Good day, ladies and gentlemen, and welcome to the Ziff Davis Third Quarter 2023 Earnings Call. My name is Paul, and I will be the operator assisting you today. [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, and welcome to the Ziff Davis Investor Conference Call for Q3 2023. 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 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 that time regarding the procedure for asking questions. In addition, you can e-mail 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. Our third quarter financial results reflect solid and encouraging improvement in a number of parts of our business. Most notably, our organic growth rate was flat in the quarter after 6 consecutive quarters of low to mid-single-digit decline. We believe our business is turning the corner and is set up for positive organic growth in 2024. Let's begin with our Digital Media segment. where our organic growth rate in Q3 was positive, led by the connectivity business, which grew high single digits in the quarter and continues to be amongst our most consistent performers. Our Speedtest app continues to be popular with users having reached an all-time high in monthly iOS installs in the U.S. Ookla also claimed the top spot in CC Group's list of most cited sources by telecom industry analysts. Our WiFi planning tools at Ekahau continue to be market leaders, and we're proud that they're being used for WiFi deployment at the 2024 Summer Olympics. In our health and wellness vertical, we grew mid-single digits, with continued strength in both consumer and professional-focused pharma advertising and strong subscription growth at our Lose It! weight management and nutritional wellness app. We just passed the 1-year anniversary of our Lose It! acquisition and we are very pleased with its financial results and exciting near-term product development road map. In gaming, we grew high single digits as IGN is experiencing very strong traffic growth, particularly on social and video-based platforms. While Humble also grew in the quarter, we didn't see the expected benefit from new game releases as we experienced delays with some launches and underperformance in others. In shopping, RetailMeNot was stable with year-over-year increases in usage of loyalty products such as cash back and our browser extension, and we're still…

Thank you, Vivek. Let's discuss our financial results. Our earnings release reflects both our GAAP and adjusted financial results for Q3 2023. We will focus our discussion today and my commentary will primarily relate to our Q3 2023 adjusted financial results and comparisons to prior periods. Slide 4 reflects the summary of our third quarter financial results. We reported revenue of $341 million for the third quarter of 2023 as compared with revenue of $341.9 million for the 2022 comparable period, reflecting a decline of 0.3%. FX was slightly favorable as compared with the prior year period. Q3 2023 adjusted EBITDA was $113.7 million as compared with $120.1 million for the prior year period, reflecting a decline of 5.3%. Our adjusted EBITDA margin for the quarter was 33.3%, which is an improvement as compared with Q2 2023's margin of 32.7%. We reported third quarter adjusted diluted EPS of $1.50. As Vivek noted, many of our businesses reflect significant year-over-year performance improvements. In our Digital Media segment, our gaming, connectivity and health and wellness businesses each grew organically in the third quarter. RetailMeNot was essentially flat year-over-year, but shopping was down. Collectively, our Digital Media businesses contributed positive Q3 organic growth. And while our Cyber and Martech businesses declined year-over-year, the quarterly rate of decline decelerated compared with the first half of 2023. Again, our technology businesses and in particular, our B2B technology business, had a disproportionately negative impact on our overall performance. Excluding our technology vertical, Ziff Davis revenue would have increased by nearly 2% during the third quarter as compared with our prior year. Adjusted EBITDA margins were up sequentially but down year-over-year, reflecting our continued commitment to investing in the head count that we believe is required to pursue opportunities for growth. The year-over-year margin decline of approximately…

[Operator Instructions] The first question today is coming from Shweta Khajuria from Evercore.

I've got 2, please. One for Vivek and one for Bret. So the first one, Vivek, could you please talk about general ad demand trends that you saw through the third quarter and then the fourth quarter so far as the quarters progressed? And then did you see any impact from the war -- from the geopolitical issues going on starting in October? And then a question for Bret is on M&A. Vivek talked about the M&A environment. It seems like there's not a lot of change. But at a high level, could you please remind us some of the opportunities and verticals that you think -- you are thinking about or could be incremental to the Ziff Davis portfolio?

