Good day ladies, and gentlemen and welcome to the Ziff Davis Second 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.

Thank you. Good morning, everyone and welcome to the Ziff Davis investor conference call for Q2 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. In addition, following our business outlook slides are our supplemental materials, including reconciliation statements for non GAAP measures to their nearest GAAP equivalent. Now let me turn the call over to Vivek for his remarks.

Thank you, Brett, and good morning, everyone. Our second quarter financial results were below our expectations. June revenues in particular were soft, down 3%, dragging the quarter's total revenues down 1.6% year-over-year. While we're disappointed to have taken a step back after a solid Q1 in which we grew revenues by 2.4%, we're focused on driving improved financial performance and are highly confident that we will post growth in the second half of 2024. Our Digital Media segment was flat in the second quarter. The most substantial change versus the first quarter had to do with Tech Media revenue swinging back to negative. As you know, tech advertising has been challenged for the better part of the past two years and while we saw growth in Q1, it didn't sustain in Q2. It is worth noting that all the decline was on the B2B side of the business with the consumer side showing modest growth. The most substantial sequential change in the quarter came in our Cybersecurity and MarTech segment, which swung from last quarter's 3.3% growth to this quarter's 5.8% decline. We did note that Q1 featured some timing benefits, which are negatively impacting the remainder of the year. Absent such timing impacts, the Q2 decline in Cybersecurity and MarTech was in line with what we experienced in Q4 2023. While we continue to see positive trends, particularly in our email business, our progress in other businesses has been slower than anticipated. We've reduced our full year expectation for this segment from flat to low single digit revenue decline. Notwithstanding Q2's weakness, we are reaffirming guidance based on Digital Media segment growth with the expectation of accelerating growth at gaming, connectivity, and health and wellness. In addition, between accretive acquisitions and share buybacks, we expect adjusted EPS to be…

Thank you, Vivek. Let's discuss our financial results. Our earnings release reflects both our GAAP and adjusted non GAAP financial results for Q2 2024. My commentary will primarily relate to our Q2 2024 adjusted financial results and the comparison to prior periods. Please see Slide 4 for the summary of our financial results. Q2 2024 revenues were $320.8 million as compared with revenues of $326 million for the prior year period, reflecting a 1.6% decline. Q2 2024 adjusted EBITDA was $96.3 million as compared with $106.7 million for the prior year period, reflecting a decline of 9.8%. Our adjusted EBITDA margin for the quarter was 30%. We reported second quarter adjusted diluted EPS of $1.18 as compared with $1.27 in Q2 of 2023. During our first quarter Q1 earnings call, we expressed an expectation that second quarter revenue growth would be similar to Q1 2024. When our outlook for the Q2 performance of a number of our businesses changed late in the quarter, we immediately enacted initiatives to reduce our spending and enhance our margins. While those actions did not significantly impact our second quarter results, we expect to realize their full benefit in the second half of 2024. Overall, through the first six months of 2024 as compared with 2023, revenues were slightly up, adjusted EBITDA declined by 2% and adjusted diluted EPS grew by 3.4%. 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. Q2 2024 advertising and performance marketing revenue declined 2.7% as compared with the prior year period, while trailing 12-month advertising and performance marketing revenue declined by 2.3%. The second quarter decline primarily reflects the continued impact of the factors within…

Thank you. [Operator Instructions]. The first question today is coming from Shyam Patil from SIG. Shyam, your line is live.

Thank you. Hey, good morning, guys. Congrats on the CNET deal. I know that's been on the list for a long time. Vivek, it sounds like this could be just the beginning of the company becoming more aggressive with M&A. Just wondering if you could share any further color on how you're thinking about your M&A strategy and if there are any particular areas where you see the most opportunity in the near term?

