Good day, ladies and gentlemen. And welcome to the Ziff Davis Third Quarter 2024 Earnings Conference Call. My name is Tom, 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 Q3 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, Bret, and good morning, everyone. We're very pleased with our third quarter results, the total revenue growth of 3.7% and adjusted EBITDA growth of 9.6%. It was certainly our best quarter of the year. And we're confident that we are now solidly in growth territory, with improvements in the businesses we currently own and the opportunity for us to leverage our balance sheet and cash flows to acquire businesses that we'd like to own. The digital media segment grew nearly 6% in revenue and over 14% in adjusted EBITDA in Q3. That's the best adjusted EBITDA growth for the segment since Q3 of 2021. All of our digital media verticals grew in the quarter, which is itself a milestone, with a mixture of organic and inorganic growth drivers. Our tech properties had a strong quarter, with double digit growth in our consumer tech brands, plus the benefit of acquiring CNET late in the quarter, partly offset by declines in B2B. The gaming vertical grew double digits, with steady growth from our existing properties, plus the inclusion of Gamer Network, which was acquired in May. Our shopping properties grew mid-single digits, with continued benefit from the acquisition of our Gift Cards business. Connectivity was up mid-single digits and health and wellness was slightly positive, with strong consumer revenues offsetting ongoing pressure on the provider side. Overall, we feel we've turned the corner in our digital media businesses, with advertising revenues up 5.8%, and subscription and licensing revenues up 7.8% in the quarter. The Cybersecurity and Martech segments revenues declined by a little over 4%, but we've been very focused on preserving adjusted EBITDA, which was flat in the quarter. We took a revenue hit in our Moz SEO business, partially due to the MozCon conference moving out of the…

Thank you, Vivek. Let's discuss our financial results. Our earnings release reflects both our GAAP and adjusted financial results for Q3 2024. We will focus our discussion today, and my commentary will primarily relate to our Q3 2024 adjusted financial results and their comparisons to prior periods. Slide 4 reflects the summary of our third quarter financial results. We reported revenue of $353.6 million for the third quarter of 2024. This compares with revenue of $341 million for the 2023 comparable period reflecting an increase of 3.7%. Q3 2024 adjusted EBITDA of $124.7 million increased 9.6% as compared with $113.7 million for the prior year period. Our adjusted EBITDA margin for the quarter was 35.3%, a 200 basis point improvement as compared with Q3 2023. Q3 adjusted diluted EPS was $1.64 reflecting a 9.3% increase as compared with Q3 2023. During our Q2 2024 earnings call we said that we expected our financial results to improve in the second half of the year with Q3 2024 revenue growing nearly 4%, adjusted EBITDA growing almost 10% and adjusted diluted EPS growing more than 9%, we believe that this quarter's results reflect a significant year-over-year improvement. In addition, our year-to-date results for revenue adjusted EBITDA and adjusted diluted EPS all reflect year-over-year growth. Let's discuss certain details relating to these results. 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 performance. Advertising and performance marketing revenue increased 5.8% in Q3 2024 as compared with the prior year period. This represents a significant improvement as compared with a first half 2024 decline of 1.4% as compared with the first half of 2023. Advertising and performance marketing revenues in consumer tech…

[Operator Instructions] And your first question this morning is coming from Ygal Arounian from Citigroup.

Hey, good morning, guys. Nice to see the outperformance and churn here. Maybe just on 4Q, we're still kind of expecting a nice step up into 4Q. I know we've got a full quarter of CNET and that helps. Just to help us frame what else kind of drives that step up. And in particular, are we expecting to get back to organic growth in 4Q and then I have a follow up.

Thanks for the question. I'll take that. I think 4Q really reflects all the underlying trends in the business. I think first and foremost, when you think about the fourth quarter for our company, remember the seasonality in our advertising business. But it's really just to focus on continuing execution across the board and not only driving revenue, but maintaining and adjusting our cost space dynamically to adjust to the wins of the business. Appropriately, we'll get a full quarter of CNET. We have the seasonality in our various shopping businesses. And where certain of our businesses have shown straight throughout the year, we anticipate certain of those trends continuing. With regards to organic growth, no comment on a specific metric beyond what we already said. For this quarter but importantly our Q3 organic growth rate was a significant improvement relative to what we reported in Q3 where we discussed certain specific dynamics for this quarter.

