Good day, ladies and gentlemen, and welcome to Ziff Davis Second Quarter 2022 Earnings Call. My name is Paul, and I will be the operator assisting you today. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] On this call will be Vivek Shah, CEO of Ziff Davis; and Bret Richter, Chief Financial Officer of Ziff Davis. I will now turn the call over to Bret Richter, Chief Financial Officer of Ziff Davis. Thank you. You may begin.

Thank you. Good morning, everyone, and welcome to the Ziff Davis Investor Conference Call for Q2 2022. As the operator mentioned, I am Bret Richter, Chief Financial Officer of Ziff Davis; and I'm joined by our Chief Executive Officer, Vivek Shah. A presentation is available for today's call. A copy of this presentation is available on our Web site. 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 Web site 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@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 this 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. We continue to skillfully navigate the difficult and challenging operating environment with the strategy of producing near-term earnings growth, while positioning the company for an eventful macroeconomic recovery. We grew pro forma adjusted EBITDA in Q2 by 5%, a repeat of last quarter's performance, which is particularly noteworthy given the strength of last year's second quarter. Remember, Ziff Davis grew its revenues in Q2 2021 by 42%, making it one of the biggest growth quarters in our company's history. We also posted 12% adjusted non-GAAP pro forma EPS growth in Q2 2022, which was clearly ahead of our expectations. Our company has always been bottom-line-oriented, but it's at times like these that we are particularly adept at margin management. In fact, while our revised guidance lowers the midpoint of estimated revenues for the year, we're maintaining the midpoint of our adjusted EPS estimate of $6.67. Advertising revenues declined 5% in Q2, which is consistent with the 4% decline we saw in Q1. As we said last quarter, we expected to see a continuation of the pressures in the ad market, while also lapping last year's very strong revenues. While we increased the number of advertisers year-over-year by over 100, we saw about $10,000 less in spend per advertiser reflecting, in part, a consistent reduction in budgets for many of our advertising clients. But I've also learned, in my nearly 30 years in the media business, that budgets can be restored as quickly as they are reduced. And the key to managing in this environment is to strengthen your ad products and capabilities. And that's precisely what we're doing by developing new branded content offerings, live commerce video solutions, and custom short-form videos on social platforms, to just name a few. It's also important…

Thank you, Vivek. Let's discuss our financial results. Our earnings release reflects both our GAAP and non-GAAP financial results for Q2 2022. Our earnings release also reflects pro forma adjustments for the impact of various 2021 asset dispositions. Explanations for and reconciliations of these adjustments are provided in the release. As you may recall from our previous earnings calls, our U.K. Voice assets were sold in February 2021. And we completed the sale of our B2B backup business in September 2021. The results related to these divestitures are reflected in our year-to-date 2021 financials through their respective date of sale. And the results of our B2B backup business are reflected in our Q2 2021 results through its dataset. However, these divestitures do not impact the presentation of our Q2 or year-to-date 2022 results. On October 7, 2021, we completed the spin-off of Consensus. Our year-to-date and Q2 2021 GAAP income statement reflects the financial activity related to Consensus in discontinued operations. We will focus our discussion today and my commentary will primarily relate to our Q2 pro forma non-GAAP financial results from continuing operations, which exclude the contributions from the Consensus business and exclude the contributions from our domestic businesses for the portion of the Q2 2021 period that they were owned by Ziff Davis. Now let's review the summary of our quarterly financial results on slide four. We reported pro forma revenue from continuing operations of $337.4 million for the second quarter as compared with $330 million for the prior-year period, reflecting growth of 2.2%. The strength of the U.S. dollar and the decline in the value of certain foreign currencies negatively impacted this growth rate. And if the comparable 2021 currency values would apply to our 2022 Q2 results, revenue growth would have been approximately 3.8%. Pro forma…

Thank you. We will now be conducting a question-and-answer session. In the interest of time, we ask that you please limit yourself to one question. [Operator Instructions] And the first question is coming from Shyam Patil from Susquehanna. Shyam, your line is live.