Thank you, Shweta. So I'll start with your question around the advertising market and some of the trends that we're seeing. So again, I think always helpful to unpack this by category. And so our single largest category, as you know, about 40-plus percent of our overall advertising business is health and wellness. And that continues to be very strong for the reasons I outlined earlier in the call. So we feel very bullish about where the pharma ad market is in particular, and where our assets and how we're positioned within that market near and long term. The second biggest vertical is our retail and shopping vertical, which again, I think the challenges we have are not really macro there. It's really just some of the issues we've had with Offers.com, which is this much smaller of our shopping properties, but where we're really focused on some recovery. But we tell me not, it's holding up really nicely. And obviously, the all-important holiday season, which it's hard to answer now what we're going to see in the holiday shopping season, but we're cautiously optimistic. And then the next largest category is gaming. And again, I think gaming has been an area of strength for us from an advertising point of view. So I would say that of the 4 categories, main categories we're in, we're feeling reasonably good about 3 of them. The tech category continues to be a challenge. It is, as I said, sort of a mid- to high-teens, problem for us in Q3. It is narrowing from a decline point of view as we go through the year and we anticipate it to narrow into Q4, but that's going to continue to be a headwind. But as I've said in the past, I view that as largely cyclical. And I think it's not uncommon from the other media and advertising players who have large concentrations of tech advertising. Bret?

Thanks for the question, Shweta. I think I'd answer it in 2 ways. I think the first way is sort of the macro view, which is, when we think about M&A across the company and our investable resources and liquidity to deploy, we're actually looking at all 7 of our platforms for growth and recognizing the markets that they're in and the specific dynamics. Since I've been with the company, which is nearly 2 years, the concentration of our M&A has been in connectivity and health and wellness, which have been to -- continue to be 2 of our strongest performing segments. So we could look at acquisitions like Lose It!, and Emma's Diary in the U.K. for our health business. We've done several acquisitions in our connectivity business, including CellRebel last summer, where we picked up new data capabilities to round out our portfolio and make our overall proposition for our customers stronger. So to some degree, we play to our strengths and there are opportunities in the market for our strong businesses. But we've also fortified our gaming business, which has an incredible platform through IGN and we've supplemented that platform with acquisitions like Map Genie, which extends our game help and our ability to serve that vertical and customer base. But surprisingly, if you look back and we haven't done a lot of M&A, obviously, in 2023, 1 of our 2 acquisitions was in our tech vertical. The why factor? Because we saw a platform there that we believe that, in the current weakened market protect, there was opportunity there to supplement its growth. And similarly, as we continue to see stability in our cyber and martech businesses, we can turn and start to look at those businesses to find opportunities for further M&A. So while immediately, I'll use the word, we're frustrated by the current environment to a degree, we know how to do these deals. I think that we are going to ultimately be rewarded for our patients and our pipeline continues to be robust, and it's just a matter of time before we start closing transactions.

Vivek, did you see any impact from the Israel war on the advertising business?

No, no, no.

The next question is coming from Ross Sandler from Barclays.

Vivek, 2 questions. I know it's early to be talking about guidance for next year, but maybe just the framework for thinking about how you guys can grow above or below the premium display market, let's say, the ad market grows 5% next year, what's the equation for your advertising business to be above or below that now that we're kind of lapping the tech issue and the Offers.com issue this year. So how do we think about that? And then the second question is, have you guys looked at how AI service is embedded within RetailMeNot and Everyday Health might improve kind of the user interface or any opportunity that you see to kind of infuse chatbots or other AI like services in those websites. Any thoughts there?