Yes, the only other thing I would add which might be helpful is when we look at Q3 organic, what we really have is two factors that weighed on the overall rate. One is B2B and the other is the cyber and martech business. And on B2B one thing I'll share is that we are in the process of reducing the number of ad products offered by that unit. And so we want to simplify the business and by simplifying the business walking away from revenue we think we can improve margins and so there's a sort of what, those who have followed the company for a while what we often do with acquisitions which is shrink to grow to find the profitable core of the business, we're doing that with the B2B business. And so by simplifying it we think we're going to help improve margins in 2025 that obviously contributes however to a negative organic growth element. And then cyber and martech, I discussed a little bit in the prepared remarks. We are having some challenges there but outside of that absent those two, we're in good territory and we think that's going to continue into Q4.

Okay, great. That's really helpful. And I guess maybe one on Gen AI and you'd like to give a bunch of commentary here maybe expand on it and put some of these things together? So 20% of your search queries are seeing Gen AI results in search, you've in the past, you've said that Gen AI search has been additive to your traffic, I'm not sure if that's evolved at all, if that's still the case. And then talk about the value that you bring as a high quality publisher. So how does all that kind of fit with your philosophy and your approach and what you're doing around Gen AI, maybe just quick expand on that a little bit more. Thanks.

Yes, no, we happy to, and let me just correct one thing. So the percentage of queries that are valuable to us and drive the vast majority of our traffic, it's a 10% AI overview presentation rate. So not 20%, but 10%, that's slightly up, I think from last quarter was 8%, but still obviously a relatively small portion of the overall search pie. So that's the first thing I'll just point out that Gen AI in the context or AI overviews in Google in the context of our queries is still relatively small. With respect, however, to that universe, and it's still hard to entirely tease out click-through rates on AI overview queries versus non, but if you were to listen to Google's commentary, their view is that it actually leads to more search activity, and more search activity presumably leads to more click-through. I will also say that there is an ongoing industry view of how to be sourced and sighted within Gen AI because that is amongst likely the most valuable real estate you can get, and that's where, just like in search, I just think high domain quality brands that we have essentially most of our properties have a domain authority in excess of 90 on a scale of 100, which is excellent. I think those properties will continue to do well. All to say that, look, I think that the market is very attuned to this particular set of, let's just call them algorithm changes, but we've been watching algorithm changes for a few decades now. I kind of view this consistent with those in the past, so we're very focused on continuing to rank well and search, get traffic out of search but also remember, we do a fair amount of fair amount of direct traffic, we do a fair amount of social traffic, we do a fair amount of app traffic, we have a significant email database and reach of audience through email. I know we spent a lot of time thinking about and talking about search, but we're a pretty diversified organization when it comes to traffic and ways in which we can reach and monetize audience.

Your next question is coming from Ross Sandler from Barclays.

Great. Thanks, guys. Just maybe to start, the 4Q revenue trajectory implies another nice acceleration, at least at the high end, for the advertising business, which will have a full quarter of CNET, as you mentioned. So I guess as we look out to 2025, how should we think about factors that would cause that growth rate to either sustain itself, go higher, lower, based on where we're at just in the advertising business? And then more broadly, is CNET helping change the nature of conversations that you're having with your larger advertiser accounts, given the scale that it kind of adds to the overall portfolio? And then I've got one follow-up after. Thanks, guys.

Yes, no, thanks for the questions, Ross. So let me start with your last one, because it is part of the investment thesis, where bringing CNET with ZDNet, PCMag, Mashable, Lifehacker, Spiceworks into a singular organization, which has been rebranded CNET Group, and will go to market as CNET Group, I do think puts us in a very different competitive position. Look, the reality of the ad marketplace has been that a lot of dollars have moved to search, and to social, and into CTV, and just to programmatic. But there is a real appetite amongst advertisers to do larger scale, thoughtful, integrated, multi-platform programs. But you need scale players with a lot of versatility and capability to do that. We believe CNET Group is absolutely that, and is uniquely that within tech. And so we'll be using CES in January to really bring this to bear. We have a new Head of -- Chief Revenue Officer, Head of Sales that has just been announced within the CNET Group. So we're super optimistic about what that means at a time when we are seeing green shoots within at least consumer tech. So consumer tech for the properties excluding CNET have done very well this year. And that I think is underlying strength in consumer electronics, and PC, and mobile, and those categories. There's also a fair amount of advertiser interest in affiliating with AI, and positioning companies, tech vendors positioning themselves as AI forward companies. And so that becomes also a nice tailwind, I think for the business. With respect to 2025, obviously, it's early for us to say anything substantial about next year. That's obviously in the next call. But what I will say is that, again, most of the things are up and the things that are headwinds, I think we understand and we're managing. So let's just take cyber and martech. It's an organic growth headwind for sure. It's a total growth headwind for sure, but it's not an EBITDA headwind, right. So we've been managing that cost base really, really well. So where we have to, and I mentioned what we're doing with B2B, that's all to say that long term, I'm just very bullish on the bottom line of what this company is. And that has always been how we've been focused, which is how do we become a compounder, a net income EPS, free cash flow compounder. You're seeing, I think a lot of that in this quarter. And I think that's kind of the game plan going into next year. Ross, you had another question, right?