Hey, guys, thank you. I had a couple of questions. Vivek, in your prepared remarks, you talked about strengthening ad products, and you gave a few areas where you guys are doing that. I was wondering if you could just talk about that a bit more, maybe some specifics around exactly what you guys are doing in those areas. And then on M&A, I know it's always hard to time deals, and you guys always have a very robust pipeline, but I'm just curious, do you think that you'll be able to deploy more capital, say, over the next 12 months than we you would have otherwise been able to do in a better macro, just curious on kind of the -- just how you see kind of the ability to close deals with asset price volatility? Thank you.

Hey, well, good morning, Shyam, and thanks for the question. So, I'll start with your first one around the advertising business. And what I just want to reiterate is we have some really strong green shoots coming out of a number of our categories. The gaming business continues to be strong, the health business continues to be strong, we're excited to see RetailMeNot reach a point of stability. And then, look, I think a lot of our challenges have been in a particular vertical, the technology vertical, which are all really cyclical challenges. From a product point of view, it's interesting too is that if you unpack our advertising business, the display business continues to grow, it's actually the performance marketing business which is heavy in the tech sector that has seen some of those declines. And yet, a lot of the product developments that we talked about are actually performance marketing businesses and performance marketing solutions because, fundamentally, long-term, outside of the noise of the current marketplace, return on ad spend, return on investment is key. It's key, I think, to the advertising business generally, but certainly to our franchise. So, we are leaning into more performance marketing solutions, looking for ways to leverage video within performance marketing, which has historically been more of a tech-linked-based business. And so, we're excited for all of that. And as I've said, it's in moments like these where you really want to double down on capabilities. With respect to your question on M&A, look what I'll start with is that, year-to-date, we've deployed capital actually equal to what we did last year, so it isn't as if we've been inactive and as I said -- spoke in my prepared remarks, we are excited for what Lose It! and CellRebel represent strategically to…

Thank you.

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

Wonderful, thanks, guys, for taking my questions. Just wanted to maybe ask about Moz and drill a little bit more into that; Vivek, we were just at MozCon a couple weeks ago, and I think the big thing that surprised me is just the size of some of the customers there, I mean there were some really big customers that were using Moz and seem to really love the product. Can you maybe talk a little bit about how to Moz business, specifically, is doing, and how we should be thinking about that business going forward, especially just given how competitive this market is? And then, maybe just for Bret, in terms of the macro assumptions in guidance, are you assuming things kind of stay the same as they are right now, are you assuming that there's further macro deterioration? I mean, we just saw the inflation print this morning, obviously not very pretty, so it seems to think that macro might get worse from here. Maybe if you could just help put a little bit of a finer point on the assumptions that would be helpful? Thank you, guys.

Rishi, thank you for the questions, and thank you for attending MozCon. And it's often great to see these things in person to get a real sense of the power of the brands we operate and the community's embrace of those brands. And I think that's what you saw in Seattle. It's interesting with Moz, when we acquired Moz we knew we had a company in a very important space, search engine optimization that had a really storied position but, as a business, wasn't really delivering any profitability. And as we often do in situations like that, our immediate focus was how do we extract margin, how do we extract earnings from the business. And that was job one, which has been accomplished and done. And the trick with doing that is, obviously, not damaging the brand itself, and not damaging what makes it attractive to the marketplace. And that was done as well. And you saw that live and in person, the Moz brand is as strong as it's ever been. We think the SEO space has room for multiple players, there are multiple good solutions in this space, including Moz. We continue to believe that it will continue to grow and is growing for us organically, with margin expansion, and will grow across enterprise, for sure, which we have our stat product, but we do have a fair amount of SMB customer base as well that you may not see at the MozCon. MozCon typically attracts larger companies, but we have a fairly robust small and medium enterprise portion of the business. So, we like where we are in SEO. And I'd be remiss to not also add email, because I think email and SEO or both earned media. And I think the distinction between earned and paid media is simply this, particularly for SMB, is they're getting priced out of paid search, they're getting priced out of social; those platforms are becoming harder and harder for them to extract ROI. But email, building a list, getting into the inbox, SEO, building natural search ranking is a far more efficient, possibly controllably way for SMBs to drive customer acquisition. So, I think the combination of those businesses which form most of the Moz group we're excited for. And we think, particularly in a market like this where there may be a lot of focus on expenditure, particularly on the marketing side, efficient marketing technology software may be the choice for customers.

