Good day ladies, and gentlemen and welcome to the Ziff Davis Second Quarter 2024 Earnings Conference Call. My name is Paul, 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 Q2 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, Brett, and good morning, everyone. Our second quarter financial results were below our expectations. June revenues in particular were soft, down 3%, dragging the quarter's total revenues down 1.6% year-over-year.

While we're disappointed to have taken a step back after a solid Q1 in which we grew revenues by 2.4%, we're focused on driving improved financial performance and are highly confident that we will post growth in the second half of 2024. Our Digital Media segment was flat in the second quarter.

The most substantial change versus the first quarter had to do with Tech Media revenue swinging back to negative. As you know, tech advertising has been challenged for the better part of the past two years and while we saw growth in Q1, it didn't sustain in Q2.

It is worth noting that all the decline was on the B2B side of the business with the consumer side showing modest growth. The most substantial sequential change in the quarter came in our Cybersecurity and MarTech segment, which swung from last quarter's 3.3% growth to this quarter's 5.8% decline.

We did note that Q1 featured some timing benefits, which are negatively impacting the remainder of the year. Absent such timing impacts, the Q2 decline in Cybersecurity and MarTech was in line with what we experienced in Q4 2023.

While we continue to see positive trends, particularly in our email business, our progress in other businesses has been slower than anticipated. We've reduced our full year expectation for this segment from flat to low single digit revenue decline.

Notwithstanding Q2's weakness, we are reaffirming guidance based on Digital Media segment growth with the expectation of accelerating growth at gaming, connectivity, and health and wellness. In addition, between accretive acquisitions and share buybacks, we expect adjusted EPS to be closer to the high end of our guidance range.

That would represent high single-digit adjusted EPS growth year-over-year and put us back on the path to strong bottom line growth. From the time I arrived at this company in 2012, we have been savvy and judicious capital allocators.

We have systematically and programmatically deployed our capital to compound our bottom line and adjusted EPS and in my first nine years, we deployed an average of over $300 million per year on acquisitions.

At the same time, patience and discipline have always been hallmarks of our approach and over the past few years, we've been relatively less active. In 2021, we were focused on the spinoff of our consensus business, which we believed represented terrific shareholder value creation, but limited our acquisition program.

Then the M&A market started to rapidly cool, so we deployed even less capital for M&A in 2022 and nearly nothing in 2023. We did not force ourselves to transact. Instead, we comfortably accumulated dry powder to put ourselves in a position to act decisively when the time is right.

We believe that time is now where the assets that best fit with our portfolio are becoming available at prices that align with our discipline, and we are taking action.

The recent acquisition of Gamer Network and the news earlier this week that we've signed an agreement to acquire CNET pending customary closing conditions represent in my opinion clear examples of how we use M&A to strategically enhance existing platforms and compound growth. Both of these acquisitions represent our favorite kind of deal.

First, they include powerful established brands. Gamer Network was founded 25 years ago, while CNET was founded 30 years ago. I love brands that have proven to endure and strengthen while technology evolves and competitors come and go. We derive great confidence from brands with a demonstrated ability to adapt to platform shifts.

Second, both of these acquisitions further our leadership position in their respective categories. I am particularly excited by the powerhouse lineup of CNET, Mashable, PCMag, Lifehacker, Spiceworks, and ZDNet, which should be a tech marketer's dream.

I know the tech ad category has been a source of challenge for us, but I view those as cyclical, and I'm beyond excited at the prospect of having this group of assets to capitalize on the recovery. An interesting aspect of our pending deal with CNET is that it returns ZDNet back to Ziff Davis.

ZDNet was founded 31 years ago by Ziff Davis and then sold to CNET in 2000. So this would be a homecoming of sorts for the property and the last reason why we like deals like these is that we believe that we're uniquely positioned to unlock value. We have the platforms, people, and know how to grow traffic, monetization, and free cash flow.

We're excited to welcome our colleagues from CNET to the Ziff Davis family soon. While M&A remains our priority when it comes to capital allocation, we believe that at our current price per share, Ziff Davis is one of the most attractive buying opportunities in the market.

As a result, we deployed $84 million to buy back 1.5 million in Q2, increased our board authorized buyback program allowing us to repurchase more than 8 million, additional shares and expect to be active buyers of our shares in Q3. We continue to incorporate AI into a number of our products and offerings.