Yes. No, listen, great question, and let me start by just giving some perspective on color on what we're seeing in the M&A market. So I think the first thing is as more time elapses between sort of the height of market valuations, I think time softens expectations and so we're certainly seeing that. So it's been a few years, right, since 2021 and a lot of the digital media, advertising and software-based businesses were at their peaks. The second thing we're seeing, and this has been widely, I think, reported is there's a good degree of LP pressure on private equity firms to return capital and I think as that return of capital pressure mounts, I think we're going to start to see, and we are seeing, really interesting opportunities that emerge from that. I think also situations, and this might fit in the subset in terms of private equity portfolio holdings, you have some businesses that are highly leveraged and in this interest rate environment, as terms come to bear, I think that can be a catalyst for some activity and then I think there's listen, there's just a lot of market angst over AI and what does AI mean for content and advertising businesses, angst around the duopoly and what does that mean. We have a very clear view on content and advertising and believe that premium leadership brands do exceedingly well and so I think we're going to lean into some of those concerns and so look, I think from an M&A point of view, we want assets that strengthen our leadership position in our core verticals: technology, gaming and entertainment, retail, health and wellness. These are categories we want to go deeper into and then look, also looking for adjacent subscription services businesses that like our Ookla business, like our Cybersecurity and MarTech businesses. So across the board, new verticals are always on the table and there are high value verticals that we're always keeping an eye on. So I think you've interpreted it correctly, which is we do actually feel very optimistic about where the M&A market is, and look, I do think that with Gamer Network and with CNET, I kind of view those as bellwether. These are the type of deals we love to do, as I said, and these are the type of deals that we believe are now starting to come our way.

Great. Thank you, guys.

Thank you. The next question is coming from Cory Carpenter from J.P. Morgan. Cory, your line is live.

Good morning. Vivek, one for you and one for Bret. For you Vivek, you mentioned expectations for gaming, connectivity, health, wellness to reaccelerate in the second half. Could you just expand on what gives you confidence in this and maybe more broadly, what you're seeing in the advertising market where trends have been more mixed this earning season? And Bret, for you, you mentioned oh, sorry. I'll let you answer that, and I'll ask Bret to follow-up.

Thanks, Corey. Sorry. So look, I think maybe zoom out for a moment. When we look at the first half of this year, slightly up in revenues, up in EPS around 3%, 3.5%. So not exactly where we would like to be at this point. As we said, June was a bit of a kick in the teeth, but all things considered reasonably okay. As we look at second half, the benefits are modest organic improvement. So we're not calling for meaningful big bets here and they're coming in areas that have always been traditional good sources of growth for us, gaming, health and wellness and connectivity. Cost control, so expanding margins, Bret mentioned this in his part of the opening remarks, which is we did institute a number of measures to help from the margin point of view that will show up in the second half and then the contribution from M&A is material to what we're looking to do in the second half and going forward and then in the end, the thing that shouldn't get lost, I guess, is that we think we're going to be towards the high end of the adjusted EPS guide and I think that's very important. Those who have followed the company for a long time know that we very much view ourselves as EPS compounders. In terms of the advertising market, I'll say a few things because I usually say it's well, it's not one market, it's broken into categories and customer types and ad product types. For us, tech continues to be a challenge on the B2B side. By the way, I think that's for everyone in B2B tech advertising. It's a reflection of how those companies right now are performing, but again, I believe that's cyclical and that will…

Thank you, and just to follow-up, in in June, curious, what happened or what do you think happened that caused the, pullback across a couple of verticals at the same time, more macro related, more specific to your businesses? Just more color there would be helpful. Thank you.

Yes. Cory, it's Bret. I wouldn't put it on the macro. I think one of the things that we are characterized as a business is we have sort of high customer concentration. If you think about the ad business, we've got roughly 1700 customers and if you take out some of the B2C stuff in our subscription business, again, we have large customer accounts where sales can amount to 100 of 1000s of dollars. It doesn't take a tremendous amount of movement on the part of a customer to either cancel a campaign or move a campaign from Q2 to Q3. We also have different types of revenue even on the subscription licensing side. We've got revenue that is sort of recognized over a contract life and certain licensing revenue that's recognized on a one-time basis. Depending on the timing of certain of those contracts and even winning or losing a contract it can impact a quarter, and again when we spoke in May, we had a perspective on the balance of Q2. By the end of Q2, we had a different perspective. We took action across the business to balance our investment against our expected incoming revenue. Those will impact, as Vivek said and I said in my prepared remarks more the back half of the year than the front part of the year, but again I think part of this is just large customers and the timing of successes in the marketplace.

Thank you.

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

Hey, guys. Just two questions. First on CNET, as somebody that actually covered that company when it was public back in the day, great to hear we'll be talking about it go forward. So maybe just some high level thoughts on accretion and how this might help the overall advertising go to market, within that tech vertical consumer tech vertical, and then the second question, your long term free cash flow conversion of mid-to-high 50s, is that still the right way to think about it given the TDS and these other new companies coming into the fold? How should we think about that metric go forward? Thanks a lot, guys.

