Ziff Davis, Inc. (NASDAQ:ZD) Q4 2023 Earnings Call Transcript
Ziff Davis, Inc. (NASDAQ:ZD) Q4 2023 Earnings Call Transcript February 22, 2024
Ziff Davis, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen, and welcome to the Ziff Davis 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.
Bret Richter: 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.
Vivek Shah: 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 innovative video ad solutions, significantly boosting our video ad inventory to meet rising advertiser demand and spend. The game publishing side of Humble continues to see delays in game releases and lower sales representing a drag on growth in the quarter. Our connectivity business had a terrific low teens growth quarter with Speedtest hitting an incredible milestone of 50 billion tests taken and Ekahau AI Pro winning 2023 Innovation of the Year from the WiFi Awards. Our connectivity business has been the strongest and most consistent grower in the portfolio.
Our health business has also been a steady contributor of growth, capping off a year of high single digit revenue growth. Notably, Lose It achieved record bookings in Q4. We believe Lose It 's success will be buttressed by the popularity of the new GLP-1 class of weight loss drugs, which require an even greater focus on diet and nutrition to promote healthy weight loss. Shopping was a tale of two cities. While RetailMeNot's total commissionable orders were up in the quarter, reflecting a relatively strong holiday season, we saw a decline in average order value. Along with continued pressures at Offers.com, the shopping business tipped into negative territory. However, our shopping business is set up for a strong 2024 with organic improvements and the addition of a recently acquired gift card business.
In our Cybersecurity and Martech segment, the trend of quarter over quarter improvements continued. Revenues fell approximately 4% with VPN representing the vast majority of the drag. The good news is that we believe our sustained efforts at VPN customer acquisition are paying off, and we're confident that we will be back to growth in the second half of 2024. Our email marketing business' growth rate improved to high single digits, and we believe that this momentum will carry into 2024. Major focus for email marketing will be expanding our go to market reach. In Q4 2023, we expanded our outside sales capacity to better engage midsized enterprises, and we recently released the first in a series of upgrades to our APIs, which should better enable us to sell through independent software vendors and SaaS marketplaces.
Email marketing is another example of our multiyear strategy in which we acquire businesses with the initial focus on managing them to a strong profitable core and then building organically off of a solid foundation. This shrink-to-grow strategy is playing out in our Moz SEO business right now. It's solidly profitable, and with new leadership installed at Moz, our focus has shifted to getting it to growth. For 2024, the midpoint of our guidance represents 5.6% of revenue growth, reflecting improvements in organic growth along with the contribution of revenues from recently acquired businesses. It excludes the contribution from any additional acquisitions we may consummate over the course of the year, and we're increasingly bullish on our ability to close deals as the M&A market thaws.
In 2023, half of our businesses grew organically and half declined. In 2024, we anticipate that ratio to substantially improve with the lion's share of our businesses growing. And to be clear, we expect all of them to return to growth by 2025. We don't believe in owning businesses in structural decline. Cycles happen and impermanent headwinds emerge, and we've proven highly adept at managing those. The key to our acquisition system is having the discipline and vision to distinguish between cyclically challenged businesses and those that are structurally challenged. We believe 2024 will be a noticeably improved environment for M&A. We believe the valuation gaps are closing. Private equity owners are eager for liquidity and strategics are rationalizing portfolios.
Our pipeline is filling up, and our balance sheet can support a substantial amount of deal activity. Now let me discuss just a few of our AI initiatives. Across the organization, we're continuing to leverage AI for exciting new product experiences and efficiencies across our operations. In Q4, Ekahau launched new AI enabled product features to their optimizer product. The upgraded Ekahau optimizer features AI driven insights for improved WiFi performance, identifying configuration and design related issues. It delivers customized optimization recommendations and proposed configuration changes to the network. Our What to Expect property rolled out an innovative AI shopping helper for expecting parents. This tool interprets consumers' needs from their inputs and uses our database of expert reviewed content to deliver customized product recommendations.
Similarly, Healthy Careers introduced a new AI career companion. This conversational chatbot enables healthcare job seekers to describe their ideal job scenario and receive customized job listings. Healthy Careers also rolled out an AI driven cover letter creator designed to align user profiles and resumes with specific job listings, providing them with a tailored cover letter to support their job application efforts. Our Lose It app took a significant step forward by integrating an AI enabled feature that simplifies the way users log meals. We believe utilizing voice commands in natural language as compared to typing in meals consumed makes the app much more accessible and user friendly. With a full rollout scheduled for all users in the second quarter of 2024, we're excited about the potential this feature has to enhance user engagement and streamline meal tracking.