A beta version of the down detector situation report is now powered by GenAI delivering concise and prioritized insights into service availability, incidents and outages. More specifically, it provides a clear text analysis on overall outage impact assessment, user and geographical impact.

This new service has been shortlisted for the most innovative test and measurement product by Light Reading. IGN has now released its well-received Chatbot on the IGN mobile app, introducing game help on the mobile platform. Chatbot on the IGN app leverages our own vector store database.

LUCID's LLM powered voice food logging has now been fully rolled out to its users, greatly simplifying daily food consumption inputs. These are just a few of the examples of the AI enablement work being done at the company. I know there continues to be investor interest in the impacts of AI on search. Google rolled out AI overviews on May 14, 2024.

Prior to that, it was referred to as the Search Generative Experience, SGE, which was only available in Google Labs. Now that the AI overview experience is in full circulation, we wanted to revisit the analysis we did in Q3 of 2023 relating to the frequency of AI overviews being presented to users.

We analyzed thousands of queries across our key domains that generate the lion's share of our organic search referrals and the percentage of times that an AI overview appeared. It fell to 8%, meaning 92% of the time, the search engine results page did not include an AI overview for the queries that matter to us most.

Analysis by other industry experts indicate a similar percentage of overall searches resulting in AI overviews.

At this point, we don't see it as a significant change to the search experience, and it's also important to remember that we hypothesize and Google recently confirmed that links and AI overviews get a higher click through than traditional web listing links.

I believe the more interesting aspect of AI's impact on search is whether new AI based search competitors can challenge Google's dominance.

Google owns 90% of the search market, and over 60% of referrals to the open web derive from Google searches, and with the launch of Perplexity and the beta launch of SearchGPT, we have search engines that employ AI to generate results. The thousands of engineers, once required to operate a search engine, may be obviated with AI.

In addition, distribution deals like the ones Google has in place with browsers may become available given the recent court ruling aiding in the building of market share. Competition is a good thing. Let me provide you with an update on our ESG efforts.

We continue to actively work with our largest suppliers to ensure we are on track to meet our 2030 science-based emissions reduction targets.

We have done a sustainability survey, hosted educational climate webinars, shared our ESG report, and now require all new and existing suppliers to complete a detailed ESG questionnaire upon signing or renewal of a contract.

These actions are an essential element of our Scope 3 emissions reduction strategy, and we are grateful to be able to work alongside and partner with many of our suppliers to lead decarbonization efforts across our industry.

In addition, we've been working this summer on disclosing our ESG efforts to both the S&P Corporate Sustainability Assessment, which we are participating in for the first time, and the CDP Climate Questionnaire, which marks our second year of participation.

These assessments are another crucial part of our overall ESG strategy because they hold us accountable to our science based targets and provide us a vehicle to further communicate our actions and leadership to investors, suppliers, customers, and employees.

Our efforts have not gone unnoticed and we were pleased that in July MSCI reiterated our AA rating, which is considered a leader. Just this week, we were also excited to receive the Sustainability Leadership Award from the Business Intelligence Group. Needless to say, I'm incredibly proud of the important work we are doing on this front.

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 non GAAP financial results for Q2 2024. My commentary will primarily relate to our Q2 2024 adjusted financial results and the comparison to prior periods. Please see Slide 4 for the summary of our financial results.

Q2 2024 revenues were $320.8 million as compared with revenues of $326 million for the prior year period, reflecting a 1.6% decline. Q2 2024 adjusted EBITDA was $96.3 million as compared with $106.7 million for the prior year period, reflecting a decline of 9.8%. Our adjusted EBITDA margin for the quarter was 30%.

We reported second quarter adjusted diluted EPS of $1.18 as compared with $1.27 in Q2 of 2023. During our first quarter Q1 earnings call, we expressed an expectation that second quarter revenue growth would be similar to Q1 2024.

When our outlook for the Q2 performance of a number of our businesses changed late in the quarter, we immediately enacted initiatives to reduce our spending and enhance our margins. While those actions did not significantly impact our second quarter results, we expect to realize their full benefit in the second half of 2024.

Overall, through the first six months of 2024 as compared with 2023, revenues were slightly up, adjusted EBITDA declined by 2% and adjusted diluted EPS grew by 3.4%. 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 results. Q2 2024 advertising and performance marketing revenue declined 2.7% as compared with the prior year period, while trailing 12-month advertising and performance marketing revenue declined by 2.3%.

