Good day, ladies and gentlemen, and welcome to the Ziff Davis third quarter 2022 earnings call. My name is Paul, and I will be the operator assisting you today. At this time, all participants are in 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.

Thank you. Good morning, everyone, and welcome to the Ziff Davis investor conference call for q3 2022. As the operator mentioned, I am Bret Richter, Chief Financial Officer of Ziff Davis; and I'm 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 is 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 the time regarding the procedures for asking questions. In addition, you can email questions to investor@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 would 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 slide show 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.

Thank you, Bret, and good morning, everyone. Against the backdrop of global economic uncertainty and pressures, as well as strong headwinds in the advertising market, we were able to deliver pro forma adjusted non-GAAP EBITDA and EPS growth of 4.2$ and 12.9%, respectively, in the third quarter. Our focus has been and remains generating earnings growth while managing through a challenging market environment. At the same time, we're focused on positioning the company for an eventual macroeconomic recovery through targeted investments, organizational changes and upgrades, and a reduced operating cost base. Finally, we are continuing to strengthen our balance sheet to fund our acquisition program. We believe the current climate will ultimately present us with a rich set of targets and opportunities. Let me share some observations about our advertising business. Advertising revenues declined 6% in Q3, which was similar to the decline we experienced in Q2. The combination of tougher prior year comps, and the ongoing and well-known pressures in the advertising market, explain the decline. At the same time, the ad market needs to be unpacked by category. In our Gaming And Entertainment vertical, we saw ad revenue growth, like we did last quarter, roughly a mid-single digit grower and a continued bright spot for us. RetailMeNot was flat in the third quarter, just like it was in the second quarter, which we view as a positive, given the environment and tough comps. We have seen some declines at one of our smaller properties, offers.com, which we view as reversible. Our health advertising business was flat in the quarter, with continued pressure in our direct consumer pharma business being offset by stability within the direct to provider pharma segment, and growth in our parenting and pregnancy business aided by acquisition. The main drag on our advertising business has…

Thank you, Vivek. Let's discuss our financial results. Our earnings release reflects both our GAAP and non-GAAP financial results for Q3 2022. Our earnings release also reflects pro forma adjustments for the impact of various 2021 asset dispositions. Explanations for and reconciliations of these adjustments are provided in the release. As discussed during our previous earnings calls, our UK voice assets were sold in February, 2021, and we completed the sale of our B2B Backup business in September 2021. The results related to these divestitures are reflected in our year-to-date 2021 financials through their respective date of sale, and the results of our B2B Backup business are reflected in our Q3 2021 results through its sale date. However, these divestitures do not impact the presentation of our Q3 or year-to-date 2022 results On October 7, 2021, we completed the spinoff of Consensus. Our year-to-date and Q3 2021 GAAP income statement reflects the financial activity related to Consensus in discontinued operations. We'll focus our discussion today and my commentary will primarily relate to our Q3 pro forma non-GAAP financial results from continuing operations, which exclude the contributions from the Consensus business, and exclude the contributions from our divested businesses for the portion of the Q3 2021 period that they were owned by Ziff Davis. Now, let's review the summary of our quarterly financial results on Slide 4. We reported pro forma revenue from continuing operations of $341.9 million for the third quarter, as compared with $345.6 million for the prior year period, reflecting a decline of 1.1%. The strength of the US dollar and the decline in value of certain foreign currencies, negatively impacted this growth rate. And if the comparable 2021 currency values were applied to our 2022 Q3 results, revenue would have increased by approximately 1.1%. Pro forma adjusted…

[Operator Instructions] And the first question is coming from Rishi Jaluria from RBC. Rishi, your line is live.

Oh, wonderful. Thanks so much for taking my question. Just one for me. Vivek, as we think about looking out into Q4, given everything going on and macro and the like, how are you thinking about the eCommerce environment? I know around this time this year, you had some comments that proved to be pretty forward-looking and accurate as it pertains to kind of a challenging eCommerce season last time around. So, how should we think about it heading into the season this time, and kind of what's embedded into your expectations as you give us the implied Q4 guidance? Thanks.