Thank you, Ross. So let me start with 2024. Obviously, you're right, it's early. But what I will say is that I do view Q3 as an inflection point for us. Just as a reminder, I mean, we've had 6 consecutive quarters of low- to mid-single-digit organic decline as a company organically flat in Q3, but in the Digital Media segment actually organically up. So I think that's a very positive sign, and I think an indication of where we think things are going to go for 2024. You also rightly point out that the comps are -- should the comps benefit us from a year-over-year growth perspective next year. So we're looking for that. And as I said, the part of the advertising equation that has been most problematic, which is the tech piece, is narrowing. So for all of those reasons, we feel reasonably bullish about our ability to grow at or better than market. We think that, again, market has to be taken from a category point of view, not from an overall point of view. And then also remember, we have a fairly even balance between display and performance marketing. But what I'll also say about our display business is that our display business is 65% health. So the part of the -- the largest part of our display business is the category that why we call it display, I actually kind of view it as performance. Remember, the delineation that we make between display and performance is actually a pricing delineation. Is it -- do we charge on ad serve or we charging on clicks, actions or bounties. That is the delineation in our company between display and performance. It doesn't mean that display isn't performative and it is performance-driven. So look, I think overall, we feel good about that. On the AI question, absolutely. So in my own opinion and what's infused in the company strategically, if AI really is a way to improve user interfaces. And it's more than just content. So accessing content like complicated game guides, as I described with IGN or complicated medical information, as I described at Everyday Health, or even within kind of stacking savings within RetailMeNot where you take cash back here, a coupon code here and then a sale -- a product on sale here for sure. But also on the software side of the equation, what you'll find is that UI and improvements in UI using AI will make things like Moz Pro, Campaigner and VIPRE, our software businesses really, I think, engage consumers -- sorry, customers in a different and better way. So I am very bullish on it. We talked about a few of them in the prepared remarks, but there are a long list of activities aligned with what you just asked about across the company.

The next question is coming from Shyam Patil from SIG.

I had a couple of questions. First one, cookie deprecation slated to start next year with, I think, Google's ecosystem. So like how are you thinking about this -- and when you think you -- how you're preparing for it and how the industry is prepared for it? And then for next year, just in terms of the revenue seasonality, you expect it to kind of be similar to what we've seen in '23? Do you expect it to be more back-end loaded? Just maybe if you can talk about revenue seasonality next year.

Shyam, so with respect to cooked deprecation, again, remember, our advertising model doesn't rely on or really involve the collection of cookies to then target people outside of our properties. And that's where that makes a lot of sense or you're using third-party cookies to inform the placement of advertising on your properties. That is not what we do. So our advertising is a function of context. We place advertising based on the contextual relevance. When we do use data to further refine targeting on our own properties, it's our own data set. So in that sense, none of what's happening with cookie deprecation has an impact or effect on what we do. What you could start to think is, well, it may have an impact and effect on what everyone else does, and this contextual targeting regain its footing and currency in the overall ad market. If that happens, that's only good for us. And then remember, on our performance marketing, it really is about driving clicks, conversions, leads, bounty-based activity from our property directly to another property. Having said all that, one of the things that I think as a company we've done an exceptionally good job at is building our database of users, our database of information around those users, e-mail addresses. We probably have one of the larger e-mail databases within the marketplace that when you think about the value of e-mail, it's persistent, it is actually identity and can be used in a very -- in a variety of ways in which to reach customers, whether it's in the inbox or on other platforms. So look, I think it is -- the cookie deprecation issue doesn't affect us, but at the same time, I don't want to leave you with the idea that we're not database marketers, in mindset, we are, we just do it within our closed ecosystem. On the question around quarters, if 2024 is too early to talk about, quarters are probably really too early to talk about. And so probably wait another quarter to really get into that. But look, the seasonality is a known seasonality. You know it. Q4 is always going to be heavy. Q1 is always our lightest quarter, and the middle quarters are kind of in between. And so it's going to resemble that, I think, again, too.

The next question is coming from Cory Carpenter from JPMorgan.

