Ziff Davis, Inc. — FY 2023 Form 10-K
Business context and reporting period
For the fiscal year ended December 31, 2023, Ziff Davis reported two segments: Digital Media, spanning technology, shopping, gaming, connectivity and health, and Cybersecurity and Martech, providing subscription-based software and services. Digital Media is more exposed to advertising demand and holiday-season seasonality; Cybersecurity and Martech revenue is primarily subscription-based. Comparative figures below are for FY 2022 unless stated otherwise.
Key financial metrics
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Revenue | $1.364 billion | $1.391 billion |
| Operating income | $132.6 million | $198.9 million |
| Operating margin | 9.7% | 14.3% |
| Net income | $41.5 million | $63.8 million |
| Diluted EPS | $0.89 | $1.36 |
| Operating cash flow | $320.0 million | $336.4 million |
| Capital expenditures | $108.7 million | $106.2 million |
- Revenue fell 1.9%. Digital Media revenue was $1.073 billion, down 0.6%; Cybersecurity and Martech revenue was $291.2 million, down 6.8%.
- Digital Media advertising revenue declined 5.2% to $747.3 million, while Digital Media subscription and licensing revenue increased 15.9% to $283.5 million. Cybersecurity and Martech subscription revenue declined $21.4 million.
- Digital Media operating income fell 29.1% to $141.0 million, with a 13.1% segment operating margin versus 18.4%. Cybersecurity and Martech operating income declined 14.2% to $43.1 million, with a 14.8% margin versus 16.0%.
- Cash and cash equivalents were $737.6 million; short- and long-term investments totaled $168.0 million. Current assets were $1.191 billion and current liabilities $431.8 million. Working capital was approximately $759.2 million.
- Outstanding debt principal was $1.010 billion: $550 million of 1.75% convertible notes due 2026 and approximately $460 million of 4.625% senior notes due 2030. No borrowings were outstanding under the revolving credit agreement; the company reported compliance with debt covenants.
- Operating cash flow less property-and-equipment purchases was approximately $211.2 million, compared with $230.3 million in 2022. The company repurchased 1.586 million shares for $104.9 million under its repurchase program and paid no dividends.
Material changes and unusual items
- Operating income declined 33.3%, and net income declined 34.9%, despite revenue decreasing only modestly. Operating costs rose to 90% of revenue from 86%, including higher general and administrative costs and impairment expense.
- Goodwill impairment was $56.9 million, versus $27.4 million in 2022, all related to Digital Media reporting units. Management cited lower forecasts for revenue and profitability, higher interest rates and market volatility. One affected reporting unit had no fair-value cushion after impairment and carried $79.2 million of goodwill.
- The company recorded a $28.5 million unrealized loss on its remaining Consensus investment, versus $7.1 million in 2022. It also reported a $9.3 million after-tax loss from its OCV equity-method investment, compared with a $7.7 million loss in 2022.
- Interest expense, net declined to $20.0 million from $33.8 million, mainly due to higher interest income. The 2023 tax rate was 32.2%, down from 44.2%, principally because the 2022 Consensus-related deferred tax charge did not recur; goodwill impairment without a corresponding tax benefit partly offset the reduction.
- Net advertising revenue retention for the quarter ended December 31, 2023 was 87.1%, compared with 92.0% a year earlier. The reported subscription and licensing customer churn rate was 2.86%, compared with an adjusted 4.02% for the prior-year quarter.
Outlook, risks and contingencies
- The filing provides no specific FY 2024 revenue, earnings or cash-flow guidance. Management expects Digital Media to improve through acquisition integration and longer-term online advertising trends, and plans to continue enhancing Cybersecurity and Martech offerings. Acquisitions remain part of the capital-allocation strategy; their timing, scale and effect on margins may vary.
- Management expects cash on hand, operating cash generation and revolving-credit availability to be sufficient for anticipated working capital, capital expenditures and potential share repurchases for at least the next 12 months. The company had $1.010 billion of debt principal, with $550 million due in 2026; interest rates and refinancing conditions are risks.
- Key business risks include short-term and discretionary digital advertising demand, competition for audiences and ad budgets, dependence on search and third-party platforms, cybersecurity incidents, generative-AI use of company content, privacy and health-data regulation, and the ability to integrate acquisitions.
- Potentially material uncertainties include sales, use, telecommunications and similar tax assessments: the company recorded $28.1 million of related reserves and said additional liabilities could have a material financial impact. It also reported $36.1 million of liabilities for uncertain tax positions; audit outcomes and reserve changes are uncertain.
- Management said existing legal proceedings were not expected, based on current knowledge and accrued liabilities, to have a material adverse effect; unfavorable outcomes could nevertheless materially affect a particular period. A securities class action dismissal is on appeal. The company reported no material loss contingency accrual for the described proceedings.
- After year-end, on February 5, 2024, the company completed the acquisition of TDS Gift Cards for approximately $48 million in cash, subject to working-capital adjustments; purchase accounting was not yet finalized.
- The financial-statement auditor issued an unqualified opinion and identified revenue-audit evidence sufficiency as a critical audit matter. Management and the auditor concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Whether advertising trends and the 87.1% quarterly retention metric stabilize, and whether subscription growth can offset advertising and Cybersecurity and Martech declines.
- Whether the impaired Digital Media reporting unit meets management’s forecasts, given its lack of fair-value cushion and remaining goodwill.
- Debt repayment and refinancing plans, convertible-note conversion conditions, covenant headroom and cash available after investment commitments and repurchases.
- Potential exposure from tax assessments, uncertain tax positions, ongoing audits and the appeal in the securities litigation.
- The performance, valuation and liquidity of the Consensus and OCV investments, and the finalized purchase accounting and expected contribution from TDS Gift Cards.