Good morning, Rishi. So, look, I think that I would characterize our view of eCommerce and the holiday shopping season, in particular in Q4 as cautious. I think we recognize that the environment really hasn't seen any improvement. I do think the comp is a little bit easier in the sense that last year's Q4, as you point out and as we had thought, showed some signs of weakness. I think we'll know a lot more obviously in the coming weeks as to what the combination of what consumer demand looks like, and what the nature of the deals and different opportunities are in the retail marketplace. So, it's too early to say, but I think our guidance, I would say character - I would characterize our view as being cautious. We see opportunities where we can convince ourselves where there may be upside, and then there are scenarios where you can see potential risks. So, I think we've kind of gone center of the fairway in terms of our guidance and what's built into our revenue guidance that we shared earlier in the call.

Wonderful. Thank you so much.

Thank you. And the next question is coming from Will Power from Baird. Will, your line is live.

Okay, great. Thanks, Vivek, probably for you, would just love to get your perspective on the broader M&A pipeline. I know you've been a little quieter there, and it sounds like you still expect to be more active. I mean, is it principally a function of valuations meeting given the current macro environment? Is it getting comfortable with just the operations and results of the targets that you're looking at, given macro? I mean, just any broader color on what's creating some reticence if I'm reading that right and just what the broader pipeline actually looks like here.

Yes, no, listen, it’s a great question, and I go back to what I said earlier in the call, which is, I think we've done a really good job of understanding the markets in which we operate. I think back to over a year ago when we affected the Consensus spin, we saw a window and I think we obviously timed that well, and that's been a great success for shareholders. Our headcount management, I don't want to underestimate that or understate that piece of it. We have been on top of this headcount down 10% from the beginning of the year as we were starting to see some of these signs. And so, I put our M&A discipline and our patience into that category of thinking, which is, we do believe that there are going to be sensational opportunity for us. We want to be very precious with capital at a time when capital is precious. And so, I think that's the reason why we have - to use your word, we've been reticent, but I view it as more being patient. As I also said, though, I do think the market is turning. And I think maybe earlier in this cycle, there was a view that the cycle would be short-lived, macroeconomically I mean. I don't think anyone has that view now, and I think the market views this as something that they need to settle into. And so, I think whether the word is capitulation, whatever word you want to use, from a seller's perspective, I think we're approaching that. And so, from my point of view, it's an exciting position for us to be in. As you know, we have been an acquisition-driven company for the last decade in what has only been a seller's market. And I think this rotation, I think we will - we hope to time this well, and I think our patience is going to be rewarded.

Well, the only thing I'd add is, I believe we've had the opportunity in 2022 to close some deals, but for all the reasons Vivek mentioned, but also, we are actively managing human capital. And in some of these deals, we have to consider kind of effort versus impact and whether or not we want to take on the integration of this deal or move on to something else. And some of them are attractive in many ways, but you just look and say, is that where we want to allocate our energy for the next six to 12 months? So, there are opportunities out there and we've had them, but we believe patience is an asset in this environment.

Right. Thank you. That all makes sense.

Thank you. And the next question is coming from James Breen from William Blair. James, your line of live.

Thanks for taking the question. Just on the subscription side, you talked about the customer loss there. So, would you say this is sort of a low point in terms of the revenue, the quarterly revenue or average monthly revenue per subscriber in the churn rate there, and we'll see that start to come back down as we move forward? Thanks.

Yes, James, I think there's a lot going on in these metrics, and I think we've tried to highlight a couple in these calls. I mean, obviously, these metrics are relatively new to the company. I think we started them about a year ago and formally early this year. And even at different points in this year, we've tried to evolve them. I mean, the biggest impact to these subscriber metrics was the acquisition to Lose It!. And we acquired Lose It! at the end of the second quarter, characterized by a significant number of customers, low seven figures at low average revenue. And that's really changed the mix of what you see. But on the other end, we also have Ookla’s impact, particularly in the churn rate - the revenue term rate, which is characterized by the opposite dynamic of very few customers relatively at very large average revenues. And we're seeing some timing impacts, if you will, as we prepare these quarterly metrics. We're going to continue to analyze them and make sure they're as helpful as possible. But taking a step back, I mean, this is a way for us to try to characterize a customer - a revenue per customer and an activity churn rate across a subscription revenue base that's characterized by many, many different types of customers. So, there's a lot going on in there. That said, I do think, to give you the simple answer to your question, now that we have a full quarter of Lose It! in there, the numbers should begin to settle down relative to the quarters without it.