Yes, the second one was kind of related to what you just said at the end there. And Bret, you can hop in on this one. But the EBITDA to free cash flow conversion was above 60% in the quarter, as you guys mentioned. And then we're above the kind of medium term target of, I think you said, like mid to high-50s conversion. So were there any factors that caused that to tick up? And how should we think about converting EBITDA to free cash flow kind of steady state go forward?

Sure. Thanks, Ross. I'll take that. So again, when we look at our business and we look at EBITDA conversion, we obviously run our expectations within a range and starting first and foremost where we ultimately perform in that range impacts the conversion rate because the extra dollar of EBITDA doesn't necessarily come with more OpEx or more leverage interest expense. Of course, there is a tax impact. So again, when we think about free cash flow, we think about within a range. We also, when we say we're targeting kind of a mid-50s type of conversion rate, that excludes kind of unique aspects of any quarter could be some financing fees, which we had Q3. It could be some M&A fees, if we had transactions. We also look ultimately for every one of our businesses to contribute to free cash flow, which is critical. And then when we looked at this quarter, I think a lot of things happen. One, remember the seasonality of our debt payments. We pay our interest expense other than on our recently exchange convert in Q4 and Q2. We have timing of tax payments. We have timing of working capital, particularly as it relates to TDS. TDS was a negative contributor in Q1 and Q2 and a positive contributor in Q3. We looked at performance in Q4. So I think from pointing at all that to say we can't look at free cash flow in any given quarter as an indicator of the next quarter. But what we did see this quarter is a significant improvement in working capital, which is something that's been a headwind for this business for the last several quarters and we've highlighted and an overall very significant contribution to cash. I mean, to see any of our key financial metrics go up year-over-year on 75 plus percent obviously points to progress, but also of course points to something maybe a typical in the quarter where in this case it was that we did that for that working capital and recapture. So again, continue to target towards the mid-50s excluding specific kind of one-time items, higher or lower depending on our performance within the range and any given quarter, not necessarily an indicator that this quarter was very strong and we're not going to back up from that.

Your next question is coming from Cory Carpenter from J.P. Morgan.

Good morning and thank you. I wanted to ask about the study you referenced earlier and released a few days ago on the use of publisher data to train AI models. Just could you talk about your key learnings after going through this exercise and how it informs your approach to potential AI licensing deals? And then have a follow-up for Bret. Thanks.

Yes, thanks for the question, Corey. So look, I think that one thing to recognize within the AI and large language model landscape is that there hasn't actually been a deal cut or announced that we're aware of where any of the companies who own these foundational models have actually paid a license for training. Many of these deals are essentially licenses for maybe go forward content for what they call RAC or may include releases on liability with respect to training. And I think it's a fundamental disagreement that exists between companies like ours and the owners and operators of LLMs, which is their view that training is fair use and our view that it is not and requires license. So then within that, what we wanted to do is really understand how much of our content and other premium publisher content, how important that content is to the process of LLM training. And the headline is, it's very important. And so what you may hear in the marketplace is that, look, it's a vast quantum of data. No particular data provider or particular publisher or content or copyright owner is material. And it's essentially the entirety of the internet. And while they've sucked in the entirety of the internet, there is a portion of the internet, a very small portion that has a disproportionate impact in the training and the weight with which they trained these models. And so the paper is worth reading. Access did a little piece on it. It's starting to get some real attention, which is these large language models have learned and continue to learn from the best. And I think there are all sorts of implications, we believe, in that and our continued view that there needs to be licensing for training, not just licensing for retrieval, augmented generation, but not just RAC, but for training. So I think it's important. It is fact-based. It is not just about the Davis. It is about a number of premium publishers. And I think it's worth reading and worth understanding.