The second quarter decline primarily reflects the continued impact of the factors within our digital media segment related to our health and shopping businesses that we discussed on the Q1 2024 call, as well as lower than expected demand for our B2B lead generation services within our technology business, impacting a number of anticipated second quarter campaigns.

This was also in part by growth in our gaming and entertainment business. Our net advertising and performance marketing revenue retention, an annual trailing 12-month statistic was 90.5% for Q2 2024. In the second quarter, Ziff Davis had close to 1700 advertisers with an average quarterly revenue per advertiser of more than $100,000.

This reflects fewer customers at a higher average revenue per customer as compared with the prior year period. Slide 6 depicts our subscription and licensing revenue. Q2 2024 subscription and licensing revenue grew 0.3% as compared with the prior year period. Subscription and licensing revenue grew 2.6% during the last 12 months.

Customers grew both year-over-year and sequentially, and average quarterly revenue per customer of $41.74 declined in both instances, in part reflecting an increase in B2C subscribers. Revenue churn increased sequentially, but reflected a similar level to the prior year quarter.

The table on the bottom of slide 6 includes subscription and licensing metrics for the last eight quarters. Q2 2024 other revenues declined by approximately $900,000 year-over-year, primarily reflecting a decline in the contribution from our Humble Games Publishing business.

Slide 7 provides quarterly organic and total revenue growth rates to the last eight quarters.

The company includes revenue from an acquired business within the definition of organic revenue for the first month in which the company can compare that full month in the current year against the corresponding full month under its ownership in the prior year.

Similarly, the company excludes revenue from divested assets beginning with the quarter of the disposal of the asset as well as from the prior year's comparable period. As depicted on the slide, second quarter 2024 organic revenue declined 5%. We expect this metric to improve in the second half of 2024.

Please refer to Slide 8 as we discuss our balance sheet. As of the end of Q2 2024, we had $687 million of cash and cash equivalents and $153 million of long-term investments. We also have significant leverage capacity on both the gross and net leverage basis.

During the quarter, we announced the expansion of the availability under our revolving credit facility. Our revolver now has $350 million of credit availability and the maturity date of the revolver has been extended to June of 2027. To further enhance our liquidity, during the second quarter, we sold our remaining stake in Consensus Cloud Solutions.

Consistent with our plan to divest these shares prior to the fifth anniversary of the spinoff transaction. Prior to this transaction, we had just over one million CCSI shares. As indicated during our first quarter call, during the second quarter, we resumed repurchases of our common stock.

During the second quarter, we repurchased 1.5 million shares of our common stock for a cost of approximately $84 million. At the end of the second quarter, we had approximately 3.2 million shares remaining under our stock repurchase authorization, which was due to expire in August of 2025.

However, as Vivek mentioned, our board has acted to increase our current stock repurchase authorization by 5 million shares to approximately 8.2 million shares available for repurchase and extend the expiration date of this authorization to August, 2029.

Net of all this activity as of the end of the second quarter, gross leverage was 2.1 times trailing 12 months adjusted EBITDA and our net leverage was 0.7 times and 0.4 times including the value of our financial investments.

In July, we issued $263.1 million of new 3.625% convertible notes due 2028 and paid an aggregate of approximately $135 million in cash in exchange for $400.9 million of our 1.75% convertible notes due 2026.

As a result of this transaction, we reduced the gross amount of our outstanding debt by $138 million extended the maturity of $263 million of our debt and with the attractive conversion premium we were able to obtain, we reduced the total number of shares underlying our outstanding convertible debt by more than 1.1 million shares.

Pro forma for this transaction as of June 30, 2024, our total debt outstanding was $872 million and our gross leverage ratio was less than two times. We have been actively deploying capital throughout 2024 to support our goal of long term shareholder value creation.

Our investments in closed and pending M&A activity is higher than it has been in several years. We have repurchased 1.5 million shares of our stock and paid down a significant portion of our 1.75% convertible notes, reducing our gross debt and creating incremental borrowing capacity.

We have also significantly expanded our revolver capacity and extended the maturity of both our revolver and the majority of our outstanding convertible securities. We have done this sufficiently maintaining and achieving attractive terms.

We also monetize the balance of our CCSI stake, turning an equity investment into additional liquid investable resources. Our strong balance sheet continues to be the foundation of our capital allocation strategy and these steps make our balance sheet stronger.

