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

Good morning, everyone, and welcome to the Ziff Davis Investor Conference Call for Q1 2023. 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 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 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 and 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 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..

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 Ziff Davis revenues in the first quarter would have grown over 1% year-over-year. As a result, the tech vertical has shrunk to representing only 8% of total revenues in the first quarter. Most exciting for us in the quarter was the performance of our connectivity and health and wellness verticals.

Both businesses experienced double-digit revenue growth. As you'll recall, we recruited Stephen Bay to be the President of the Connectivity division, and he's hit the ground running with the team. Ekahau, an industry leader in WiFi planning and optimization achieved significant year-over-year growth.

And we continue to see strong demand within Ookla for core data services across the industry as operators continue to deploy and optimize their 5G networks.

In our last call, I mentioned that we were seeing some green shoots in both our consumer and professional pharma ad businesses where pharma digital ad spend appears to have returned to its more predictable pre-pandemic cadence buttressed by a strong 2023 drug launch calendar.

And in March, the Everyday Health Group was, for the first time in our history, #1, in Comscore's health category with an unduplicated U.S. reach of 81.8 million unique visitors. My hearty congratulations to Dan Stone and the team at Everyday Health.

The gaming vertical declined in the first quarter, but that was primarily due to the timing of humble game releases and a very tough game advertising comp given last year's Q1 release of AAA titles.

Shopping was down in the quarter, but retail may not grew for the third quarter in a row, which we view as very important, while Offers.com continued to slide. As I said on the last call, we've reallocated resources to address what is largely a technical set of challenges that offers and believe we can stabilize and return the asset to grow.

Cybersecurity and martech were down high single digits year-over-year in revenue in the first quarter, with growth in e-mail being offset by declines in VPN. This represents a slight improvement from Q4, and we believe each subsequent quarter this year will represent an incremental improvement over the last.

We're encouraged by strong usage and a robust new business pipeline for our Campaigner and SMTP e-mail solutions and quarter-on-quarter growth in customer adds for our VPN solutions. In addition, as we progress throughout the year, we currently expect a more favorable year-over-year impact from FX, which was a drag in Q1.

On the M&A front, we continue to balance our active sourcing program with a commitment to pursuing only the highest confidence opportunities where we are uniquely positioned to unlock value. With nearly $900 million of cash and investments on our balance sheet, we continue to have a great deal of capacity to deploy capital for acquisitions.

When the right opportunities arise, we will have the ability to act decisively. But we continue to be patient and selective in a market that is in the midst of a rotation that we believe will result in increasingly attractive opportunities over the balance of this year.

We are very aware that our recent pace of acquisition activity has been slower than we expected. However, we believe our patients will ultimately be rewarded, and we're grateful for our shareholders' patience as well.

We're always examining our portfolio and making decisions about where to invest and where to monetize assets by divesting or seeking partners to enhance the growth potential of our businesses.

It's in this context that we've hired an advisor to explore strategic options for our B2B tech business, and we're pleased with the quality and nature of the discussions we're having. This is not a first for us.

In recent years, we have run several successful processes that resulted in a sharper focus for us and an exciting new chapter for the divested enterprise. Portfolio rationalization is an important discipline and healthy exercise for any company.

And to be clear, we intend to remain leaders in the B2C tech publishing business with brands such as PCMag, Mashable and our newest addition, I wanted to pick up from some of the discussion we had on our last call about AI. I understand investor interest in the topic is high and rightly so.

We're very excited by the potential that AI has to create compelling opportunities across our company. But that's not new. We've been utilizing AI technologies to enhance and streamline our business for over a decade. Machine learning algorithms power our proprietary customer data platform.

AI powers many of our products, including Moz and our connectivity solutions at Ookla and Ekahau. AI also supports our compliance and security processes. What is new are the exciting advancements in generative AI and large language models, LLMs. We've identified 3 key categories of opportunities.

The first is enhancing the value proposition of our proprietary data to deliver predictive analytics and insights. The second is about creating new conversational experiences across our consumer-facing brands. And the third is about increasing our content velocity and gaining efficiencies in our content production process.

On the data front, we possess a significant quantum of proprietary, valuable and permissioned data. We are a global leader in connectivity insights with over 7 billion throughput tests from over 600 million app installs across more than 190 countries every year.

We are a category leader in shopping and e-commerce data with over 2 billion annual [impressions] and over 200 million unique visitors. Our Moz brand is one of the most trusted authorities in online search with over 44 trillion indexed links, 1.25 billion keyword suggestion and 670 million analyzed search engine results pages.

