Good day, ladies and gentlemen, and welcome to the Ziff Davis Fourth Quarter and Yearend 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, Chief Executive Officer 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 Q4 and fiscal year 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 fourth quarter financial results give us confidence that we've turned the corner as a company and that our business is set up for solid growth in 2024. The second half of 2023 represented a meaningful improvement over the first half. And while 2023 was the first and hopefully last time in our history as a public company that revenues fell, our outlook for 2024 reflects a clear return to growth. It's also worth reminding everyone that during what was a very challenging operating environment. Ziff Davis revenues declined a relatively modest 1.4% over the last two years. Adjusted EBITDA over that two-year period was essentially flat. I believe it's a valuable reminder of the resilience and downside protection offered by our portfolio approach. Our diversification in ad categories and the combination of advertising, subscription and licensing-based Internet businesses has allowed us to maintain a very attractive financial position and build an enviable balance sheet during what has been an eviscerating period for many in our industry. We view ourselves as being in a position of strength and believe 2024 represents an inflection point for us. In our Digital Media segment, while we were down a little more than a percentage point in revenue in Q4, with continued headwinds at our B2B tech business, we saw high single digit growth for the first time in 2023 from our consumer tech properties. That's a very positive sign as the tech category has been the most significant headwind for us these past two years. On the B2B side, we anticipate stabilizing the business based on a strengthening of the enterprise tech market in 2024. IGN had another solid mid-single digit growth quarter as did Humble's core Bundles business. In Q4, IGN and Map Genie launched…

Thank you, Vivek. Let's discuss our financial results. Our earnings release reflects both our GAAP and adjusted financial results for Q4 fiscal year 2023. We will focus our discussion today and my commentary will primarily relate to our Q4 2023 adjusted financial results and their comparisons to prior periods. Let's turn to slide 4 for the summary of our quarterly financial results. Fourth quarter 2023 revenue was $389.9 million as compared with revenue of $396.7 million for the prior year period reflecting a decline of 1.7%. Q4 adjusted EBITDA was $167.6 million as compared with $168.3 million for the prior year period, reflecting a small year over year reduction. Our adjusted EBITDA margin for the quarter was 43%, an improvement as compared with the 42.4% margin that we reported for the prior year period. We reported fourth quarter adjusted diluted EPS of $2.33. This figure reflects a 3.1% increase as compared with our Q4 2022 adjusted results. Turning to slide 5, fiscal year 2023 total revenue declined 1.9% to $1.364 billion as compared with fiscal year 2022. Adjusted EBITDA declined 4.9% to $482.3 million as compared with fiscal year 2022 adjusted EBITDA primarily reflecting the decline in revenue. Our adjusted EBITDA margin for fiscal year 2023 was 35.4%. Adjusted diluted EPS declined 6.9% to $6.19 as compared with fiscal year 2022 adjusted diluted EPS. As we have discussed, the primary contributor to our 2023 fiscal year revenue decline was our B2B technology business. With regard to the fourth quarter of 2023, Consumer Tech Connectivity, Email, IGN and Health and Wellness each contributed positive organic growth. Excluding B2B, Q4 2023 revenue would have declined only 0.3% as compared with 2022 and fiscal year revenue would have grown slightly. Overall, 2023 was a challenging year. However, our second half results reflect significant…

Thank you. In the interest of time, we ask that you please limit yourself to one question. [Operator Instructions]. Our first question today is from Cory Carpenter from JPMorgan. Cory, your line is live.

Great. Thank you. I had two. First, Vivek, I'm just curious how you would characterize the overall health of the ad market in the fourth quarter relative to the prior quarter and the trends that you're seeing year to date. And then, secondly, more broadly beyond advertising, just if you could expand a bit on what you're seeing that gives you the confidence in the accelerating revenue growth in 2024. Thank you. Yes.

Thank you, Corey. So maybe I'll start with Q4. And when I think about the ad market, as you know, I think about it by category because it's the best way I think to unpack what's going on. So in Q4, the gaming category, the health and wellness category were very strong. Shopping as I mentioned in retail was interesting for us in the sense that great volume, but lower average order value for the commissionable orders that we drove. I look at that as just sort of a less of a statement about the health of retail. I think it's quite healthy. I just think a mix of the type of transactions that we drove. So I look at those verticals as strong. And then in tech, I was really pleased to see that the consumer side of our tech business grew and that's a very positive sign. So from our point of view that was important to see. B2B continued to be a challenge. It was in Q4 and for the full year. And just as a point of reference, nearly the entirety of our ad decline in 2023 was a function of tech. So tech is the space we're watching. We believe we're at a point where on the enterprise and B2B side of the tech ad category, we've hit bottom. There's some good signals we're seeing at least within the early goings of 2024. So I think look generally healthy and it's reflected in our guidance. We think that in the end the pieces that have been growing will continue to grow and that the areas where we have had challenges we're going to see certainly sequential improvements. And that's kind of to me it's all about the slope and the slope is positive.

