Ziff Davis, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Ziff Davis operates Digital Media and Cybersecurity and Martech businesses. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $326.0 | $337.4 | $633.2 | $652.4 |
| Operating income | $38.9 | $45.9 | $65.2 | $76.4 |
| Net income (loss) | $16.7 | $(46.4) | $9.1 | $(21.9) |
| Diluted EPS | $0.36 | $(0.99) | $0.19 | $(0.47) |
| Operating cash flow | Not provided for quarter | $155.0 | $192.5 |
- Q2 operating margin was approximately 11.9%, down from 13.6%; first-half operating margin was approximately 10.3%, versus 11.7%.
- For the first half, capital expenditures were $55.3 million and operating cash flow less capital expenditures was approximately $99.8 million. Cash and cash equivalents increased to $679.1 million.
- At June 30, current assets were $1.075 billion and current liabilities $436.0 million. Cash, cash equivalents and investments totaled $829.3 million.
- Long-term debt carrying value was $1.000 billion ($1.010 billion principal), comprising $550 million of 1.75% convertible notes due 2026 and $460 million of 4.625% senior notes due 2030. No credit facility borrowings were outstanding; the company reported compliance with debt covenants.
Changes versus comparable periods
- Revenue fell 3.4% in Q2 and 3.0% in the first half. Digital Media Q2 revenue declined 2.3% to $252.9 million; Cybersecurity and Martech declined 7.2% to $73.2 million.
- Digital Media advertising revenue fell 7.5% in Q2 to $175.1 million, while Digital Media subscription revenue rose 15.7% to $68.2 million. Cybersecurity and Martech subscription revenue declined 7.2%.
- Digital Media operating income fell 17.7% in Q2 to $36.7 million. Cybersecurity and Martech operating income increased 7.5% to $13.5 million, as lower expenses more than offset lower revenue.
- Net income improved from the prior-year loss, but comparisons include investment-related items: Q2 2022 included a $48.2 million loss on disposition of Consensus shares and larger Consensus fair-value losses. First-half 2023 included $23.5 million of unrealized Consensus investment losses.
- First-half operating cash flow decreased $37.4 million year over year, primarily due to lower customer collections from timing and higher prepaid expenses. Cash used for investing was lower, mainly because of reduced acquisition spending.
Outlook, commentary and risks
- The filing provides no quantified revenue or earnings guidance. Management says existing cash, operating cash generation and revolving-credit availability should cover anticipated working capital, capital expenditures and possible repurchases for at least the next 12 months.
- Management expects Digital Media to benefit over time from online advertising shifts, platform improvements and acquisition integration; it describes Cybersecurity and Martech as subscription-driven, with generally steadier margins. Acquisition pace and future effects on margins are uncertain.
- Advertising metrics weakened: net advertising revenue retention was 89.8%, versus 99.6% a year earlier; advertiser count declined to 1,924 from 2,016. Subscription and licensing subscribers rose to 3.175 million from 2.475 million, while churn increased to 3.51% from 3.12%. The company notes prior-year subscriber metrics were adjusted for improved reseller visibility.
- The company recorded $7.4 million of additional convertible-note interest expense in Q2, relating to accumulated additional interest. It states the cumulative $7.7 million expense is nonrecurring after satisfying the relevant indenture conditions as of August 1, 2023.
- Share repurchases totaled $63.9 million in the first half, including excise tax; 980,418 shares were repurchased under the program. A July minority investment in Xyla, an AI company, was $25 million in cash and company shares.
- Indirect-tax reserves were $25.5 million; management says additional liabilities are reasonably possible and could materially affect results. Uncertain income-tax-position liabilities were $40.3 million.
- Pending matters include an appeal in a securities class action and remaining derivative claims. Management does not consider materially unfavorable outcomes probable, but notes an adverse resolution could materially affect a particular period. The filing also identifies uncertainty around instability or failures of financial institutions.
Important facts for investors to verify
- Whether advertising demand and advertiser retention stabilize, and whether Digital Media’s subscription growth can offset advertising declines.
- Drivers of declining Cybersecurity and Martech revenue, subscriber trends and rising churn.
- Cash-flow conversion, capital spending and the liquidity quality of reported investments; the $829.3 million total includes investments that are not equivalent to cash.
- Debt servicing and convertible-note terms, including the additional-interest payment and future conversion or refinancing implications.
- Potential exposure from indirect taxes, uncertain tax positions and outstanding litigation, plus execution and valuation risks from acquisitions and the Xyla investment.