Thanks, Ross. And I'm glad you're revealing that we're probably around similar ages. I remember seeing that as a public company too. Let me say a few things about it and I have to be somewhat careful. Obviously, we're signed, we're not closed, we've got to go through the HSR process, but at a high level, I'll say a few things. One, it's highly strategic. The tech vertical has always been an important vertical for the company and CNET has been, as you know, for decades a market leader and we have an immense amount of respect for the brand, its heritage, its team and what it represents to its audience, what it represents to the tech community at large. It's to me, it reminds me of what IGN was for us when we acquired IGN within the gaming space. I think CNET occupies a very, very similar kind of space and then what I'll talk more broadly about, I guess, is how I see the ad market today and how it's evolving. For sure, marketers spend a significant amount of their budgets, digital ad budgets I'm talking about now, on search and social and programmatic. Those are three big areas, but I believe in every vertical you have a few players that are the at scale premium players that are in a position to do attractive direct ad deals, premium deals and that's how we're trying to be positioned and viewed in every one of the verticals we're in and I believe that CNET puts us in a very, very great position within the tech vertical whether it's you're looking to reach IT decision makers, you're looking to reach tech enthusiasts, early adopters, customers of consumer electronics, potential customers, whoever it is, I think that whole space, I think we're going to occupy a really great one. So we're very excited for it. It is a brand that we have thought about for many years frankly and the fact that it's that we've signed this agreement I think is super compelling. I'll let Brett talk to the free cash flow conversion question.

Yes, Ross. Frist and foremost, I think yes that is sort of our long term target and but maybe unpack it a little bit. Frist and foremost, obviously it depends on performance and what I mean by that is when you think about our free cash flow, a number of the elements are relatively fixed and if you start with EBITDA and we're subtracting our CapEx, usually our CapEx program over a 12-month period is essentially fixed as we develop and invest in our products and businesses and to the extent that our EBITDA is not at high end of our range, you're going to see a high flow through every $5 of EBITDA is sort of a point of free cash flow conversion. We talked about in 2023 coming out of some dynamics in the business we had a buildup of working capital. I think we've stabilized that situation, but we're still clawing back some of the build-up on the balance sheet and then TDS has had the expected impact on the business. The dynamics of TDS is it's a highly seasonal business with the concentration in the fourth quarter. It builds up a significant amount of cash at the end of the year and it runs out in the first quarter. We happen to do a first quarter acquisition and that acquisition we experienced the negative outflow of some of the cash it had built up in the fourth quarter running out towards its customers. Very relatively small nominal impact in the second quarter and as we get into the back half of the year, we'd anticipate that being a contributor, but again, I think that conversion rate is our target for the business. We also have on a go forward basis smaller expected investment in Humble Games that should positively impact it. So yes, our plan is to get back to those levels.

Thank you.

Thank you. The next question is coming from Jian Li from Evercore ISI. Your line is live.

Great. Thanks for taking the question. I have a couple of, AI related questions. So first, definitely appreciate the color around just the Google AI overviews share of search in general, but, like, for the, Ziff Davis publisher assets specifically, are you seeing any discernible impacts at all, to your traffic to your publisher side driven by the adoption of, AI overview? And, also, second, you mentioned some kind of interesting GenAI tools across several real assets. What are you seeing in terms of user engagement on the side? Is it driving more impressions? You can kind of talk about the, how these can be monetized and where we should see this on the P&L impact. Thanks.

No. So great question. On the first piece with respect to organic search, no, we're not seeing any impacts from AI overviews only because as I say the rate at which overviews are presenting themselves is quite low against the queries that matter to us, but as I also said, I think more broadly across all queries, it's quite low and it continues to reduce and I think Google is looking for which of the queries where AI overviews will be additive to the search experience, but what I'll also say is that in other analyses we've done is actually when AI overviews present themselves, it's actually a positive to organic search because it's actually elevating your links to your site above everything else. So the way AI reviews are presenting right now is they're at the top of the SERP. So in some ways it's interesting, right, which is it's not happening that frequently, but when it happens, it's actually been viewed as a net positive if you're in the overview and I think I can imagine a world where we go from SEO to SAIO, something that AI overview or SAOO. So look, I think that in the end, it's not really a factor right now. I think the other part of this, which I also spoke to is the degree to which Google as a search engine starts to see any competition from other emerging search engines. Way too early to say. What I will say is that those search engines are very much focused on how to create a search engine result page that delivers publisher traffic because I think they view an opportunity for a SERP that may have more publisher content than maybe ad content for instance. So that'll be interesting to watch, but…

Great. Thanks for the color.