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

Thanks for taking my questions. My first one is on cookie deprecation. Any change -- and I know Vivek, you've talked about contextual advertising and that you may not be as impacted from deprecation, but I guess my question is, are you seeing any early signs of whether contextual advertising is actually benefiting you as cookies will be deprecated and it's still in the testing phase? So any comment that, you may have on that would be helpful. And then my second question is just on the overall M&A environment. Your language seems a little bit more optimistic for 2024 in terms of healthier pipeline, strong balance sheet, what you may be seeing on valuations. Any update on how we should think about it? Thank you.

Yes. Two great questions. So I'll start with the deprecation of the third party cookie, which as you know has started after many years of delay from Google. And so by the end of the year the Chrome browser which is the dominant browser in the marketplace will no longer allow for third party cookies. And that has meaningful implication for advertising models that do rely on audience targeting and targeting users across multiple websites. As you know, that's not what we do. We target advertising based on context and the environment in which we find the user. We do use a fair amount of first party data which is our own demographic data that we have on our audiences to target advertising, that will not be affected at all. So with respect to our business, the deprecation of the third party cookie is largely a nonevent for us. Whether or not that translates into what you're asking which is well then will the pendulum in the market swing to contextual premium content targeted advertising? That's the theory. It's too early for me to say that that theory is yet proving and being demonstrated and it's not built into our guidance. To be very clear, our guidance is not a function of a pendulum swinging towards properties like ours. But the theory in the marketplace by many is that what you're describing will happen. The other thing that I think is important about all of this is that in the end, I do think it also comes down to performance and the degree to which the third-party cookie deprecation impairs the performance of competing ad platforms and our ad platforms continue to perform. And as you know, we're very focused on performance driven solutions both in terms of our performance…

The next question Ygal Arounian from Citigroup. Ygal, your line is live.

Hey, good morning, guys. Just first follow-up on the cookie question, just to be clear. Is there any cookie-based advertising for you guys or targeting at all, or is cookies just a 0?

So there is single digit millions a year of revenue relating to reach extension where we look to reach our audience off domain on third party properties. That requires cookies. Having said that, the so it's small number, but the evolution of that we believe will go to email hash ID based matching of users. And we have an email database in the United States in excess 100 million. So email data collection has been a priority at this company for years partly in anticipation of this. And so I might flip it, Ygal, just say that we're now thinking about we have an asset here that allows for reach extension and off domain targeting given that we have this pretty large asset should we be leaning more into that in this period of time where cookies are being deprecated? So the answer is it's small. The thing that's going to replace we believe cookies will be email hash and we believe we're very strong there. We also are unsold ad inventory. So as you know, when we look to sell our advertising inventory, we do this on an insertion order basis. We are not focused on the programmatic monetization of our inventory. That has never been a focus for our company. But when we don't sell advertising that advertising is bought on a programmatic basis. And if yield starts to suffer in the programmatic land because CPMs start to suffer in the programmatic land because of cookie deprecation then presumably our yield on programmatic would come down. But again, we're talking low -- like couple of points of revenue is the representation of programmatic at the company. So no, but even there it's not always clear when people are buying us programmatically, are they buying contextual, are they buying domain targeted, are they buying a cookie match, can you use an email hash match? There's a lot in there. So overall, my view of cookie deprecation is difficult for many in the ecosystem, neutral to possibly positive to us.

Okay. Really helpful. Certainly a lot to keep an eye on and cookies as we go through the year. On GenAI and I guess GenAI search in particular, you've given some data points in the past around how you thought, GenAI search was driving traffic or incrementally more traffic to you guys. Is that still the case? Do you do you still see that happening? You know, I know it's still small, but, how do you think about that? And, how does that factor to how you're thinking about, you know, pursuing licensing with the media alliance on scraping your data?