I had 2 on AI. I wanted to dig a little more into the 20% keywords prompting AI response as you mentioned on the call. I think -- so 2 questions here. First, just curious what you learned in terms of which of your verticals or properties were being directed or were not being directed to the AI experience and any learnings there? And then second, curious if you think this 20% level is perhaps uniquely low? Is it Ziff Davis or in your portfolio or broadly consistent across the industry?

Yes, great questions, Cory. And so I'm glad you asked about this because I did think and find it to be a very interesting analysis. So remember, last quarter, the analysis was, well, Bing is the only at-scale generative search product in the marketplace, how is it going for us? And the analysis said, it's going really well. And by the way, that's continued into this quarter. but then we wanted to dig in deeper and say, okay, but how often is the SERP, the search engine result page, how often is it actually infused by AI versus non-AI. And I think we were somewhat surprised at the low incidence and prevalence levels of that with respect to the keywords that matter to us. Now the next, and by the way, we did that from Google also because that we could see in Google SGE. The next analysis probably, Cory is, what you're asking, which is, is this dissimilar to other keyword categories and to other properties. And we haven't done that yet. So that's an interesting question. It's something we should analyze and understand. But at least with respect to us, the incidence levels were lower than expected and were consistent between Bing and Google, which I also found somewhat interesting. But then we looked at, well, when there is a generative search component and non-generative search component, non-generative AI component, are there differences in the clicks that we're getting out of that page? And the difference is the generative search was actually higher. And so again, I'm not saying surprising to me based on my own observations, I think in the past, I would say, consistent but so in some senses you can say, well, huh, the generative piece might actually be accretive to click-through rate. It's early days. We couldn't do this on Google SGE, by the way, because you cannot separate in reporting the Google SGE experiences from natural Google or from default Google. You can do with Bing, obviously, because it's not 1 experience, right? So we can attribute entirely to the Bing experience. look, all to say that -- and I've said it before, and I'm attempting to bring to the marketplace real data around this, which is I think the concerns that I hear are really overdone. And I think are overly simplistic and really is not the area that we're really thinking about. I know it's on the minds of a lot of investors, which is why we want to accommodate this through all of this analysis. But more to come, we're going to continue to unpack this. And last thing I'll say on this, is just on Moz, we own a leading SEO authority and essentially think-tank, and they confirm everything that I've described. So that's another data point internally that's kind of -- we have an SEO bookings institution or something inside of our company, and that's always valuable.

The next question is coming from Ygal Arounian from Citi.

This is Max on for Ygal. Just you mentioned the investing more in head count and growth initiatives for next year. So maybe you could walk us through, where you're investing in, what aspect -- where the business you're hiring in the growth initiatives for next year? And then just 1 on Xyla, maybe -- it sounds like it's -- the partnership is going well, expanding it at connectivity, but the only thing you can share on the first partnership into health and wellness -- and then just where do you see that going next year?

Thanks for the question, Max. I think the macro point we're making about our head count spending is that we did not view and don't view 2023 as a year where our marginal point of margin is sacrosanct and that we have to deliver that last bit of profitability as we navigate what has been an improving quarter-to-quarter, but on an uncertain environment, macro and for certain of our businesses. I think Q3, as Vivek noted, is to a degree a turning point or milestone as we brought organic growth back to flat, and we are leaning in to finish 2023 strong. And throughout the year, where we saw pockets of opportunity in our businesses we spent. And some of that spending is concentrated in pockets of our businesses that are growing. We talked about health growing, we talked about connectivity growing, gaming, although tied to the product in the marketplace, strength this year. So we are loosening the reins on the business where we believe there's opportunity to pursue. As we complete 2023, some of that talent in place -- dynamic business. We constantly need more talent. We'll continue to lean in. And then we'll have to find areas of pullback from time to time, but it's really across the business wherever we see that opportunity.