Great, thank you, Rishi. I guess the way I'd characterize how we think about it is with a number of points. First of all, when we spoke in May, we highlighted the fact that we saw a lot of pressure in the first quarter. And even at that time, we anticipated seeing some of that pressure in the second quarter. But the back-half of our year was a little bit more optimistic, looking toward stabilization, if not some improvement. I think the most significant factor in us revising our guidance is that we are not expecting stabilization in the second-half. And while our guidance reflects a range which, by its very nature, provides some room for certain factors being variable, we're also not projecting a significant further downturn from here. That said, Q3, Q4 is a relatively short period, it's about six months. In putting this together, we have note -- 90 more days of performance data, we've had significantly more customer dialogues, we've observed behavioral changes from certain of our customers and seeing some delays and pullbacks. We've gotten some positive indications for late in the year. Of course, tying that to our first-half dialogues, where we had some positive indications and those indications changed have to be a consideration. But in revising this guidance we created a range that we think we're -- can perform within and we're comfortable with the guidance we put forward.

All right, that's really helpful. Thank you, guys.

Thanks, Rishi.

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

Okay, great. Yes, no, a couple of questions. First one probably for Vivek, I mean it's great to get some of the breakdown within advertising, and nice to see some of it strengthen in healthcare, and gaming, in particular. I'd love to get your perspective on visibility into the second-half of the year for those particular verticals. I know, normally, you have good lead times within pharma, but those areas where you think you continue to grow, maybe even double digits in the second-half. So, just any more color or confidence on what you're going to see there would be great.

But, look, I think it's always hard to say, category-by-category there are a lot of different dynamics. What I will say is this, so, one is, the comps start to get easier. I think we can't say it enough, I mean last year's Q2 was incredibly strong, 42% overall revenue growth, 20% organic revenue growth. And so, in some ways, if you take a two-year view it starts to make a little bit more sense. In the second-half, really in Q4, remember the organic growth in Q4 of last year was 2%. So, we do think we'll have a favorable comp. And we do think that if the retail environments improved we can see some upside there. We do think some of the supply chain challenges, particularly in the hardware, consumer electronics, and device world, where we're seeing a lot of pressure in our tech business, I think some of that will start to alleviate. And then I also think some of the issues around baby formula and some of the issues around DTC pharma delays. On the gaming front, I'd have to look at the schedule of game releases; it's actually quite dependent on that. And I think my recollection on that is it'll be more Q4 than Q3 from a gaming release cycle, it's very sensitive to gaming and theatrical movie releases. So, I don't want to -- I hesitate to give you a very specific answer on the gaming piece between Q3 and Q4. So, look, I think that this is all a function of what our clients are going to do in the near-term. If they continue to feel like they need to cut costs, be short-term-focused, drive their earnings; there's nothing we can do, right. And I think that is a reality of that situation. At the same time, we're preparing the company as if that will continue and still be able to generate earnings and cash flow, build our balance sheet, and then be opportunistic on M&A, because if it's happening to us on the cyclical basis it's happening to others, others may not have the ability to weather this in the way that we obviously do.

Okay, got it, that's helpful. And then maybe just the second question, as you look at the subscription business, I mean it sounds like you continue to see strength in Ookla, you talked about Moz, a few other areas. But I'd just be curious what you're seeing from a macro perspective across your subscription portfolio. Are there any particular areas that are being more impacted there negatively? And then as you look at the -- kind of the ARPU decline in subscription, I may have missed this in the prepared remarks, was there a mix shift there, is anything particular you'd point to on that ARPU change there?