Going forward, we plan to continue to favor our pursuit of accretive M&A transactions such as CNET while seizing the opportunity to repurchase our shares at what we strongly believe are attractive valuation levels as indicated by the implied current price to adjusted EPS ratio that does not appear to take into account the growth in adjusted EPS reflected in our guidance.

We intend to continue to repurchase our common stock in the third quarter. Turning to Slide 10, we are reaffirming the fiscal year 2024 guidance range that we presented in February 2024.

While second quarter revenue performance has not met our expectations, as we noted, our year-to-date revenue is up slightly as compared with the 2023 comparable period.

This fact combined with our current expectations for the balance of 2024, the expected impact of our recent cost initiatives and the pending acquisition of CNET supports our reaffirmation of the guidance range that we set in February of this year.

Within this guidance, we expect our fiscal year 2024 adjusted EBITDA performance and adjusted diluted EPS performance, which is bolstered by a recent and planned stock repurchases to fall within a higher level of the range than our revenue.

Including the anticipated impact of the CNET transaction and our other M&A transactions, we currently expect results to improve in the second half of 2024, particularly in the fourth quarter and while we are not providing specific quarterly performance expectations for the balance of 2024, we remind you that the company typically shows strong Q4 seasonality for its advertising and performance marketing businesses and that our original guidance was for Q4 to represent approximately 30% of our fiscal year 2024 revenues.

We expect the acquisition of CNET to support, if not improve this percentage. We also expect our recent cost initiatives to positively impact margins in the second half of 2024. Slide 16 includes a reconciliation of free cash flow. Year-to-date free cash flow was $72.5 million.

However, this figure includes negative free cash flow of $40.5 million associated with TDS. As an issue of gift cards, TDS maintains a large working capital position and experiences seasonality and while the first half of 2024 reflects significant working capital usage at TDS, we expect TDS to be a contributor to free cash flow on an annual basis.

Excluding the impact of TDS, year-to-date free cash flow was $113 million. Overall, while our second quarter results were below our expectations, we remain optimistic for our outlook for the balance of 2024.

We took several important steps to enhance our liquidity and strengthen our balance sheet during the second quarter, while we allocated a significant portion of our investable resources to stock repurchases.

Our pending acquisition of CNET reflects an improved deal making environment and we believe that we will see more opportunities to allocate capital to M&A in the near future. Despite some unexpected challenges in Q2, we believe we can deliver revenue and earnings growth and enhance shareholder value during the second half of 2024.

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

Thank you. [Operator Instructions]. The first question today is coming from Shyam Patil from SIG. Shyam, your line is live..

Thank you. Hey, good morning, guys. Congrats on the CNET deal. I know that's been on the list for a long time. Vivek, it sounds like this could be just the beginning of the company becoming more aggressive with M&A.

Just wondering if you could share any further color on how you're thinking about your M&A strategy and if there are any particular areas where you see the most opportunity in the near term?.

technology, gaming and entertainment, retail, health and wellness. These are categories we want to go deeper into and then look, also looking for adjacent subscription services businesses that like our Ookla business, like our Cybersecurity and MarTech businesses.

So across the board, new verticals are always on the table and there are high value verticals that we're always keeping an eye on. So I think you've interpreted it correctly, which is we do actually feel very optimistic about where the M&A market is, and look, I do think that with Gamer Network and with CNET, I kind of view those as bellwether.

These are the type of deals we love to do, as I said, and these are the type of deals that we believe are now starting to come our way..

Great. Thank you, guys..

Thank you. The next question is coming from Cory Carpenter from J.P. Morgan. Cory, your line is live..

Good morning. Vivek, one for you and one for Bret. For you Vivek, you mentioned expectations for gaming, connectivity, health, wellness to reaccelerate in the second half.

Could you just expand on what gives you confidence in this and maybe more broadly, what you're seeing in the advertising market where trends have been more mixed this earning season? And Bret, for you, you mentioned oh, sorry. I'll let you answer that, and I'll ask Bret to follow-up..

Thanks, Corey. Sorry. So look, I think maybe zoom out for a moment. When we look at the first half of this year, slightly up in revenues, up in EPS around 3%, 3.5%. So not exactly where we would like to be at this point. As we said, June was a bit of a kick in the teeth, but all things considered reasonably okay.

As we look at second half, the benefits are modest organic improvement. So we're not calling for meaningful big bets here and they're coming in areas that have always been traditional good sources of growth for us, gaming, health and wellness and connectivity.