And Max, just on your question on Xyla. I'm happy you picked up on the point, which is Xyla as a partner is helping us across the entire company, which has been really exciting. They've got a perspective, a skill set, a set of capabilities that are really helpful for us across all the various businesses and real concrete things are happening. With respect to health and wellness, nothing's been launched yet. We're hopeful that early part of next year, we'll start launching and rolling out products. We're very careful in health. And obviously, you've seen or know of the executive order, we have to be very careful in the health space with respect to whatever we do in AI. So we want to be measured thoughtful and deliberate. We're certainly, I think, on the front edge of this but we have to be awfully careful in this space.

The next question is coming from Kunal Madhukar from UBS.

This is Jason on for Kunal from UBS. A couple of questions from me as well. The first one is on capital allocation. You guys have been consistently buying back stock year-to-date. And I'm curious to hear about your capital allocation priority at the moment given that you guys also seem pretty engaged in any imminent M&A opportunity as well? So where do you guys expect to allocate your capital, say, in the next 6 to 9 months? And on the long-term outlook, I understand that you guys are focusing on turning the business around to return to growth. But from a long-term perspective, what would you highlight as the main drivers for you to potentially grow more than mid-single digit organically as -- in which verticals do you see the most attractive opportunities in the real apart from the M&A?

Jason, thanks for the question. Welcome to the call. I don't -- our message on capital allocation, I hope, has been very, very consistent. Four pillars: first and foremost, healthy balance sheet, which I believe we continue to maintain and continue to achieve. We have a tremendous amount of flexibility and liquidity in our balance sheet and capital allocation strategies are built on the back of balance sheet health. The 3 areas that we allocate our investable capital are to the business, M&A and shareholder capital returns. For the prior question, we believe we're giving the business the capital it needs to pursue its opportunities. We're thoughtful about that capital allocation. You can imagine debates within 4 walls of institutions about where that capital goes. But we like to believe that we're judicious but thoughtful about how we give our businesses the capital that they need to pursue their growth opportunities. And we talked a little bit about how some of that money was spent this year. So then that leaves M&A and shareholder returns primarily stock buybacks -- we've also -- if you look back over the last 2 years, bought back certain debt securities. We're prioritizing M&A. It's been challenging to close transactions in this environment. That's a known dialogue within this group. But we supplement that with capital returns, particularly through our stock buybacks. And we've done that this year, we bought back almost 1.6 million shares. So as we move forward, I don't think those dynamics change. The mix may change. It certainly our ambition to see more capital deployed through M&A. It's beyond an ambition, it's an expectation. Again, rewarded for our patients, but we have the capital, we have the pipeline. We're in the dialogues. The gap between buyer and seller expectations will close and we'll announce deals, and we'll supplement that with stock buybacks as we think is appropriate for the overall mix.

The next question is coming from Rishi Jaluria from RBC.

I'll keep myself to 1. I wanted to dig a little bit deeper into MozCon. One of the answers you brought up kind of the data and usage there. Can you talk a little bit about momentum you're seeing within Moz because I got to say when I was recently at MozCon was really impressed with some of the enterprise traction that you're getting there? And the opportunity both to continue to move Moz up market as well as the opportunity with Gen AI and Moz because I think there is a little bit of a misnumber that generative AI is going to completely replace SEO, and you and I know that's absolutely not true. But maybe expand a little bit on kind of your opportunity there with Gen AI.

Thank you, Rishi, and I'm glad. I know you've taken the time and energy to attend MozCon, which we really do appreciate and sometimes seeing some of our brands in live, give you a sense of their power and -- and again, I'll say we have multiple different ones across different events. So if anyone's ever interested and witnessing themselves, they should reach out to us, and we can be helpful there. What I will say is that I think all of the attention that generative AI has generated, I actually think puts Moz in a very interesting space because I think with change and questions come opportunities. And so I think Moz and others in this space, and there are a few other really good players in this space, will all benefit. So I think there's going to be a rising tide phenomenon. What I'll also say is that the broader martech portfolio of Moz and our e-mail marketing assets really are a powerful set of entities, and we're really excited about all of those. Because look, I think we say SEO, we say e-mail, a lot of this means basically using software tools and content to extract traffic versus paid media where you're buying traffic. And so for SMBs and even enterprises, you want to do the first before you get to the second, right? You want to get "earned media" before you get into paid media. And so we think that the Moz Group really has an opportunity around earned media and driving earned media. And then the last thing I'll just say is that, Moz is a unique entity because it is both a business for us but it is an internal resource for us as a company that is always focused on earned media and ways in which we can drive earned media, whether that's search, whether that's social, whether that's e-mail, Moz becomes a strategic resource for us. So it's kind of kind of interesting, and I will say that it was part of our underwriting thesis. Our acquisition thesis was this would be good to have in-house is to have the Moz scientists, frankly, on our side.