The only other impact is the relative growth rates of the consumer-oriented subscriptions like Lose It! versus the non-consumer-oriented subscription. The Lose It! business is on a nice trajectory. And so, as the overall mix of subscribers starts to weigh more towards Lose It!, you will see that show up in the average revenue per subscriber, but then you'll also see that show up in terms of total revenue. And then just one thing on churn, churn is revenue-based, I think what Bret's pointing out. It's not customer account-based. So, any kind of simple movement of a contract at Ookla that goes from one quarter to another, can influence that, and we did have that in Q3.

Great. Thanks.

Thank you. And the next question is coming from Jon Tanwanteng from CJS. John, your line is live.

Yes. Hi, good morning. It's Pete Lucas for John. You guys covered a lot. Just one question on the Cybersecurity business. You mentioned optimistic about your ability to grow there. Can you provide us with any update on the programs that will help drive growth going forward and where you expect to see some traction in the near-term?

Sure. No, so look, from a product point of view, as I might have mentioned in our last call, we're looking to roll out some features in Q1 that we think are important features in our B2B endpoint disaster recovery piece of the business. So, we're excited for that. We have also pretty much gone through an entire change in the sales and marketing organization from leadership on down. There's been quite a significant amount of turnover as we move to a channel-first model within the Vipre Group, our Cybersecurity business. And then I think that we've brought on a bunch of new distribution partners in the channel. Now, this is going to take time and I've said this before, these are businesses that you don't, particularly subscription business, particularly Cybersecurity businesses, where unless this is someone coming to the Cybersecurity market for the first time, you're generally dislocating someone else. And these are really sticky implementations. And this is a sticky space, which is why I think people like it, but it's also why it will take some time for us to generate what we believe can be some really good growth. The only other piece I will add, which is distinct, we call Cybersecurity, it includes endpoint. It includes email security, includes security awareness training, and those three kind of go together really well, often shared customers, lots of bundling and cross-selling opportunities. The thing that sits apart from that is the VPN business, which is a privacy business. It's establishing a privacy tunnel largely for consumers. And that's a part of the business that when we initially got into it, was a great growth engine for the company, really hit on what consumers were looking for. It has become a much more competitive space. There's been a fair amount of venture that's gone into it that's allowed some of our competition to frankly, outbid us on marketing and outpay on bounty-based and customer acquisition programs. And that, we've suffered from. We haven't tried to compete in that world. I think it's diseconomic. We don't like the CAC to LTV. So, what we've really got to do is innovate from a customer acquisition point of view, or see some more sobriety kind of return in terms of what people are willing to pay for customers, what competitors are willing to pay for customers. So, a little bit of a different dynamic, also a work in progress, but again, new leadership, new ideas, and new product. This reminds me of where Consensus was when I first took on the CEO role of the company and said, you know, if we can dial a few of these pieces, it could be a really attractive growth story.

Very helpful. Thanks. I'll jump back in the queue.

Thank you. [Operator instructions]. And the next question is coming from Shyam Patil from Susquehanna. Shyam, your line is live.

Hey, this is Aaron on for Shyam. Thank you for taking our questions. First, maybe just one more on the M&A strategy. Thanks for all the colors so far. Are there any categories where the M&A environment looks particularly attractive right now? And could you also talk a bit about the opportunity for a potential larger acquisition in a new category? And then secondly, just wanted to ask about the OpEx declines. We saw that sales and marketing and R&D came down meaningfully sequentially and year-over-year. Can you dig a bit more into what's driving the declines there? Is it mostly the headcount declines or is there anything else to call out? Thank you.

Yes, no, thanks Aaron. So, to take your first set of questions, just on M&A, obviously, anyone in the advertising ecosystem is feeling this, and those that weren't quick to respond and may feel currently undercapitalized, are probably the most target-rich types of acquisition At the same time, what I would say is that I think those that have predicated their ad businesses more on interest-based advertising and ad targeting, which as we know through changes being made in the Apple ecosystem, the coming deprecation of the third party cookie, has put that whole segment of the digital media and ad market in sort of a tenuous space. So, we see opportunities there. The trick is, do we think those models can transition to a more first party contextual and data-driven type monetization, which is what we specialize in. So, I would say, we're looking at those. At the same time, I will say that we are very interested in companies that are actually weathering this storm like we are well. And those types of companies that are proving their resilience that can grow earnings in an environment like this, are really interesting to us too. So, to me, it’s both sides of that coin. As for larger deals, look, I wouldn't say that anything's changed in our view, which is, we tend to spread our capital around. We tend to look to feed a number of our different verticals and business units. We have a general bias towards feeding our existing platforms versus creating new platforms, but we're always open to a new platform. Our level of conviction just needs to be really high, because if we're going to make concentrated bets inside the company, then we need to really, really be confident in the ROIC that we're going to see from that, particularly in an environment like this that is somewhat of a capital-constrained environment. On the cost side, I would say that largely it is headcount. As I mentioned, about 40% of the company's expenditures are in headcount, and we've been managing that really, really well, and we're going to continue to manage that well. We have looked at non-productive marketing and dialing back what we view as nonproductive marketing that isn't generating the kind of CAC LTV that we'd like.