By harnessing our unique proprietary data, we can enable predictive insights that directly support our customers' objectives and create more value for them. For example, we can leverage our connectivity data to support providers with predictive insights on customers that are likely to churn.

We're also excited about leveraging generative AI to create new conversational experiences with our audiences. Until now, audience engagement has primarily been one way. We can soon have two-way interactions through AI-powered virtual assistance that can deepen our audience engagement.

For example, in our Lose It! app, we can offer our audience a personalized virtual nutritionist that instantly addresses their queries based on their app inputs. This represents a unique opportunity for us to better support our audiences and objectives, resulting in greater engagement.

Lastly, the opportunities to improve efficiency and effectiveness across all of our businesses have increased rapidly. For example, our various editorial teams are actively pursuing the integration of generative AI across multiple steps in the editorial workflow to produce more high-quality content.

This has come about bottoms up from the editorial organization itself as our creators see an enormous opportunity to enhance productivity while ensuring the continued creation of trusted editorial content. Before I hand the call back to Bret, let me provide you with an update on our ESG efforts.

In April, we released Ziff Davis' 2022 ESG report, and separately, Ziff Davis' 2022 DEI report, both of which can be found on our website. The ESG report includes findings from our most recent greenhouse gas inventory and I'm pleased to report that our 2022 Scope 1, 2 and 3 combined emissions represent a 7% decrease from 2021.

This is solid year-over-year progress and illustrates that we are on the right path as we await validation of our science-based emission reduction targets from the SBTi, scheduled to happen later this month.

The report also details how we've leveraged our platforms to help implement change in our communities and discusses our extensive data privacy, security and corporate governance practices. The DEI report provides an update on company demographics and our ongoing efforts to increase representation across Ziff Davis.

Of note, in 2022, Ziff Davis increased the percentage of women, both hired and promoted and we increased the percentage of people of color who are promoted and are managers as compared to the prior year. The report also includes the latest programs, policies and actions we are taking to foster a workplace in which all can thrive.

Needless to say, I'm incredibly proud of the work Ziff Davis has done and continues to do and I hope you'll take some time to review the reports. With that, let me hand the call back to Bret..

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, Ziff Davis Q1 2023 revenue grew more than 1% year-over-year.

On Slides 5 and 6, we have provided performance summaries for our 2 primary sources of revenue, advertising and subscription. Slide 5 presents the company's advertising revenue performance. Q1 2023 advertising revenue declined by 8% as compared with the prior year period, consistent with Q4 2022.

This performance was also heavily impacted by the challenges within tech. Excluding our technology vertical, year-over-year advertising decline would have been 2%. Trailing 12-month advertising revenue declined by 7%. This was also impacted by the reduction in foreign currency rates as compared with the prior year period.

Our net advertising revenue retention and annual trailing 12-month statistic that we update quarterly, was approximately 91% for Q1 2023, largely consistent with the decline in advertising revenue.

As defined in the slide, in the first quarter, Ziff Davis had more than 1,700 advertisers with the average quarterly revenue per advertiser of nearly $90,000. This reflects fewer customers at a higher average revenue per customer as compared with the prior year period. Slide 6 depicts our subscription revenue performance.

Q1 2023 subscription revenue grew 4.5% as compared with the prior year period and was again negatively impacted by FX. Subscription revenues grew 6% during the last 12 months, excluding the contribution from certain businesses that were divested in 2021. The table on the bottom of Slide 6 includes subscription metrics for the last 9 quarters.

Sequentially, total subscription customers were essentially flat primarily reflecting growth in Lose It! subscriptions, offset by slight declines in gaming and privacy. Sequentially, our average quarterly revenue per subscriber grew by 1.7% to $47.14.

As noted on our prior call, since Q3 2022, these metrics reflect the inclusion of a full quarter of our recent acquisition, Lose It! which is characterized by a significant number of monthly subscribers at a significantly lower average revenue than the average of our other subscription businesses.

Overall, the acquisition of Lose It! has significantly raised our number of subscribers and lowered our average quarterly revenue per subscriber as compared with the prior year period. Our overall churn rate improved 53 basis points from Q4 2022 to 3.28%.

This decline reflects a number of factors, including improvements in connectivity, Humble Bundle and martech churn. Additionally, the company's Q1 2023 other revenues declined 2% year-over-year. Slide 7 provides quarterly organic and total revenue growth rates for the last 9 quarters.

Revenues from businesses owned for at least a full 12 months are included in organic revenue, while acquired revenue relates to businesses we've owned for less than 12 months. First quarter 2023 organic revenue declined 6%, a small improvement as compared with Q4 2022.