We remain enthusiastic about the value AI can bring to Ziff Davis, but we do not accept AI platforms using our copyright content without rightful compensation. Our highly researched and carefully verified articles significantly contribute to GenAI training datasets. Analysis by The Washington Post and the Allen Institute for AI highlights Ziff Davis as a top source of text for Google's C4 LLM training dataset, ranking us alongside publishers such as The New York Times. In fact, we were the fifth largest source of tokens in that analysis. We are committed to defending our rights and pursuing licensing agreements. To that end, we are actively engaged with the News Media Alliance as it explores potential licensing frameworks to more effectively manage the use of publishers' content.
As I've stated before, we believe both of these statements to be true. AI has the transformational potential to create meaningful value for Ziff Davis, and AI companies must respect our copyrights. Finally, let me provide you with an update on our ESG efforts. Last summer, we submitted the CDP Climate Questionnaire, widely considered the gold standard of environmental reporting. We were very pleased to learn that just a few weeks ago, we received a B, a highly respectable score, especially as a first-time participant. We look forward to taking part in CDP annually and making it a component of our ongoing reporting. With respect to our 2030 science-based emissions reduction targets, we are actively working with our largest suppliers to ensure we are on track to meet our targets.
On the social front, I'm pleased to share that we earned a score of 100 on the Human Rights Campaign Foundation's 2023-2024 Corporate Equality Index. And Ziff Davis was once again named one of the best places to work for LGBTQ plus employees. As it pertains to governance, over the past year, we've refreshed our board of directors, adding three directors who bring valuable perspective and experience. Jana Barsten, former KPMG Global Audit Sector Leader for the Tech Industry, Kirk McDonald, former CEO of GroupM North America, and Neville Ray, former President of Technology at T Mobile. Our board has never been stronger. 2024 is off to a promising start. With momentum in several of our businesses and our first M&A transaction of the year already closed, we believe that Ziff Davis is well positioned to execute upon our total growth strategy and return to creating shareholder value.
With that, let me hand the call back to Bret.
Bret Richter: Thank you, Vivek. Let's discuss our financial results. Our earnings release reflects both our GAAP and adjusted financial results for 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 improvement as compared with our first half results. For the full fiscal year, despite pressure on growth and a modest total revenue decline, we generated significant adjusted EBITDA and adjusted diluted EPS. On slide 6 and 7, we have provided performance summaries for our two primary sources of revenue, advertising and subscription and licensing. Slide 6 reflects our Q4 fiscal year 2023 advertising revenue. Q4 2023 advertising revenue declined 3.7% as compared with the prior year period and fiscal year 2023 advertising revenue declined by 5.2% as compared with 2022.
Excluding our B2B tech business, advertising revenues would have declined by 1.4% in Q4 and 1.9% for all of 2023. Our net advertising revenue retention, an annual trailing 12-month statistic that we update quarterly, was approximately 87% for Q4 2023, reflecting recent pressures on digital advertising revenues. As defined in the slide, in the Q4, Ziff Davis had 1943 advertisers with an average quarterly revenue per advertiser of approximately $120,000 slightly higher than the comparable Q4 2022 metric. Slide 7 depicts our subscription and licensing revenue performance. Q4 2023 subscription and licensing revenue grew 4.1% as compared with the prior year period, and these revenues grew 3.1% during the last 12 months. The table on the bottom of slide 7 includes subscription and licensing metrics for the last 8 quarters.
Sequentially, total subscription and licensing customers decreased modestly to 3.266 million primarily reflecting growth at Lose It offset by a decline in our VPN and Humble Bundle subscribers. Sequentially, our average quarterly revenue per customer increased to $44.77 and subscription and licensing churn declined 34 basis points sequentially to 2.86%. The improvements in quarterly revenue per customer and churn reflect a number of factors, including the impact of strong performance within Ookla. With regard to the balance of our revenue, the company's Q4 2023 other revenues declined year over year to $10.5 million from $14.4 million in Q4 2022, primarily reflecting lower revenue from our video game publishing business. Slide 8 reflects organic and total revenue growth rates for the 2021 to 2023 period.