Thank you. The next question will be from Ygal Arounian from Citigroup. Ygal, your line is live.

Hey, good morning, guys. Maybe just first going back to the guidance and the trajectory from where we are to the maintaining the guidance for the full year, can you help break down what the expectations are from M&A within that number and kind of, like, the mix between that and organic revenue as we kind of work through the back half of the year. I don't know if you could size CNET in particular, but just maybe more broadly, if not that specific?

Yes, I don't think we're going to break it down in that specificity. What I will say is I think it's three things. It is improving organic. It is improving margins against the cost control, so that more affects obviously adjusted EBITDA and EPS and then the contribution of M&A, and I think it's probably instructive to just for those who followed the company for a long time, it's always been the combination of those three things in our formula. Look, organic is not where we'd like it. So let me be clear about that. We can't continue to be in a place where organic is a source of decline, but it's a modest source of decline and it is we believe certainly over the last 12 months it is a reducing headwind and we believe that's going to continue. In the end, the company has always been a serial acquirer and a net income adjusted EPS compounder to highly accretive M&A deployment, generation of free cash flow, deployment of free cash flow, leveraging balance sheet, being very smart about our capital structure. I think the thing that we're hoping to convey today is that that second part of what has been the Ziff Davis equation is, I think, firmly back. That part has been absent, frankly, for the last few years for the reasons I described at the beginning of the call. We're signaling now we believe a real change there. So acquisitions are important. They're important to the second half guide. Make no mistake about that and they're important to 2025 and beyond.

And maybe the only thing I'd add is with regards to the timing for the balance of the year, Q4 is a seasonally large and strong quarter for the company overall based on the dynamics of the business, and M&A is a meaningful portion of our guide, and as we said, we factored in both existing and pending impacts, including our expectation of the closing of CNET. So given where we sit here in the beginning of August, there's an expectation that that has an impact on Q3, but probably a small impact on Q3 with a full impact on Q4.

Okay, got it. Helpful. And then, Vivek, I guess going back to AI and more on the licensing front, you guys have been more patient. Is that the stance you continue to take here? Maybe any updates to how you're thinking about licensing opportunities in your approach with, with the LLMs? Thanks.

Yeah. I mean, look, obviously, we have nothing to report. We continue to be in dialogue. I think what's, possibly becoming clear in the market, these deals aren't that big. They're not large needle movers and I think what they relate to are fairly large questions around copyright and what is allowed and what is fair use and what isn't, and I think we would rather either be in a situation where there's a recognition that the original training, was not a fair use situation and there needs to be compensation for it before we get into sort of the rag style deals that seem to be in the marketplace. So I guess what I'd say is I'm in the category of companies. I'm certainly not alone that I think feel that, this near-term money is not that appealing. It's not that appealing in size and duration against what I think we recognize has been a high concentration of the training and ongoing training coming from a fairly small subset of meaningfully sized publishers. So all to say that in the end, we're not feeling that compelled right now to do deals that we think might be very short term. I think we'd rather see how this plays out a little bit more, and at the same time, we're actually optimistic that some of the movement around trying to build search engines that become meaningful sources of referral traffic that is interesting to me. So to the degree to which that can come to fruition in any way meaningfully, I think that would be very productive, and then obviously, there are major things happening relating to search deals and yes, sorry, search distribution deals and what does that mean in that mix. So this will be an interesting space, I think, to watch. I think being a little patient and waiting is probably a good thing for us.

Got it. Thanks so much.

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

Hey, guys. This is Chris Fountain on for Rishi Jaluria. Thanks for taking my question. I wanted to go back to profitability. Can you talk a bit more about the actions that you took in Q2 to right size the expense base to match the growth headwinds? And just to confirm, are these actions what is giving you confidence in reaching the higher end of the EPS range?

