ZD - NASDAQ

Good day, ladies and gentlemen, and welcome to the

Good morning, everyone, and welcome to the

Thank you, Bret, and good morning, everyone. While the operating environment, particularly the advertising market remains challenging, we're pleased to see incremental improvements in our business and have reasons to be cautiously optimistic about a stronger second half. While we're seeing scattered headwinds in different pockets of our portfolio, along with some exciting tailwinds, it is our tech vertical that is having an outsized impact on revenue growth. Of our 7 verticals, Tech has been, by far, the most negatively affected by the current environment. In fact, excluding tech, total

Thank you, Vivek. Let's discuss our financial results. Our earnings release reflects both our GAAP and adjusted financial results for Q1 2023. We will focus our discussion today and my commentary will primarily relate to our Q1 2023 adjusted financial results and our comparisons to prior periods. Now let's review the summary of our quarterly financial results on Slide 4. We reported revenue of $307.1 million for the first quarter of 2023 as compared with revenue of $315.1 million for the prior year period, reflecting a decline of 2.5%. FX negatively impacted the Q1 year-over-year growth rate and if the comparable 2022 currency values were applied to our 2023 Q1 results, revenue would have declined by approximately 1.5%. Adjusted EBITDA was $94.3 million for Q1 2023 as compared with $100.8 million for the prior year period, reflecting a decline of 6.4%. Our adjusted EBITDA margin for the quarter was 30.7%. We reported fourth quarter adjusted diluted EPS of $1.10. While Q1 2023 was overall consistent with our expectations, we saw a wide spread in performance between some of our businesses. As Vivek noted, our technology business performance and in particular, our B2B business continues to reflect market pressures and therefore, had a disproportionately negative impact on our year-over-year results. While certain of our other businesses also declined year-over-year, as Vivek noted earlier, several exhibited year-over-year growth, primarily our connectivity and health and wellness businesses. Excluding tech,

[Operator Instructions] And the first question today is coming from Ross Sandler from Barclays.

This is Joey on for Ross. So any additional color you can provide on the linearity that you saw in 1Q for the advertising business. And then so far in 2Q, any meaningful callouts there. I appreciate the commentary Vivek on the different verticals this quarter?

Yes. No, listen, it's a great question. And I think when we think about the advertising business and trends, it is worth unpacking by category. So you start with our largest ad category, which is health and wellness. So a strong quarter in Q1. As I said, I think given where the drug pipeline is and the cadence that we are seeing in the marketplace as well as the upfronts, which I talked about, I think, in the last call, we're optimistic about pharma, health and wellness in general. And remember, this category represents roughly 40% to 45% of our advertising business. So that's -- it's an important one to focus on. The next largest category is shopping. And it should not be lost that we tell me not with 3 consecutive quarters of year-over-year growth. That's important for us to see. I think it reflects both the execution of RetailMeNot, but also generally the e-commerce marketplace. So we feel good about what's happening in retail. Gaming is choppy, and that is driven by the calendar. And so I think by the end of the year, we feel like we'll be in a good place, but the Q1 comps were tough, just given that last year's Q1 saw a significant slate of AAA games. And then tech has been the issue. Tech, as a category, both B2B and B2C, had been challenging. And we're in a cycle and it's a tough cycle. We've seen it before. I've seen it in my career in other places. Check comes back. And when it comes back, I think we'll be in a very good position, particularly on the B2C side. So I think, look, when we talk about the ad market, it's markets within the market, and I think the markets we're in, we feel generally optimistic about what they represent for the balance of the year.

The next question is coming from Ygal Arounian from Citigroup.

You have [Max] on for Ygal Arounian. I guess could you guys just talk about how you're thinking about capital allocation. You talked about stepping up buybacks and M&A opportunities. But can you just maybe give some more color on the current M&A environment? How private markets are trending and kind of how we should think about that for the rest of the year? And then also maybe just on the B2B tech business, can you just maybe give us kind of a rough scope of how impactful that is and kind of what -- like what inning we're in that process?