Yes, no, I would reiterate that. On a sequential basis and even on - for those categories, it's clearly the headcount and our efforts of managing the cost base in an environment where revenue is precious. But I'd also point out, and I'm assuming you're focused on the pro forma, but obviously, in the year-over-year comparison, if you're looking at our GAAP P&L, we still have an impact of the divestitures from 2021, which factors into some of those line items. But with regards to this year, it's really our cost focus and managing our expenditures relative to our revenue opportunities.

Very helpful. Thank you very much guys.

Thank you. And the next question is coming from Shweta Khajuria from Evercore ISI. Shweta, your line is live.

Thank you for taking my question. Vivek, you have fairly - this is a high-level question. You have relationships with larger advertisers and a pretty good sense of where the sentiment is. At a high level, any thoughts on what advertisers and agencies are thinking in terms of when the sentiment could change, or are we thinking Q1, Q2 of next year? And what are you hearing from those folks? Thank you.

Shweta, it's the question, and I would say that I think it's human nature for many to say that it's around the quarter. And I've heard that, but I heard that earlier this year about the present quarter. I hear about sort of returns in Q1, Q2, some say back half. I think the reality is, no one knows. And I think the more important point is that we are operating from the point of view that we are not going to rely on a market recovery in the near-term. We're going to manage the business as well as we can. We're going to focus on driving earnings growth, building our balance sheet, being very smart about our precious capital, and just expecting the macroeconomic environment to remain unchanged. Not because we know that to be true, but I think it's the only responsible way for us to manage our business. When the market starts to recover, we will be in a very strong position, because what I've also said is, we're bringing in new talent. We're feeding opportunities inside the company that we think have promise. And so, it's an allocation or possibly a reallocation of our resources that we're very, very focused on. And that's one thing I am proud of. I am proud of the fact that we continue to generate EBITDA growth. We've done it three successive quarters. Obviously, our guidance for Q4 implies the same. Look, we're talking about a mid-single digit organic decline for the company in revenue, with a high single digit earnings growth reality, which I think is - that is not easy to do, I think for any business. I certainly don't think it's easy to do for media businesses, which can have gross margin flow-through impact. So, look, I think all the same, I wish I could tell you, I wish the crystal ball could tell you, date certain quarter, certain when things are going to return, but in some ways, I think in an environment like this, it affords us the opportunity to really put capital to work, I think in ways that are going to be amplified from a returns point of view a few years down the road. So, no one likes this, but I would say we are built for this.

That makes sense.

Shweta, the only thing I'd add is with - it's also sectors and sub-sectors. So, the biggest impact to the company this year has been tech, and we all see what's happening in the tech market. There's a lot of negative commentary about human capital and layoffs from some of the big players, but I feel pretty comfortable saying that if we were going to take a multi - make a multi-year bet, betting on tech seems to make sense. It’s one of the strongest parts of our economy overall. Clearly, not at the moment. Our gaming business is largely tied to release cycles. And on a quarter-by-quarter basis, if we see more releases, more quality releases, delays, pushes, it's going to impact. And on our health and wellness advertising business, it's been a mix. Consumers been hit this year, while professional businesses performed better. And a lot of that's tied to specific decisions by large advertisers, particularly pharma. So, I think overall, the advertising environment has been a headwind in a meaningful way, but it's not consistent in every aspect of our advertising business.

That makes sense. Thanks, Bret. Thanks, Vivek.

Thank you. There were no other questions in queue at this time. I would now like to have the call back to Bret Richter for any closing remarks.

Thank you, Paul. We appreciate you all joining us today for our Q3 2022 earnings call. Our upcoming conference participation’s details are on our Investor Relations website. We hope to see some of you where we participate, and thank you all and have a good day.

Thank you. Ladies and gentlemen, this does conclude today’s conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.