Revenues from businesses owned for at least a full 12 months are included in organic revenue, while inorganic revenue relates to businesses, we have owned for less than 12 months. Q4 2023 organic revenue declined 2%, including the declines at B2B. Please refer to slide 9. As of the end of Q4 2023, we had $738 million of cash and cash equivalents and approximately $168 million of short- and long-term investments. We also continue to have significant leverage capacity both on a gross and net leverage basis. As of the end of 2023, gross leverage was 2.1 times trailing 12 months adjusted EBITDA and our net leverage was 0.6 times and only 0.2 times if you include the value of our financial investments. During 2023, we deployed capital to repurchase approximately $109 million of our common shares.
We did not repurchase shares during the Q4. We also did not close any acquisitions during the Q4. The strength of our balance sheet is one of our most valuable assets, particularly in the context of our M&A strategy. We continue to be active in the pursuit of transactions of various sizes across all of our businesses. Having closed one transaction already in 2024, we look forward to returning to a level of acquisition activity that is more consistent with our company's history. During 2023, we deployed approximately $25 million of capital in support of our current and prior period M&A activity. Turning to slides 11 and 12, I'll provide a few additional details related to our guidance range. We believe our guidance range reflects the positive momentum that we are seeing in several of our businesses and the expectation of certain performance improvements in others.
We believe the macroeconomic environment is stabilized as compared with this time last year. And while we would not yet characterize the macro as strong or without risk, our expectations for 2024 do assume that the current environment remains stable. The high end of our guidance for 2024 revenue, adjusted EBITDA and adjusted diluted EPS reflects growth rates of approximately 7.8%, 8% and 9.4% as compared with the unaudited results we present today. The low end reflects growth of approximately 3.4%, 3.7%, and 3.9%, respectively. Each of these growth rates are significantly higher than the expectations for 2023 that we discussed at this time last year. Our EPS guidance reflects the adjusted EBITDA range adjusted for net interest expense, higher depreciation from our recent capital investments and slightly higher taxes each as compared with 2023.
It also reflects the absence of $3.4 million of other loss that we reported in 2023. The midpoint of our guidance reflects mid to high single digit growth in advertising revenue, subscription revenue and licensing revenue growth in the low to mid-single digits and low double digit other revenue growth, each as compared with the prior year period. The midpoint also reflects modest growth in the first quarter and the year's highest rate of growth in the fourth quarter. Revenue growth is a function of both organic growth and inorganic growth from recent acquisitions. We expect to return to positive organic growth in the second quarter, with the first quarter reflecting relatively flat organic growth year-over-year. Given the seasonality of our digital media properties, we anticipate that more than 20% of our revenues will be realized in the first quarter with approximately 30% expected for the fourth quarter.
At the midpoint of our range, the company expects to have an adjusted EBITDA margin of approximately 35.5% for the year. We have slightly raised the range for our projected tax rate to an annual rate of between 23.25% and 25.25% to reflect our anticipated earnings mix and increases in certain local tax rates. Note, these rates are expected to fluctuate quarterly. Additional details related to our anticipated share count are outlined on the slides as well. Note that these figures do not assume additional share repurchases, which may occur during the fiscal year 2024 period. The guidance range reflects a return to growth for our company. And we believe that this plan, which reflects both positive organic growth and the impact of recent acquisitions, places us on a path back towards our long-term total revenue and adjusted EBITDA growth rate targets of approximately 15%.
We further believe that this guidance reflects the proper balance of pursuing investments in our business to support growth opportunities in 2024 and beyond and our focus on delivering profitable growth, robust adjusted EBITDA margins, and free cash flow generation, all tenants of our value creation strategy. And note that our 2024 guidance does not reflect any additional 2024 M&A, which could represent upside. Following our business outlook slides are our supplemental materials, including reconciliation statements for the various non-GAAP measures to the nearest GAAP equivalent. Please see slide 18, which includes a reconciliation of free cash flow. Our 2023 free cash flow was $211 million. As shown on slide 18, Q4 2023 free cash flow reflects a substantial improvement as compared with the prior year period, in part reflecting an improvement in working capital as compared with the balance of 2023.
2023 was a challenging year. And while we are proud of our overall performance, which demonstrates the resilience of our diversified business model, we have now turned our attention to 2024 and are energized to pursue and achieve our plans. With that, I would now ask the operator to rejoin us to instruct you on how to queue for questions.
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