Yes, sure. Let me start with M&A and then maybe I'll ask Bret to talk about share buybacks and the B2B tech business. So look, 2023 is currently on pace to be the lowest M&A year since 2009. And this isn't just a statement about what we're seeing. I think it's the marketplace. The lower middle market which is where we really focus and specialize is particularly quiet. So that is the backdrop. But our commitment to our acquisition program is unwavering. We have 7 great platforms on which to acquire, we have the capacity to add a new vertical to that. So we are very much focused on a pretty robust pipeline, but at the same time, there is a fundamental gap between buyers and sellers in this marketplace. And so we do believe we're witnessing a rotation, but it is taking longer than any of us would like. Patience and discipline have always been hallmarks of our approach. So we don't look at these things in short periods of time. And I might sort of remind everyone that M&A has always been lumpy. So if you go back to 2019 and 2020, in those 2 years, we deployed $900 million against our acquisition program. Then in 2021 and 2022, we deployed about $300 million. I think the pendulum is slowly swinging back. So if you look at this over, I think, a longer window of time, I think you'll start to see that historically we've seen this before. And so look, I also think as a buyer, we're in a privileged position. You've got tightening credit, and that just tightens every day. I think for a lot of buyers using stock and deals is unappealing given market performance. So as a buyer with a significant amount of cash sitting on our balance sheet, I think we do have an advantage over other buyers as this rotation plays itself out. Bret?

Sure. So with regards to capital allocation, as we've talked about, this is a constant dynamic process within the business that starts with a healthy balance sheet, which we're very fortunate to have. And then, of course, then look at the cash flow generation of the business over time, our expectations, the environments we're in, the markets we're operating in and make decisions. . With regards to the comments we made today, stock buybacks are always an important component of our capital allocation strategy. But when the stock is trading at a level that we believe creates an opportunity for us to capture meaningful shareholder value by acquiring shares that moves up in the pecking order, and we're currently allocating capital to a stock buyback. We believe our stock is meaningful upside potential. That current trading represents sort of a discount to our intrinsic value and what we can do over time. But importantly, we believe that we can repurchase shares, fund our M&A program and maintain the healthy balance sheet given these dynamics. Of course, going back to my first statement, this is a constant and dynamic equation that we manage. There's always a healthy competition for uses of our capital but we're very comfortable and confident with the decisions we're making at this time. Similarly, looking at our businesses strategically and how they fit in our portfolio is also part of our capital allocation strategy. And we're constantly evaluating each asset and how it fits in a hole. The valuations like this involve numerous factors, internal factors, external factors, general market conditions, conditions specific to the business at a point in time, over points in time. And in the case of Spiceworks, our enterprise tech business, given certain facts and circumstances, we've determined to explore strategic alternatives. It's early. No specific outcome is a certainty. We're encouraged by sort of the initial stages of our exploration. This approach, as Vivek mentioned, is entirely consistent with past practice as we look at portfolio review and portfolio development, but we'll see what happens over time. Spiceworks a meaningful business in terms of scale and both in its own right and relative to

The next question is coming from Shweta Khajuria from Evercore ISI.

Vivek, on generative AI and LLMs, you nicely laid out the -- how you're leveraging it to -- for the benefit of the company and how you plan to do that for the long term. I guess one of the pushbacks we get is on content creation and access to content. So what would you say to someone who thinks that content -- access to content has been made so much easier with ChatGPT, whereby engagement on certain platforms could go down, whether it is a cooking website or a health and wellness website. So how do you think of -- how should we think about that? And then, Bret, I'm sorry, but could you please repeat the cadence for the second quarter and the balance of the year for revenue and EBITDA. I just want to make sure we got that right.

Thanks, Shweta. So look, you're right. There's certainly -- hypothesis that I've heard around the threat being that generative AI lowers the barrier to entry the content, to which I say, the barrier was long removed with the explosion of user-generated content. And I remember the same sort of thesis sort of starting to develop. And I think forgetting how the content is produced and even who's producing it, I think, trust, duration, distribution, monetization and brand matter. And I think all the points of differentiation around the kind of content that ultimately has value and the kind of content that does it. So I don't think that there's going to be any meaningful real change in the fact that there's a lot of content in the world today. And I also do think that marrying human and artificial intelligence only makes us stronger. I think that fundamentally, I look at it quite the opposite, that our ability to produce more, the velocity by which we can produce content is incredibly exciting. I understand that with any new technology, it's that old law, right? We overestimate the impact of the technology in the short term and underestimate the effect in the long term. We believe that this technology is as meaningful as when I first saw the Mosaic in the early 1990s, right? You recognize what this can do. But for the reasons I laid out and probably for other reasons that we haven't even thought through and use cases, I think this is great for our business. And I really do believe that we have been systematic. And if you think about things we've said in the past, we've talked about data and data exhaust a lot. And part of that is by systematically acquiring businesses that have proprietary data sets, data that is unique, data that can create a competitive advantage, I actually put -- I think that puts us in a very different category than maybe a lot of other "content" companies. So I'm bullish we're obviously mindful of all the dynamics. It is early days, but there's a lot of energy and excitement inside of this company and a number of different initiatives and experiments around AI.