I'll let Bret take ARPU in a second, but to answer your question on the macroeconomic pressures or dynamics on the subscription business. We're not seeing that as much to be honest with you. So, as I've said, we've had a number of our subscription businesses to continue to perform well. And I would say that the business where we are not seeing growth, which is in our Cybersecurity suite of subscription offerings, I view those as micro issues. And I believe that we are on a path to addressing those issues, which I've talked about in the past, which are sales and marketing issues and shifting to a channel-first approach. And then some issues on the consumer VPN piece of this and some of the competitive realities, but a lot of those again I think is how we can execute, how we can run these businesses for both growth and profitability, shift to a more balanced approach. Historically, it's been profit, profit, profit, and not a lot of focus on growth. They are very stick by the way, particularly on the B2B cybersecurity part of the business. We don't really lose customers, but we are not wining customers. And we need to orient ourselves to doing exactly that. So, I would not characterize at this moment the subscription business feeling the macroeconomic pressures that the advertising businesses are. I wouldn't characterize that; doesn't mean it can't happen, but I think right now we are seeing the issues there as more micro on the ARPU.

Yes, and - well, on ARPU we did make a comment in our prepared remarks, but I definitely think it's worth repeating. So, I appreciate the question. In both our advertising and our subscription metrics, these metrics are an attempt to reflect the business in three kinds of keys ways; the customers we serve, the revenue the produce, and the retention rates that we can track. That's a positive. What's challenging in reporting these metrics quarter-to-quarter is that a business that's focused on and partly driven by M&A in its DNA, using our capital to grow the business through M&A in addition to organically, these metrics are often at risk of an impact. Earlier this year, we did an acquisition in our health & wellness business lifecycle marketing which was characterized by a higher number of advertisers per advertising dollar at a lower spend per advertiser and that impacted those metrics on our last call. This quarter we closed an acquisition also in health & wellness for a company called Lose It! which is characterized by a high number of customers at a single digit average revenue per month. So, again, you see a quarter by quarter change in this trend that's more impacted by M&A than by almost any other activity in the business. There are certain other activities in the business which certain of our sectors contributing more contributing less in any given quarter in these metrics and we did highlight some of that in our prepared remarks, but I would just caution if not ask to focus quarter to quarter that these metrics can be impacted by our M&A activity.

Yes, that's helpful. Thank you.

Thank you. The next question is coming from Joe Goodwin from JMP Securities. Joe, your line is live.

Right. Thank you for taking my questions. Vivek, just on -- just kind of to double up on the cybersecurity business, obviously you guys are making changes over the past two - three quarters or so, but just curious are you seeing green shoots from these efforts, any positives or things to highlight there?

Yes, no, we definitely are. Look, I think that the first thing I'll say is that we are releasing an EDR which endpoint detection and response solution to our customers. And so, EDR is really widely adopted at the enterprise level large companies, but not really at SMB level. And we think this will allow us to win some business and drive some share of wallet. So, we are -- the product is in beta I believe in October. And we will full launch in January of 2023. So, we are excited for that. We have -- the advanced email security product is really competitive. And so, we think it's great protection against phishing, malware, and other threats. And we've added some features, with calculation, advanced analytics that we needed to get done. Inspired eLearning, which is the security awareness training piece of the business, is now -- I think by the end of the year, we are going to be in 17 languages to help us with our multinational customers and expansion outside of the United States. So, there is a lot going on the product side that we are excited about. And then as I said, we do have a complete overhaul of the sales and marketing organization. It is in the process of taking place. We have a great leader in place right now and focusing on selling through the channel which is really where we see the biggest opportunity. So, with our new chief revenue officer and the hires that he has made, we feel very, very good about the channel first strategy that we are putting in place. So, there are ranges, but this takes time, right? Subscription business is built over time. And so, I think we are optimistic going into next year where that can go. It's an app business, it's a business at scale with great profitability, but we really need to get this on to the growth trajectory, because I think it will have a very different valuation profile when we do.

Got it, okay. Thank you for that. And then, Vivek, where are you spending the majority of your time today in the business? Are you evaluating M&A or what would you say -- where are you most focused?