Cost control, so expanding margins, Bret mentioned this in his part of the opening remarks, which is we did institute a number of measures to help from the margin point of view that will show up in the second half and then the contribution from M&A is material to what we're looking to do in the second half and going forward and then in the end, the thing that shouldn't get lost, I guess, is that we think we're going to be towards the high end of the adjusted EPS guide and I think that's very important.

Those who have followed the company for a long time know that we very much view ourselves as EPS compounders. In terms of the advertising market, I'll say a few things because I usually say it's well, it's not one market, it's broken into categories and customer types and ad product types. For us, tech continues to be a challenge on the B2B side.

By the way, I think that's for everyone in B2B tech advertising. It's a reflection of how those companies right now are performing, but again, I believe that's cyclical and that will turn. It's taking longer than I would have hoped, but we believe it's there. Consumer tech has done reasonably well. Health and wellness continues to do well.

We've had one major pharma advertiser pause campaigns across the board. We're seeing that loosen up and getting unpaused, we think, into the second half. So again, very good there. Gaming and Entertainment, interestingly, the gaming industry has been in some turmoil, but our advertising business hasn't reflected that.

So we've been able to sort of, I think perform a little bit differently than how the gaming publishing industry has been performing. So that's been a net positive, and then in retail, actually retail is strong. We just had our commission issue, which we talked about in the last call and a distribution issue, which we talked about in the last call.

So look, again, I think that when I look at it all relatively healthy and in the end, the other thing to recognize it's worth zooming out with our ad business 24 months.

Our business has held up probably better than most 24 months ago, and so maybe our comps going forward don't seem as percentagewise dramatic as maybe some others, but it's probably helpful to look at it over a longer period of time..

Thank you, and just to follow-up, in in June, curious, what happened or what do you think happened that caused the, pullback across a couple of verticals at the same time, more macro related, more specific to your businesses? Just more color there would be helpful. Thank you..

Yes. Cory, it's Bret. I wouldn't put it on the macro. I think one of the things that we are characterized as a business is we have sort of high customer concentration.

If you think about the ad business, we've got roughly 1700 customers and if you take out some of the B2C stuff in our subscription business, again, we have large customer accounts where sales can amount to 100 of 1000s of dollars.

It doesn't take a tremendous amount of movement on the part of a customer to either cancel a campaign or move a campaign from Q2 to Q3. We also have different types of revenue even on the subscription licensing side. We've got revenue that is sort of recognized over a contract life and certain licensing revenue that's recognized on a one-time basis.

Depending on the timing of certain of those contracts and even winning or losing a contract it can impact a quarter, and again when we spoke in May, we had a perspective on the balance of Q2. By the end of Q2, we had a different perspective. We took action across the business to balance our investment against our expected incoming revenue.

Those will impact, as Vivek said and I said in my prepared remarks more the back half of the year than the front part of the year, but again I think part of this is just large customers and the timing of successes in the marketplace..

Thank you..

The next question is coming from Ross Sandler from Barclays. Ross, your line is live..

Hey, guys. Just two questions. First on CNET, as somebody that actually covered that company when it was public back in the day, great to hear we'll be talking about it go forward.

So maybe just some high level thoughts on accretion and how this might help the overall advertising go to market, within that tech vertical consumer tech vertical, and then the second question, your long term free cash flow conversion of mid-to-high 50s, is that still the right way to think about it given the TDS and these other new companies coming into the fold? How should we think about that metric go forward? Thanks a lot, guys..

Thanks, Ross. And I'm glad you're revealing that we're probably around similar ages. I remember seeing that as a public company too. Let me say a few things about it and I have to be somewhat careful. Obviously, we're signed, we're not closed, we've got to go through the HSR process, but at a high level, I'll say a few things. One, it's highly strategic.

The tech vertical has always been an important vertical for the company and CNET has been, as you know, for decades a market leader and we have an immense amount of respect for the brand, its heritage, its team and what it represents to its audience, what it represents to the tech community at large.

It's to me, it reminds me of what IGN was for us when we acquired IGN within the gaming space. I think CNET occupies a very, very similar kind of space and then what I'll talk more broadly about, I guess, is how I see the ad market today and how it's evolving.

For sure, marketers spend a significant amount of their budgets, digital ad budgets I'm talking about now, on search and social and programmatic.