Yes. So we do continue to keep track and the trends continue. So again, Bing being the only GenAI search engine in wide circulation continues to drive a significant amount of growth in referrals and significantly greater than their overall growth. So Bing continues to be a very good and growing traffic source for us. And then as you know on the Google side, the SGE experience as they call it, which is their GenAI experience, is not in wide circulation. It is in Google Labs. And the only thing we can really see there is the rates in which we are seeing generative responses to queries and that is dropping. So I forget the statistic, but I think it's now under 20% of queries that lead to traffic for us even have a GenAI response. So the rates of GenAI inside of the search experience are actually going down. We can speculate as to why that happens, but I think they're trying to test to see what queries require a GenAI response and improves the overall experience and which don't. Overall, I think that theory that we were hearing that GenAI equals 0 clicks and therefore publishers won't get clicks. I don't see it. There's no evidence of it. In fact, it's been the contrary. So I kind of look at that one as a bit of a settled issue in my own mind. We're going to keep watching it, But I don't that's not the piece of the GenAI equation that I'm thinking a lot about. The piece that I am thinking a lot about is compensation. And so as long as the search operators in their usage of large language models continue with the age-old value trade of you can have access to my content to crawl from search indexing as well as GenAI as long as I get appropriate traffic. That value equation is fine for us. The issue we have is all of these other instances of large language models using our data and I quoted some statistics in my prepared remarks, it's substantial and building businesses and revenue streams on the back of our copyright content there needs to be compensation for that. We have registered that point of view with the large language model operators. Nothing to report except that there is dialogue going on. You have seen in the marketplace I think some reports of deals. I think that's good to see because it demonstrates that I think some of the LLMs really understand that they do need to pay for copyright content for both training and for retrieval in a rack type system, both I think require compensation.

Okay. And then the right way to think about that would be just all kind of incremental margin flowing through because the bill that's been quite meaningful for you guys?

Yes, that would just be incremental -- it could be incremental licensing revenue. It's too early to speculate what that would look like, when that would happen. I think part of this is how much of our publishers are going to continue to do one off deals? Or is this going to get adjudicated in a different way and a third party will create a licensing framework that everyone can benefit from. Those things still need to be determined. Is this adjudicated in courts? Is this adjudicated legislatively? Is this done just through business agreements? All of that needs to be worked out.

The next question is coming from Ross Sandler from Barclays. Ross, your line is live.

Just a quick follow-up on that last point on the AI licensing. So there's an article out that Google's paying Reddit $60 million to scrape, you know, data for AI training. And you mentioned, Vivek, some of the percentages that your websites represent in terms of, I think it was tokens or just aggregate text. How do we think about, like, the size of Reddit and that sixty from one entity compared to the size of all your websites. And then I would envision that this is gonna happen across not just one entity, but, a single digit handful of entities. So could you put some rough numbers around that? And then I got one follow-up on the ad business.

Yes, sure. So with respect to obviously, we don't have much visibility into the Reddit deal. I can say that in terms of orders of magnitude of tokens, and I'm doing this a little bit from memory, but we're in the top five of tokens that were analyzed by the Washington Post and the Allen Institute, Reddit's in the top five as well. So we are within that let's just say cohort of large token providers. So that's one statement. As to again how this evolves, I don't know. Speaking on behalf of our company, obviously, we're going to do what we can to maximize value for our company and our shareholders. At the same time, at an industry level, I have to believe that this needs to get consolidated into an industry level licensing framework and royalty framework, not unlike what you have in the music industry that's used a lot as a point of reference. I think that's where you're going to get the scale. I think it just gets hard to continue to do all of these one-off type deals. Obviously, some are happening, and in the end, we're going to sit here and make a judgment as to really what is in our best interest, right? Does it to move early and secure a deal or to wait for things to evolve and find that the unit economics are better? It's a little early to say. And then you have to also recognize that different LLMs may be doing different things and may value different datasets and tokens in different ways. By the way, I'm only talking about the content that is available for that can be technically scraped on the open Internet. What I am not talking about are the data sets that we have that are proprietary at Ookla, at Moz, at Lose It for instance. That's a different set of data that I also think will have some licensing potential. I mentioned this a few calls ago in the early days and early days meaning two years ago, we did do a licensing deal for Moz with OpenAI relating to our database of domain authorities. We probably didn't understand it then we understand it now a little bit better that was likely used as part of their LLM waiting and using our DAA's domain authority data to weight different sources of text. So look, there's a lot here. I would say that I view these as incremental revenue opportunities, not compensation for harm unless there is some fundamental change in the way the search engines operate and I don't believe that's the case.