Yes. So again, thanks for the question, Chris. I think it's just constantly calibrating our investments in the business against our expectation of top line performance and whether that's continued accelerated hiring to build capacity in the business in anticipation of more activity or you go to the other end which is keeping open positions open longer or potentially eliminating open positions in areas where we see more pressure in the near term with an expectation of rebuilding into the future. I think on the EPS side that's a combination of things, and it's a combination of the -- again the anticipated we obviously have to close the acquisition impact of our pending M&A and our existing M&A, but it's also the impact of the share buybacks. I think this was a very important period of time for the company from a balance sheet perspective. If you look back over the last 24 plus months, we've accumulated a lot of cash and we really put a lot of that cash to work in the second quarter and into the third quarter. Not only did we buy back 1.5 million shares and commit to a meaningful acquisition, but we also took steps to extend the maturity and on attractive terms for more than half of our convertible outstanding. We paid down $135 million of our convertible. We're really pleased with that transaction and where it puts us in terms of staggered maturity and our cost of debt with the coupon on that less than 4% and we also took steps to expand our available capacity through our revolver. So that gives us the ability on a go forward basis to not only continue to commit to our M&A program but at these levels our expectation in the quarter is to be active in our stock. Our Board took steps to support our stock buyback program by increasing the availability under our program by 5 million shares. So when you look at EPS, it's the multiple steps of the expected performance of our existing businesses in the back half of the year, the impact of pending M&A, the cost actions we took in a quarter where our revenue expectations fell short of where we thought they'd be and then our commitment to allocating our capital to the buyback program and all that working together allows us to make the statement we made today.

Got it. Thanks, Bret.

Thank you. The next question will be from Jonathan Tanwanteng from CJS Securities. Jon, your line is live.

Hi, good morning. Thank you for taking my questions. I was wondering if you could talk, very high level about the revenue and margin profiles and their trajectories you've seen over the last several years compared to similar properties you have at Ziff and maybe how you expect to change them and drive value there assuming acquisition closes?

Again, I don't 1, I don't we're not breaking out CNET, but two, we're still in this period where it's not closed, it's signed. But let me just say that, again broadly that CNET is a leader in this market has been and continues to be. It has a balance of direct advertising revenue and affiliate commerce just like us. It is not programmatic heavy just like us, more direct ad deals, sponsorship deals, video advertising plus affiliate commerce, which is driving traffic to merchants and getting paid a commission if a consumer buys. So model wise, very consistent with how we go to market and how we monetize at PCMag and Mashable. ZDNet has more of a B2B kind of focus or history in Providence, which kind of maps well to what a Spiceworks does. So I think very consistent profile wise, very consistent business model wise, I think very consistent sort of cost structure, editorial, ad sales, product and engineering, very much the kind of business that we understand and very much the kind of business we operate today.

Okay. Fair enough, and you alluded to this earlier, but it seems like it sounds like there's a lot more properties similar to this behind the scene that just given the timing in private equity and all the things that you mentioned. Can you just kind of size for us how many of these things you're seeing compared to maybe three or six months ago and scope for us, how aggressive you think you can be over the next year or so?

Yes. Well, it's an interesting question. It's less about are we seeing more. I think we've always been seeing a lot. It's now the nature of the discussions are have evolved -- have moved and shifted to where we believe these are actionable. I think that's the key point. I think the key point is that the bid ask spread has narrowed and it's come closer to where we were, and so I think that's a key thing to understand. These are deals we are very excited to do at these particular valuations and so to me, I believe it's a valuation statement more than a sort of sourcing and volume of deal statement because the sourcing has always been there, right? It's not like we were not having conversations. It just felt like, wow, there's a football field between where we are and they are and that's going to be hard and not a productive dialogue. So we think it's going to be productive. We think we're going to be in a position listen, historically, just maybe as a way to frame this, we often talked about being able to recycle 100% of our free cash flow into M&A and to manage borrowings at gross debt over EBITDA of three times with all of that capital being available for acquisitions with a hurdle of a 20% cash-on-cash return on those deals. Another way we often look at it is within an incubation period of, let's call it, 18 months, that the next 12-month effective purchase price over EBITDA after this incubation period, this is an important statement, is roughly six times and that's what we work towards. That's never changed, right? And so to us now, there are more opportunities that fit within that model and within that framework.

Perfect. Thank you.

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

Thank you, Paul, and thank you everyone for joining our call today. We appreciate the interest and the support. We hope to see some of you at our upcoming conferences, which we'll post in due course. Have a great day.

This does conclude today's conference. [Operator Closing Remarks].