Those are three big areas, but I believe in every vertical you have a few players that are the at scale premium players that are in a position to do attractive direct ad deals, premium deals and that's how we're trying to be positioned and viewed in every one of the verticals we're in and I believe that CNET puts us in a very, very great position within the tech vertical whether it's you're looking to reach IT decision makers, you're looking to reach tech enthusiasts, early adopters, customers of consumer electronics, potential customers, whoever it is, I think that whole space, I think we're going to occupy a really great one.

So we're very excited for it. It is a brand that we have thought about for many years frankly and the fact that it's that we've signed this agreement I think is super compelling. I'll let Brett talk to the free cash flow conversion question..

Yes, Ross. Frist and foremost, I think yes that is sort of our long term target and but maybe unpack it a little bit.

Frist and foremost, obviously it depends on performance and what I mean by that is when you think about our free cash flow, a number of the elements are relatively fixed and if you start with EBITDA and we're subtracting our CapEx, usually our CapEx program over a 12-month period is essentially fixed as we develop and invest in our products and businesses and to the extent that our EBITDA is not at high end of our range, you're going to see a high flow through every $5 of EBITDA is sort of a point of free cash flow conversion.

We talked about in 2023 coming out of some dynamics in the business we had a buildup of working capital. I think we've stabilized that situation, but we're still clawing back some of the build-up on the balance sheet and then TDS has had the expected impact on the business.

The dynamics of TDS is it's a highly seasonal business with the concentration in the fourth quarter. It builds up a significant amount of cash at the end of the year and it runs out in the first quarter.

We happen to do a first quarter acquisition and that acquisition we experienced the negative outflow of some of the cash it had built up in the fourth quarter running out towards its customers.

Very relatively small nominal impact in the second quarter and as we get into the back half of the year, we'd anticipate that being a contributor, but again, I think that conversion rate is our target for the business. We also have on a go forward basis smaller expected investment in Humble Games that should positively impact it.

So yes, our plan is to get back to those levels..

Thank you..

Thank you. The next question is coming from Jian Li from Evercore ISI. Your line is live..

Great. Thanks for taking the question. I have a couple of, AI related questions.

So first, definitely appreciate the color around just the Google AI overviews share of search in general, but, like, for the, Ziff Davis publisher assets specifically, are you seeing any discernible impacts at all, to your traffic to your publisher side driven by the adoption of, AI overview? And, also, second, you mentioned some kind of interesting GenAI tools across several real assets.

What are you seeing in terms of user engagement on the side? Is it driving more impressions? You can kind of talk about the, how these can be monetized and where we should see this on the P&L impact. Thanks..

No. So great question.

On the first piece with respect to organic search, no, we're not seeing any impacts from AI overviews only because as I say the rate at which overviews are presenting themselves is quite low against the queries that matter to us, but as I also said, I think more broadly across all queries, it's quite low and it continues to reduce and I think Google is looking for which of the queries where AI overviews will be additive to the search experience, but what I'll also say is that in other analyses we've done is actually when AI overviews present themselves, it's actually a positive to organic search because it's actually elevating your links to your site above everything else.

So the way AI reviews are presenting right now is they're at the top of the SERP.

So in some ways it's interesting, right, which is it's not happening that frequently, but when it happens, it's actually been viewed as a net positive if you're in the overview and I think I can imagine a world where we go from SEO to SAIO, something that AI overview or SAOO. So look, I think that in the end, it's not really a factor right now.

I think the other part of this, which I also spoke to is the degree to which Google as a search engine starts to see any competition from other emerging search engines. Way too early to say.

What I will say is that those search engines are very much focused on how to create a search engine result page that delivers publisher traffic because I think they view an opportunity for a SERP that may have more publisher content than maybe ad content for instance.

So that'll be interesting to watch, but again, Google is in such a great position in search. It'll take a while I think for anyone to really eat into that market share.

On the second question relating to when we incorporate AI into our products, what is the expected or hoped for benefit? And I think right now much of it is actually around our subscription offerings and making our subscription offerings easier to use, making them more productive that should result in improved retention.

So when we talk about Lose It and shifting to voice logging, one of the big sort of adherence issues in an app like Lose It is actually entering in your food consumption. Well, the degree to which we can make that easier, we believe, helps drive retention. Retention helps drive revenue.

Similarly, some of the changes within some of the things we've done that I talked about with respect to Downdetector, which is a subscription service, again, so I think we look for retention. On the media side, I guess you're right.