Got it. Okay. And if we go back to the ad business, and we look at your guidance, the 5% to 7% for 2024. How do we think about the, the inputs to get to that that that kind of revenue growth? Like, if we look at traffic that you're attempting to drive more of to your sites or CPM and you mentioned new video product at IGN, things like that. How do we kind of bridge to getting to that that mid-single digit number between things that you can control and just the overall ad market being in a better place in 2024?

Yes. Look, I mean, it's there's a very unpacked category by category answer. I won't give you that in the interest of time. What I will tell you is if as long as tech doesn't decline another 20 plus percent, we're fine. And our view with the turn in consumer tech in Q4 and our view into the enterprise market stability, we don't believe that's happening again.

The next question is coming from Kunal Madhukar from UBS. Kunal, your line is live.

This is Jason on for Kunal from UBS. I have a couple of questions. So the first one is on the M&A. I know you guys have been seeing some signs of thawing since the end of last year and that trend is continuing so far. And you also provided some general commentary on sort of the environment where strategic buyers are more willing to transact. Can you unpack that a little bit? Could you provide some commentary on which industry vertical you are seeing the trend? And also, apart from that, independently, where do you guys want to grow in your portfolio in five years vertical? And I have a follow-up.

From an M&A point of view, our sourcing activity as you know comes in two ways. One is we have these 7 platforms, right. And so each of our platforms, tech and gaming and connectivity and health, cybersecurity, Martech, shopping, all of these platforms are each individually looking to source deals. And I would say that they're all having success in engaging in a lot of discussions both inbound and out bound. So there's a fair amount of sourcing that happens there. And then we're always on the lookout at the corporate level Bret and myself and our corporate development team looking for new platforms, new verticals in which to enter. So both sets of activities are happening. And because we have this sort of wide breadth of places to look and people who are looking, we generally see a lot and I would say tonal -- I would just say the tone in each of these is lots of responsiveness, lots of willingness to provide information in diligence processes. These are the things that I look for, right. In the end is how open are they? How willing are they to give information and answer questions? How quickly are they responding? And what we're seeing now is a lot like what we saw in the 2020, 2021 and those time periods. In terms of where, I've said this before I tend to like bolt on’s the existing verticals for a variety of reasons because they're generally underwritten with a fair amount of synergy value as a function of being bolted on. And so from a cash on cash return point of view, those tend to be very good. The second thing is that we have a lot of mouths to beat here. And so the degree to which we can support the capital allocation needs of each of our 7 businesses and platforms, I think we like to be able to do that. And the last is that these deals are sized in a way where there's a good sort of risk reward balance. Having said that, as we did with Everyday Health, which got us into the health vertical and has been as you know a very successful business for us and with RetailMeNot, which has gotten us into the shopping vertical, we are always on the lookout for the next vertical. So look, I think it wouldn't be appropriate for me to say I favor one set over another or any one of these groups because we're in all of these verticals because we like being in these verticals. And so we hope to be able to spread it around.

The only thing I might add is if you look back over the last couple of years and you look at where we've allocated capital primarily, we've allocated capital to our businesses that have gone through the transition post-acquisition of reaching a profitable core and are healthy businesses that are either achieving or on the precipice of growth. So we've invested in health, we've invested in connectivity, we've invested in gaming. As Vivek said on his prepared remarks, I think we're starting to see that in our Martech business, our Moz, our email business is growing. So I think as our businesses reach the evolution of sort of structural stability and through that integration phase and start on their path to growth, they become stronger candidates internally for investment capital.

Got it. Thank you so much. My second question is on sort of, B2B tech space. You guys mentioned that on the call, just now that, you know, we might be at the bottom for, enterprise B2B space. And speaking of SpliceWorks, just curious, you know, is one of its competitor, TechTarget, recently announced a merger deal with another competitor? So I'm just curious how your current view, on the space has changed, after the news? Thank you.

Yes. No, obviously, we follow the space carefully and we've seen the merger that you described. Look, I think at the end of the day, the SpliceWorks business, we've got a plan in place, some new talent at the organization and we're confident in their ability to execute against that plan. As you know, we did seek strategic alternatives for the business last year and it was a good process, probably not well timed given what was going on in the space. I think in our view, holding the asset made more sense given where it was. And I think we're feeling good about that now because we sense that that might have been the bottom and maybe that's not the best time to be considering those types of opportunities. The other thing I will say within the SpliceWorks business that sometimes you need to go through a process like this to better understand what you have is that there is interestingly inside of the SpliceWorks business software that we provide help desk software is what it's most well-known for which is actually free to the user and is ad supportive. And we're as we look at where GenAI could potentially have the most impact, it might be actually encoding and software development. And so we may be moving into a time where software development supported by advertising which hasn't really happened ad supported software in the enterprise or within the business has not really happened. We actually might be at a moment where that is going to happen. And if that's true, SpliceWorks has an interesting position there with an existing help desk software and few other software tools for the SMB. So just another thing that came out that is a little unique and a little different that we're going to lean into.