Shweta, thanks for the question with regards to the cadence of expectations over the course of the balance of the year. Happy to repeat them and maybe unpack just a little bit more. But I think it's important in asking a question for an answering question, I should say, is that we're not running the company in 90-day sprints. We set expectations for a 12-month period. We did that in February, made further comments on it today. And we're running the business not only over the long term, but with that overall plan for 2023 in mind. The dynamics that we've discussed in this call and Vivek has highlighted is such that so many of our businesses have their unique characteristics over the course of a 12-month period that are dependent on their specific market factors, the calendar game releases seasonality. But it's also worth mentioning businesses like our connectivity business that signed very significant contracts can often have dollars flow in just before quarter end or just after quarter end and have very little impact over a 12-month period, but a meaningful impact on a quarter. That said, I mean, just completed the first quarter and confirming our guidance for the year, what we had said was we think it will be a balanced first half and second half. Second half, approximately 55% of overall annual revenue depending on what we achieved and how we perform, but that's our expectation. It's embedded in our guidance. We will see EBITDA margins lower in the second quarter, partly as a result of the cadence of revenue, the mix of revenue and the expectation of performance, but also because we are investing in initiatives that we believe will result in growth in the back half of the year and beyond. So we're spending some money, particularly in hiring in certain of our businesses. So that will have an impact on margins. And I believe what we said is second quarter margins will be near or slightly above first quarter margins. And of course, we have to continue to run the businesses dynamically and move through the balance of the year.

The next question is coming from Rishi Jaluria from RBC.

As we think about the potential of divesting the B2B tech business. Can you maybe help us understand your thought process behind looking at certain businesses that have faced challenges, be them secular or execution? And what drives the decision point between investing more and bringing new leadership and maybe layering on more acquisitions and trying to turn around the business versus ultimately deciding that divest is the best use of time and the asset? I know you did the B2B backup divestment recently and that made sense. But maybe just remind us of kind of that thought process and how you weigh those 2 decision points.

Thanks for the question, Rishi. I mean there are almost too many factors to count. It's a holistic review that is both specific to the business. But I think you alluded to is also based on an element of capital allocation that we don't necessarily talk about enough in a business like ours, but it's human capital allocation. And not only where do we want to invest our dollars, but where we want to invest our energies and which businesses sort of as they compete for those energies, pull ahead and others, which may be at points in time, compete less effectively. This is an exploration. Explorations are triggered by multiple factors, sometimes internal initiatives, sometimes external triggers. And essentially, we look at all of our assets in our portfolio on a regular basis and just analyze fit opportunity, analyze competition for financial resources, analyze competition for human resources and even against opportunities that haven't yet manifested in our business because we're constantly out there looking to expand our businesses inorganically through M&A. So again, no promises to an outcome here. We're early in an exploration. We're encouraged by the initial energies, but portfolio review is as important an element of our management's time allocation as anything else we do.

And I think one of the things, Rishi, that I would just underscore that Bret said is the internal competition for resources and capital is real. And so often, we have to look at an asset against the other assets inside of the company and their needs for capital, their pipelines, where they're looking to take their businesses what the profile looks like in terms of growth for those businesses. And our capital is not incident, right? That much we know. And so I think against that backdrop, it is part of the assessment. And then look, we're always thinking about this in terms of what is the value we might extract in the transaction that's financial value, focus and other positives in that against what would be the value if we continue to run the business and we're in the evaluation stage, right? So we're not going to predetermine the outcome per se, but we want to be transparent on the process that we're running. And I think it is healthy. And as you know, we do this regularly. And as I think you pointed out, we do believe the B2B backup process that we ran a couple of years ago was the right thing for us to do.

The next question is coming from Shyam Patil from SIG.