It would be session time, maybe more ad load and ad impressions if people are engaging, for instance, with IGN content in a more meaningful way, but that's very early days and I don't want to leave anyone with the impression that AI tooling of content experiences is going to lead to some dramatic change in the ad inventories of the business.

I think they are all experimental. They're all, I think, trying to contribute to a better user experience, but I don't want to necessarily overstate that. I actually think AI incorporated into software is more compelling..

Great. Thanks for the color..

Thank you. The next question will be from Ygal Arounian from Citigroup. Ygal, your line is live..

Hey, good morning, guys. Maybe just first going back to the guidance and the trajectory from where we are to the maintaining the guidance for the full year, can you help break down what the expectations are from M&A within that number and kind of, like, the mix between that and organic revenue as we kind of work through the back half of the year.

I don't know if you could size CNET in particular, but just maybe more broadly, if not that specific?.

Yes, I don't think we're going to break it down in that specificity. What I will say is I think it's three things. It is improving organic.

It is improving margins against the cost control, so that more affects obviously adjusted EBITDA and EPS and then the contribution of M&A, and I think it's probably instructive to just for those who followed the company for a long time, it's always been the combination of those three things in our formula. Look, organic is not where we'd like it.

So let me be clear about that. We can't continue to be in a place where organic is a source of decline, but it's a modest source of decline and it is we believe certainly over the last 12 months it is a reducing headwind and we believe that's going to continue.

In the end, the company has always been a serial acquirer and a net income adjusted EPS compounder to highly accretive M&A deployment, generation of free cash flow, deployment of free cash flow, leveraging balance sheet, being very smart about our capital structure.

I think the thing that we're hoping to convey today is that that second part of what has been the Ziff Davis equation is, I think, firmly back. That part has been absent, frankly, for the last few years for the reasons I described at the beginning of the call. We're signaling now we believe a real change there. So acquisitions are important.

They're important to the second half guide. Make no mistake about that and they're important to 2025 and beyond..

And maybe the only thing I'd add is with regards to the timing for the balance of the year, Q4 is a seasonally large and strong quarter for the company overall based on the dynamics of the business, and M&A is a meaningful portion of our guide, and as we said, we factored in both existing and pending impacts, including our expectation of the closing of CNET.

So given where we sit here in the beginning of August, there's an expectation that that has an impact on Q3, but probably a small impact on Q3 with a full impact on Q4..

Okay, got it. Helpful. And then, Vivek, I guess going back to AI and more on the licensing front, you guys have been more patient. Is that the stance you continue to take here? Maybe any updates to how you're thinking about licensing opportunities in your approach with, with the LLMs? Thanks..

Yeah. I mean, look, obviously, we have nothing to report. We continue to be in dialogue. I think what's, possibly becoming clear in the market, these deals aren't that big.

They're not large needle movers and I think what they relate to are fairly large questions around copyright and what is allowed and what is fair use and what isn't, and I think we would rather either be in a situation where there's a recognition that the original training, was not a fair use situation and there needs to be compensation for it before we get into sort of the rag style deals that seem to be in the marketplace.

So I guess what I'd say is I'm in the category of companies. I'm certainly not alone that I think feel that, this near-term money is not that appealing.

It's not that appealing in size and duration against what I think we recognize has been a high concentration of the training and ongoing training coming from a fairly small subset of meaningfully sized publishers. So all to say that in the end, we're not feeling that compelled right now to do deals that we think might be very short term.

I think we'd rather see how this plays out a little bit more, and at the same time, we're actually optimistic that some of the movement around trying to build search engines that become meaningful sources of referral traffic that is interesting to me.

So to the degree to which that can come to fruition in any way meaningfully, I think that would be very productive, and then obviously, there are major things happening relating to search deals and yes, sorry, search distribution deals and what does that mean in that mix. So this will be an interesting space, I think, to watch.

I think being a little patient and waiting is probably a good thing for us..

Got it. Thanks so much..

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

Hey, guys. This is Chris Fountain on for Rishi Jaluria. Thanks for taking my question. I wanted to go back to profitability.

Can you talk a bit more about the actions that you took in Q2 to right size the expense base to match the growth headwinds? And just to confirm, are these actions what is giving you confidence in reaching the higher end of the EPS range?.

Yes. So again, thanks for the question, Chris.

