. As depicted on this slide first quarter 2024 organic growth was flat, which represents an improvement as compared with the organic revenue decline in Q1 2023, technology gaming and entertainment health and wellness connectivity and cybersecurity all generated organic growth for the quarter.
Please refer to slide 8 as we discuss our balance sheet. As of the end of Q1 2024, we had $735 million of cash and cash equivalents and $156 million of short and long-term investments. We also have significant leverage capacity on both a gross and net leverage basis. As of the end of the first quarter, gross leverage was 2.1 times trailing 12 months adjusted EBITDA, and our net leverage was 0.6 times and 0.2 times, including the value of our financial investments. The cash balance is net of the cash used for the acquisition of TDS. The TDS acquisition also included the acquisition of a negative net working capital position, which was factored into the net cash consideration paid at closing. Our strong balance sheet continues to be the foundation of our capital allocation strategy.
With the acquisition of TDS in the first quarter, we have returned to using our balance sheet to support M&A investments. We will also continue to consider other capital allocation alternatives, and while we did not repurchase stock during the first quarter, we plan to resume stock repurchases during the second quarter. Turning to slide 10, we are reaffirming the fiscal year 2024 guidance range that we presented in February 2024. We expect Q2 to represent revenue growth similar to that of Q1, with an acceleration in revenue growth in Q3 and Q4. Q2 adjusted EBITDA margins are expected to be a bit below Q1 2024, reflecting our plan to continue to invest in our businesses to support the balance of their 2024 plans and certain other factors. Importantly, we plan to continue to focus on the creation of long-term shareholder value and not run the business to achieve short-term quarterly results.
Following our business outlook slides are our supplemental materials, including reconciliation statements for the various non-GAAP measures to their nearest GAAP equivalent. Slide 14 includes a reconciliation of free cash flow. Q1 2024 free cash flow was $47.4 million. However, this figure includes a negative free cash flow of $39.1 million associated with TDS. As I mentioned previously, as an issuer of gift cards, TDS maintains a large working capital position. It also experiences seasonality. And while Q1 reflects significant working capital usage at TDS, we expect TDS to be a contributor to free cash flow on an annual basis. Excluding the impact of TDS, Q1 free cash flow was $86.5 million. Note that our semi-annual cash interest payments on our outstanding debt occur in Q2 and Q4, which will impact Q2 free cash flow.
In addition, we plan to make significant cash tax payments in Q2 2024. Overall, we believe that Q1 2024, which reflects growth in revenue, adjusted EBITDA, and adjusted diluted EPS, was a solid start to 2024. And while we expect some softness in the second quarter, we have reaffirmed our guidance, which implies growth in all three of these metrics for the full year. Q1 also reflects the completion of our first acquisition of 2024, and we have maintained a very strong liquidity position to support our continued focus on M&A, as well as other capital allocation alternatives, including stock repurchases. We look forward to the rest of 2024. With that, I would now ask the operator to rejoin us, to instruct you on how to queue for questions.
See also
25 Largest Companies in Mexico by Revenue and
25 Most Dangerous Crime Lords in the World.
To continue reading the Q&A session, please click here.