This decline was minus 5% adjusted for FX and primarily reflects the business unit performance trends discussed earlier. Turning to our balance sheet. Please refer to Slide 8. Our balance sheet continues to be strong. As of the end of Q1 2023, we had $722 million of cash and cash equivalents and $155 million of short- and long-term investments.

We also have significant leverage capacity both on a gross and net leverage basis. As of the end of the first quarter, gross leverage was 2x trailing 12 months adjusted EBITDA, and our net leverage was 0.6x and only 0.3x if you include the value of our financial investments.

During Q1 2023, we continue to monetize our stake in consensus selling approximately 52,400 CCSI shares for gross proceeds of $3.2 million. As of March 31, 2023, we held approximately 1 million CCSI shares, and we will continue to be opportunistic with regards to our monetization efforts.

As a reminder, we have until October 2026 to complete the disposition of our CCSI stake. Our strong balance sheet is the foundation of our capital allocation strategy. We believe that we are well positioned to continue to pursue M&A investments and other capital allocation alternatives.

We closed 1 acquisition for our media business in the first quarter, and we continue to pursue multiple M&A opportunities. We acknowledge that closing transactions in the current environment has been more challenging than anticipated.

However, we continue to believe that we are well positioned both operationally and financially to execute upon our aggressive M&A strategy. With regard to stock repurchases, we began repurchasing shares in the second quarter, and we intend to continue to do so at and even above the stock's current market price. Turning to Slide 10.

We are reaffirming the fiscal year 2023 guidance range that we presented in February 2023. As a reminder, the high end of our guidance for 2023 revenue, adjusted EBITDA and adjusted diluted EPS reflects growth rates of approximately 1%, 1% and negative 2% as compared with our 2022 adjusted financial results.

The low end reflects declines of approximately 3%, 6% and 9%, respectively. As we discussed on our year-end 2022 earnings call, the operating environment remains challenging.

Global macroeconomic pressures continue to weigh on the purchasing decisions of our largest advertising clients and in particular, our enterprise technology clients and consumers continue to navigate the pressures of high inflation and rising interest rates.

Our Q1 2023 adjusted results reflect the impact of these and other factors as well as the change in certain FX rates. As we noted on our February call, our 2023 guidance reflects the carryforward impact of our 2022 results and an expectation that the macro economy will stabilize during the second half of 2023.

As a whole, our performance during the first few months of 2023 was largely consistent with our expectations. As to the balance of 2023, we continue to expect a stronger second half. Assuming we realize this expectation, second half 2023 revenues would reflect approximately 55% of total 2023 revenues.

This revenue phasing implies a year-over-year Q2 revenue decline with revenue growth expected in the second half of 2023.

Notwithstanding the difficult environment, we have permitted investments and initiatives that we believe holds strong promise and, therefore, have continued hiring into Q2 consistent with our plan, and we expect our Q2 adjusted EBITDA margins to be near or slightly above our Q1 levels.

We would anticipate margins to be stronger in the second half resulting in the overall 2023 adjusted EBITDA margins implied by our guidance. In the event we were to consummate a transaction involving our B2B business, we would anticipate adjusting our guidance.

Following our business outlook slides are our supplemental materials, including reconciliation statements for the various non-GAAP measures to the nearest GAAP equivalent. This section includes a reconciliation on Slide 14 that reflects free cash flow. Q1 2023 reflects strong free cash flow conversion.

Q1 2023 free cash flow was $85.3 million, a similar amount to the prior year quarter despite a lower level of EBITDA. Note that our semiannual cash interest payments on our outstanding debt occurring Q2 and Q4, which will impact Q2 free cash flow.

In addition, we plan to make significantly higher cash tax payments in Q2 2023 as compared with the prior year period.

Overall, we believe our Q1 2023 results position us to continue to pursue our 2023 plan, while selectively pursuing strategic alternatives for certain of our businesses and pursuing capital allocation alternatives that we believe will enhance shareholder value.

With that, I would now ask the operator to rejoin us to instruct you on how to queue for questions..

[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 Ziff Davis.

I think what's interesting about this opportunity is it's both large enough to potentially be attractive as its own business but also small enough to potentially fit in with similar businesses in the marketplace, either of which is a path that we might go down.

The business can produce $70 million, $80 million, $80-plus million revenue, depending on market dynamics at the time.

Obviously, we've spoken about, and I think we've seen by other participants in the marketplace, what that market is partly exhibiting how the next handful of weeks, handful of months, quarter-plus play out will determine our path to that business..

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..

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