I think it's just constantly calibrating our investments in the business against our expectation of top line performance and whether that's continued accelerated hiring to build capacity in the business in anticipation of more activity or you go to the other end which is keeping open positions open longer or potentially eliminating open positions in areas where we see more pressure in the near term with an expectation of rebuilding into the future.

I think on the EPS side that's a combination of things, and it's a combination of the -- again the anticipated we obviously have to close the acquisition impact of our pending M&A and our existing M&A, but it's also the impact of the share buybacks. I think this was a very important period of time for the company from a balance sheet perspective.

If you look back over the last 24 plus months, we've accumulated a lot of cash and we really put a lot of that cash to work in the second quarter and into the third quarter.

Not only did we buy back 1.5 million shares and commit to a meaningful acquisition, but we also took steps to extend the maturity and on attractive terms for more than half of our convertible outstanding. We paid down $135 million of our convertible.

We're really pleased with that transaction and where it puts us in terms of staggered maturity and our cost of debt with the coupon on that less than 4% and we also took steps to expand our available capacity through our revolver.

So that gives us the ability on a go forward basis to not only continue to commit to our M&A program but at these levels our expectation in the quarter is to be active in our stock. Our Board took steps to support our stock buyback program by increasing the availability under our program by 5 million shares.

So when you look at EPS, it's the multiple steps of the expected performance of our existing businesses in the back half of the year, the impact of pending M&A, the cost actions we took in a quarter where our revenue expectations fell short of where we thought they'd be and then our commitment to allocating our capital to the buyback program and all that working together allows us to make the statement we made today..

Got it. Thanks, Bret..

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

Hi, good morning. Thank you for taking my questions.

I was wondering if you could talk, very high level about the revenue and margin profiles and their trajectories you've seen over the last several years compared to similar properties you have at Ziff and maybe how you expect to change them and drive value there assuming acquisition closes?.

Again, I don't 1, I don't we're not breaking out CNET, but two, we're still in this period where it's not closed, it's signed. But let me just say that, again broadly that CNET is a leader in this market has been and continues to be. It has a balance of direct advertising revenue and affiliate commerce just like us.

It is not programmatic heavy just like us, more direct ad deals, sponsorship deals, video advertising plus affiliate commerce, which is driving traffic to merchants and getting paid a commission if a consumer buys. So model wise, very consistent with how we go to market and how we monetize at PCMag and Mashable.

ZDNet has more of a B2B kind of focus or history in Providence, which kind of maps well to what a Spiceworks does.

So I think very consistent profile wise, very consistent business model wise, I think very consistent sort of cost structure, editorial, ad sales, product and engineering, very much the kind of business that we understand and very much the kind of business we operate today..

Okay. Fair enough, and you alluded to this earlier, but it seems like it sounds like there's a lot more properties similar to this behind the scene that just given the timing in private equity and all the things that you mentioned.

Can you just kind of size for us how many of these things you're seeing compared to maybe three or six months ago and scope for us, how aggressive you think you can be over the next year or so?.

Yes. Well, it's an interesting question. It's less about are we seeing more. I think we've always been seeing a lot. It's now the nature of the discussions are have evolved -- have moved and shifted to where we believe these are actionable. I think that's the key point.

I think the key point is that the bid ask spread has narrowed and it's come closer to where we were, and so I think that's a key thing to understand.

These are deals we are very excited to do at these particular valuations and so to me, I believe it's a valuation statement more than a sort of sourcing and volume of deal statement because the sourcing has always been there, right? It's not like we were not having conversations.

It just felt like, wow, there's a football field between where we are and they are and that's going to be hard and not a productive dialogue. So we think it's going to be productive.

We think we're going to be in a position listen, historically, just maybe as a way to frame this, we often talked about being able to recycle 100% of our free cash flow into M&A and to manage borrowings at gross debt over EBITDA of three times with all of that capital being available for acquisitions with a hurdle of a 20% cash-on-cash return on those deals.

Another way we often look at it is within an incubation period of, let's call it, 18 months, that the next 12-month effective purchase price over EBITDA after this incubation period, this is an important statement, is roughly six times and that's what we work towards.

That's never changed, right? And so to us now, there are more opportunities that fit within that model and within that framework..

Perfect. Thank you..

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

Thank you, Paul, and thank you everyone for joining our call today. We appreciate the interest and the support. We hope to see some of you at our upcoming conferences, which we'll post in due course. Have a great day..

This does conclude today's conference. [Operator Closing Remarks]..