Thank you. And then just on capital allocation. The repurchase commentary changed a bit I think this quarter. Last quarter you said we expect to be active buyers, which you were. This quarter, I think you said you might be opportunistic around share repurchases. Maybe we're reading into it too much, but just maybe your latest thoughts on capital allocation, and are you signaling perhaps a greater focus on M&A and away from repurchases? Thank you.

Thanks, Cory. Nothing has changed in our messaging with regards to our overall approach to capital allocation. I think when we spoke in August, I think it was important given the training of the stock at the time that we were clear that we would allocate capital to show support, and we did. I think over time our approach to capital allocation again is, I think the best word I said, it is consistent, but we've spent a fair bit of capital this year. I highlighted debt repayment, share repurchases, significant M&A relative to recent history in our prepared remarks and we always maintain the optionality or the flexibility to be dynamic and putting more capital towards any or each of those pillars. So whether you want to read into an immediate or short-term message that we're continuing towards M&A but overall long term, no change whatsoever.

Your next question is coming from Rishi Jaluria from RBC.

All right, wonderful, thanks. I'll keep it to one question. I want to drill into maybe some of the softness that we've seen at the Moz group, you talked about maybe soft new customer acquisition. Can you maybe dive a little bit deeper into exactly what has happened? What sort of steps you're taking to mitigate that and as we continue to have these conversations around Gen AI, one of the places that I think a lot of investors have said maybe at risk has been in SEO and maybe even martech more broadly. So why is this maybe not a function of just AI starting to display some of that tech? Thanks.

Yes, great questions, Rishi. So I say a couple of things. So part of the softness obviously as I pointed out had a little bit to do with the MozCon, the timing of MozCon. So that is something just to keep in mind. Look, I think that part of this may be the Moz pro customer is more SMB in orientation and not enterprise and so that might have to a little bit to do with the state of maybe SMB and sort of where they're looking to prioritize. I think all of the confusion around search and just the press around search and what's happening may have a had a chilling effect on customer acquisition. So in that sense you may well be right that the prevalence or the dialogue around AI has some people saying, this is confusing. It was confusing before, it's even more confusing. I'm not sure I want to invest in a platform right now. But I will also say that we need to improve the product. And so we are focused on delivering UX improvements. The product is not as user-friendly as it needs to be given our customer base. So I'll say that. And that is something that the team has been really focused on over the past six months, which we think will translate into more at least trial and then ultimately customer attention. We also need to lean more into paid marketing to drive subscriptions. Moz ironically has always relied on SEO to sell its SEO service. And the reality is we compete with entities who do a ton of paid marketing. And we just need to invest in paid marketing, I think, to show up in the places that customers are showing up right now to do research around SEO. But look, it is an area where we're going to have to do something. We think there's a great deal of potential, but we certainly haven't realized it. We did the early work around margin expansion and that has worked. And now the question becomes how do we get some growth out of this business because we do expect growth out of it, not just for it to be a steady state or even declining asset.

Your next question is coming from Shyam Patil, SIG

This is Aaron on for shyam. Thank you for taking our question. Maybe starting off back in your prepared remarks, you touched on the market for deal activity and it sounds like things are picking up a little bit. Can you go just a layer deeper there and unpack a bit more what you're seeing on that front and of your seven major vertical categories. Are there any areas where the M&A environment looks particularly attractive right now, and then we've got to follow up as well.