The next question is coming from Shyam Patil from SIG. Shyam, your line is live.

Good morning. This is Aaron on for Shyam. Thank you for taking our questions. I've got two. First, Vivek, you talked a lot about the AI use cases that you're building and rolling out for users on your sites and apps. Could you please provide more of an update on how you're thinking about AI use cases to improve internal operations or productivity across the portfolio?

Well, I can talk about, AI in the context of our data management platform, which is called Core. So Core is an internally built data management platform at the company that allows us to build essentially signals that emanate from every interaction between our audience and our content, our audience and our tools, our audience and our applications. And that dataset is really important in informing ad placement within our property. So there is contextual placement but even contextual plus a demographic data signal. And that combination has been really important for us over the years. I will tell you that AI being infused into our data management platform have made our signal capture and signal analysis a lot stronger. And so the degree to which we can use AI to generate better ad performance, I think that's an example of using AI to at least I guess I think you think productivity more in terms of margin and efficiency and that type of thing, but this is an example of where they just help us produce better revenue outcomes and better customer outcomes. The area where I could see efficiency from a cost point of view is in programming and encoding. And I sort of alluded to that in the SpliceWorks statement I just made to the previous question, but we are seeing success in using this from a coding point of view.

That's helpful. Thank you. And then second, on the gaming ads business, I know this is levered to product releases in the space. For those of us who aren't as close to gaming, could you just share your view on how the product release pipeline for 2024 is looking at this point?

Yes. So I mean it looks reasonably good. I think again there's some back end waiting and there's always -- its kind of pushing into the year. I will say one thing because I want to make sure that I get this on the tape so to speak. As you may have all heard E3 was canceled in Los Angeles in June. That is the major industry gaming event. We announced a week or two ago the launch of IGN Live, which will take place in Los Angeles on the same date as E3 has and it's been the response in the gaming industry amongst fans and publishers and members of the ecosystem has been incredible. And so just an example of IGN using its position and leadership position in the industry to really great effect. I think it's going to be a great event. So I will leave it there.

The next question is coming from Rishi Jaluria from RBC. Rishi, your line is live.

Wonderful. Thanks guys for squeezing me in. Two questions from me. First, I wanted to go back and talk a little bit about the initiatives you're seeing on the VPN side to drive growth. Can you dive a little bit deeper into what can be done to improve that business outside of obviously the macro environment and anything external? And then I wanted to go into AI. How is that gonna impact the actual P&L? What sort of impact are you thinking about either on the gross margin side with higher COGS of AI workloads or R&D as you build out some of these AI features and functionality? Thanks.

Yes. So just on the VPN side, the issue we had had on VPN was really a customer acquisition issue. We were getting priced out in the affiliate channels against competition who were willing to pay bounties and endure customer acquisition costs that were quite a bit higher than LTV, sort of an upside-down chase for subscriptions. That has started to mitigate and I think you can't our competition really couldn't continue that in perpetuity. So in 2023, I think our sign ups grew something like 15%, our new billings grew 33%. So as that starts to play itself out, we're going to flip the equation and really turn to growth. I also think that the product has significantly improved. A lot's been done product wise to improve its efficacy and its performance, which really helps drive retention. So there's a lot going on. We've also got some white label things that we do that are unique to us and we've got some interesting white label partnership opportunities in front of us. So all of that I think adds up to why we are feeling good about VPN coming back to growth in the second half of 2024, which is really important for our cybersecurity and Martech segment. Just to finish up on your last question, Rishi, I would say right now it doesn't the AI is not showing up in the P&L from the point of view of a cost savings or a significant change in our CapEx. I think we are integrating it into our workflows. We're finding ways to do it I think efficiently -- we're certainly hiring people but not in a way that has a radical impact on our level of capital expenditure or on our mid-30s EBITDA margins.

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

Thank you, Paul, and thank you everyone for joining us today as we wrap up 2023 and turn our attention to 2024. As we put out a release, we'll be participating in conferences in the coming weeks and we hope to see some of you there and again on our Q1 call.

This concludes today's conference. [Operator Closing Remarks].