Look, I'm focused on all of it, right. So, there's obviously managing the existing business and generating the kind of earnings growth that that we experienced in this quarter, and the kind of earnings and growth that we are guiding to for the year, 9% EPS growth doesn't just happen in an environment like this with the pressures we have. So, I think there's a fair amount of time managing these businesses working with our leadership teams in the business units to make sure that they can both perform from a bottom line point of view, but really set themselves up nicely for an eventual recovery. That is a critical part of my time and I think the organization's time. At the same time, and we view this as part of what we do is the acquisition program and being involved as I always am, and always has been around all the activity that's going on. So, that's not new, and certainly gleaning into that. And then, the last piece, I would just say is that continuing to look for talent to bring into the organization, not everyone is as well positioned as we are. This is an opportunity for us to bring talent into our company. And we've done it in a few places. We're going to continue to do it. We have a great new Head of our shopping business. As I said, we have a great new Chief Revenue Officer within the Viper Cybersecurity group. So, we're going to continue to look for great leadership.

Great. Thank you.

Thank you.

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

Hey, good morning. This is Stefanos Crist calling in for Jon, thanks for taking our questions. Just a quick one, can you just give us the underlying share count assumptions in your guidance and if that includes share repurchases?

Sure. On a go-forward basis, through the back end of the year, share repurchases is absolutely a potential allocation of capital, but we don't project share repurchases into the figures that we're using for our guidance. We repurchase shares through the second quarter, we talked about that our scripting and gave the numbers, we have capital to allocate towards that. The other thing I would just point to is that if you're doing math, relating the balance of this year to 2021, there was activity in the third quarter of 2021, when we retired our 3.25% convert. So, just make sure we pay attention to that bridge between that share count and the current share count, but looking at fully diluted shares as they stand today would be at least our baseline assumption through the back half of the year pending further allocation of capital towards that pool.

Perfect. Thanks so much.

Thank you. [Operator Instructions] And the next question is coming from [Shane O'Brien] [sic] from William Blair. Shane, your line is live.

Thanks. Not quite the name, but close enough. Can you guys talk about the cash flow dynamics here, obviously, year-to-date were down almost $100 million year-over-year. How do you think about that the back half of the year and sort of what are the biggest factors there? Thanks.

Okay, that's a great question. And thank you for giving us the opportunity to highlight this because it's important. Our 2021 cash flow statement does not reflect the split between continuing and discontinued operations and does not reflect the pro forma effect of the absence of the business that we disposed of in 2021. So, in looking at that comparison, we're comparing effectively two different businesses. We do provide some incremental disclosures on 2021, but that is not a continuing Op, so that cash flow includes Consensus's cash flow. We've actually had strong cash flow year-to-date on a conversion basis. We've tried to highlight on these calls that we look at cash flow over the longer-term, at least a 12-month period. In any given 90 day period, there're impacts of specific elements but more importantly, the timing of working capital. We're not a company that looks to make sure that payments and receipts are balanced on the last day of the quarter, if checks go out or in between the 31st and the first of the next month, it'll impact our quarterly cash flow. So, I think it's important to take a 12 month view, but not compare to the 2021 results, which reflect businesses we no longer own.

Great. So, at the current run rate you are around 280, that seemed like a fair assessment for cash flow, EBITDA somewhere high 200s?

Now, again, we don't guide to a specific cash flow metric, and cash flow is timing sensitive, we were essentially targeting this company to reach on the order of a 60% conversion rate to EBITDA, but likely a little bit below that at this time. And cash flow tends to be weighted to the first quarter is very big, given the fact that there's seasonality in our fourth quarter cash flow. So, the fact that there's I'm sorry, there's seasonality in our fourth quarter revenue, which is collected in the first quarter with regards to cash flow. So, multiplying that number by two would not necessarily factor in the seasonal dynamics of this aspect of our business.

Perfect, thanks.

And just the last comment, when we think about conversion rate, we think about conversion rate, sort of our adjusted EBITDA to the extent our non-GAAP items to the extent that were unusual items, to the extent that were M&A items, cash flow would need to be adjusted for that.

Great, thanks.

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

Great, thank you very much, Paul. We appreciate you all joining us today for our Q2 2002 earnings call. We also appreciate this a pretty busy day in the earnings market. So, thank you for your attention. We plan to issue a press release next week regarding investment conferences. We plan to participate in during the month of September. And as always, we hope to see some of you there. Thank you, and have a great rest of the day.

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