Yes, no, great question. So look, I'll tell you this that I believe that the environment is or is close to being normalized, meaning it feels just like it did pre-COVID. And that I think is really important. And what do I mean, it's not the volume of dialogue we've had that throughout. It's the nature of the dialogue and particularly the nature around price and terms and motivation for transactions. And we saw that, by the way, with the CNET transaction. We had a long history with that asset. I won't go into all those details, but the dynamics that I'm describing right now certainly went into play with respect to that acquisition. You're right, we have a diverse set of platforms for M&A. That is one of our advantages. We're not just looking in one part of the market. We're looking in a number of different sectors and verticals and categories. And so if I'm too quickly go through them for us, I'd say tech and shopping has been our most active area. Obviously with the Gift Card acquisition and with CNET. And I think offers -- continues to offer some of the best opportunities. I think these are spaces that have been challenged and often when they're challenged, that's when we can get some really good price value. Gaming looks promising. Obviously, we did Gamer Network. There are a lot of Gamer Network type deals within gaming. It is a very fragmented space. And I think we have an opportunity to consolidate a very fragmented space. I think connectivity and health and wellness are due. They have not done much in recent memory. And I think they're both as businesses and as divisions really focused on transactions and joining the party. And then I think cyber and martech is back on board. We did a small tuck-in just a few weeks ago. This is the first transaction in a while for cyber and martech. I think within it, we like email a lot. We like the email marketing space, always have. I made a comment in the prepared remarks about I think the value of email in a world where paid marketing is getting more and more expensive. And so to me it is, and by the way, email is identity. There are a lot of things we like about email. So that's how I would characterize it. Again, I think opportunities in a lot of places we’re well-positioned, gross debt over TTM EBITDA of about 1.8, great free cash flow, cash on the balance sheet, we feel good.

Great, thank you. And just quickly, given your shopping businesses, I figured I'd ask if you have any early thoughts on how the holiday season could look this year, either from a retail advertiser or a consumer perspective. Thank you.

It's early. It's early to say. You don't know until you're in it. Obviously, there's been market dialogue about the number of days in the shopping period, something to watch, but the general view is, well, that just means you'll get more spread over fewer days. I will also say that the holiday shopping window keeps expanding. We just had RetailMeNot's National Cash Back Day, and that was great for us. So things are already starting, but you don't know until you're in it, to be perfectly honest. But we're hopeful that it's going to be a solid, it's going to be a solid season.

Your next question is coming from Robert Coolbrith, Evercore ISI.

All right, thanks for taking our question. Just wondering if you may give us any update on your use of Gen AI internally, particularly maybe early on in some of the recent acquisition activity. Any thoughts on your ability to leverage that and extend that. Thanks.

Yes, and again, I might have said this the last time around, and I'll repeat it. We don't view Gen AI as being entirely helpful in content creation. We just believe that human-created produced content and journalism is vital to our value proposition, the reputation of our brands, and to the success of those brands. And I think the demand for things that are quite obviously done by humans and not machines are quite high, right? And I think we all as consumers are trying to figure out like, well, wait, who wrote this? And so again, we don't put any emphasis there. Are there things that can help in research? Absolutely. Are there things that can help maybe in helping kind of structure an outline? But that's not, to me, that's not a real change in our process. Where I am bullish, very bullish about AI is AI for coding. And so using AI to generate code, which I would say, across all of the activity in the company, some quantum of lines of code were written by AI. You still need humans involved. You can't just have AI write the code and you step away. But for code generation, and what is code? Code is language. But it's different language. It's binary. It works or it doesn't. It doesn't require tone. It doesn't require speaking to sources. It doesn't require some of that judgment that goes into content and into journalism. So a lot of focus on leveraging Gen AI for code and code writing. Then the last thing is, and I mentioned some of this on the call, and I try to do this in each call, is just how do we incorporate AI into the products? Like how does AI help our products become better? The one I liked, I didn't use it in this call, but the one I like to always think about is how AI is being used within our LUCID app and how that's made food logging so much easier for our customers, which makes them happier with the subscription offering and the product and they're going to use it more. So we're always looking for Gen AI to improve the product and user experience, Gen AI to help with coding and development, but not Gen AI for content.

Great, thank you. And one of the sort of comments right through earnings I think so far has been sort of some weakness in maybe some categories like food and beverage. Any of that come through in your health business or just curious about that? Thank you.

Yes, it's a good question. No, we haven't seen that largely because that's not a big part of the ad formula within health and wellness. What I would just say is that it's been quite robust on the direct-to-consumer side of advertising. We've had some headwinds on the provider side, largely owing to a very large pharma cutting back across the board within its provider marketing, but nothing on the food and beverage side.

This does conclude our question and answer session. At this time, I'd like to hand the floor back to Bret Richter for closing remarks.

Thank you very much, Tom. And as always, we appreciate everybody joining us today to discuss our Q3 2024 results. We've posted some information with regards to our upcoming conference participation late this year. And we hope to see some of you there. Again, thanks for joining. Have a good day.

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