This is Jared on for Shyam. I was hoping to maybe dig in a bit further on how you're thinking about bottom line pace and particularly in the back half of the year. Anything that you'd call out in terms of weighting between the third quarter and fourth quarter there? And then maybe digging in on sales and marketing, after seeing some increased efficiency in the back half of last year, [S&M] margins were largely in line year-over-year. Are you thinking that we might see more of a similar dynamic there as the year progresses? Or could we see increased efficiency?

Unpacking the business with line item details in the business as dynamic as this is a little challenging. Again, each of our businesses have a different mix of margins. Certain of our businesses have partners, certain of our businesses have external costs, certain of our businesses have sort of internally generated content which everything is internal. I think the important message again is that we expect our performance to strengthen in the back half of the year. We expect to see that across virtually all our businesses. We're seeing signs of it in several of our businesses, and we've highlighted those -- a number of them today, particularly health and connectivity. As we get to the bottom line, different dynamics are at play, including some year-over-year comparisons that we unpacked on our fourth quarter call with regards to our cadence of depreciation and amortization. Obviously, our balance sheet is changing, and we're earning more on interest income. So our net interest expense has declined year-over-year. Our tax rates have been fairly stable, although a tick up in the early part of this year. And part of that relates to the mix of revenue, and part of that relates to changes in foreign tax rates. I think it's important to stay a little bit above. And when I look at the business as a whole and looking at our overall guidance of expectations again over a 12-month period and over a mix of all our businesses rather than try to specifically unpack each and every line item.

The next question is coming from Cory Carpenter from JPMorgan.

This is Danny Pfeiffer on for Cory Carpenter. I just have 2 quick ones. So I know you've taken steps to get an advertising component onto Lose It!. Can you maybe talk about any success there? And then on generative implementation for the new conversational experiences, are there any other brands in your portfolio besides Lose It! you could see this being used in or that you've already experimented with?

Yes. Great question. So Lose It!, I mean its core subscription business continues to be a strong grower. So I just want to make that statement. And then the advertising revenue has just been incremental and it flows through at 100%. It doesn't come into our organic growth calculation yet because we haven't lapped 1 year of ownership that will show up a little bit later, so something to point out. With respect to the conversational concept and what we illustrated at the nutrition coach project within Lose It!, you have a buying assistant within RetailMeNot, you have a chatbot within really end of the editorial brand, game health and game guides, which are very important parts of IGN, so I would say -- parenting and pregnancy. I would say that you can imagine in each of these, how you can incorporate a 2-way dialogue and a back and forth trained on our data set and our proprietary content and creating an experience within our experiences. So I think really, there's something almost for every brand. And so we're excited for all of that. And look, I think it drives engagement and engagement -- ultimately we can extract ad rents.

The next question is coming from Jon Tanwanteng from CJS Securities.

Extremely helpful, answered most of my questions -- sorry, it's Peter Lukas for Jon. Been extremely helpful and answered most of my questions. Just wanted to know, you gave us a lot of color on M&A and how the outlook is there. Just wondering on where the focus is for you guys in terms of what you're looking at and kind of the approximate size of deals that you're seeing in the pipeline?

Yes. No, look, it's -- we're looking across all of the verticals, tech, but B2C tech more than anything else given the process we're running on the B2B side, shopping, connectivity, gaming, health, cybersecurity, martech. I think every one of our operating units are looking for deals. And then at the corporate level, we're looking at new verticals that we think are complementary to the verticals we're in, where we see monetization an audience playbooks that are similar, where we can apply our knowledge and platforms to them. So it's across the board. I would say that from a size point of view, as I think I said earlier, kind of this lower middle market has always been our sweet spot, right, and so deals that generally are in the under $100 million of enterprise value. Having said that, we have flexed up, the RetailMeNot deal a couple of years ago, the Everyday Health deal, those were closer to $0.5 billion deal. So I think that's still the neighborhood in which we run. We like to spread our capital around. There are a lot of mouths to feed inside of the company. So as the balance sheet builds, it doesn't change our view into our sweet spot. We don't -- I don't think get duped into, oh, we've got all this capacity, let's go necessarily bigger. We're not afraid of a bigger deal. But I think generally, our inclination is to feed as many of our general managers and the various platforms in the company.

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.

Thank you, Paul, and thank you, everyone, for joining us today for our Q1 2023 earnings call. Our upcoming conference participation schedules detailed on our website. We have some activity plan for the next handful of weeks, and we hope to see some of you there.