And the next question is coming from Jon Tanwanteng from CJS Securities.

I just wanted a quick clarification on 1 issue and then a follow-up after that. Vivek, just the 20% AI-enabled search ratio -- were you surprised by how low that was? And kind of does that imply to you that there's more upside as the AI experience has rolled out to more search terms and capacity is upgraded? Or is that more that AI is already just choosing the ones that are going to return more and get a better ratio to start with?

I think -- here's what I'd say, Jon. So the queries that -- not all queries generate AI, right, an AI -- the Gen AI result. Like in my own experience, I thought it would come up more and it hasn't. But remember, when it does, it actually has a higher click-through rate. So I'm not in this one is good versus one is bad, one is positive versus one is negative. It is what it is -- the incidence rate of AI is less than I thought and the click-through rate on AI is higher than none. That's just the fact set. Why it is? How it is? Not entirely sure. We have our own theories. This is honestly, we're using our own scientific method around trying to understand and verify causation and correlation. So it's early days. I guess what I will say is that I think the search operators are very careful to not just inject AI every time if it's not going to make something more productive and better -- and I think that's what they're probably seen. In fact, I would say in some of our analysis, but don't go to the bank with this, that the rates of AI injection are actually coming down. that if we looked at this earlier, it was higher. I'm sure they were looking at it and wondering, where does it have click-throughs better? Where does it not? What is the right success metric? Is a non-click a success metric because they got the answer? Is it click a success metric? I'm sure the search operators are spending a lot of time thinking through all of this. All we wanted to present with data based on our properties where we have perspective to just give a sense of scale and context.

Okay. Great. That's great color. And then just second, I wanted to ask about your pharma businesses. I was wondering how much of the momentum you're seeing there is related to these new weight-loss GLP-1 drugs? And second, is there a risk for other drugs to be disintermediated by that over time? And is that a net positive or net negative in your view? Or is it too early to tell?

Yes. So look, I think the GLP-1 category is an interesting opportunity for us in 2 ways: one, I think it's going to unleash a significant amount of spend as there is now competition for customers. So I think that's only going to be good for us. But I also believe it's going to actually drive our Lose It! business. And the reason for that is that nutrition is an important companion to these GLP-1s? And what you don't want to have happen is weight loss for bad nutrition, then different knock-on effects. In fact, I think there's a lot of momentum around using an app like Lose It! and others and attaching it to a GLP-1 prescription to ensure nutrition and ongoing weight management because if you get off the GLP-1, you can have a rebound very quickly. If you can change behavior and have it, then good things happen. And so there's an adherence piece to it, too. So it's actually -- it might even seem counterintuitive, which is, well, do you need a Lose It! it when you have a GLP-1? And the answer is actually yes. And I think that's also seen by the pharma industry as well. So I think there's some interesting ways in which we're going to benefit from the -- and their new therapies today, a new one was got FDA approval. So I actually think this is going to be a good opportunity for us.

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

Great. Thank you very much, Paul. And of course, we appreciate all of you joining us today for our Q3 2023 earnings call. We'll continue to participate in conferences. We announced some upcoming ones are on our website. And as we work through the next couple of months and the winter, we'll continue to inform you of our participation. Thanks for joining us, and have a great day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.