Ziff Davis, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 9, 2023. Ziff Davis is a digital media and internet company with Digital Media and Cybersecurity and Martech segments.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $341.0m | $341.9m | $974.1m | $994.3m |
| Operating income (loss) | $(13.3)m | $29.0m | $51.9m | $105.5m |
| Net income (loss) | $(31.0)m | $18.2m | $(21.9)m | $(3.7)m |
| Diluted EPS | $(0.67) | $0.39 | $(0.47) | $(0.08) |
| Operating cash flow | — | — | $227.8m | $293.2m |
Q3 operating margin was approximately (3.9)%, versus 8.5% a year earlier; nine-month operating margin was 5.3%, versus 10.6%. Cash and cash equivalents were $660.6m, with short- and long-term investments totaling $170.0m. Current assets were $1,063.7m and current liabilities $419.5m. Long-term debt was $1,000.7m, principally fixed-rate notes: $550m due 2026 and $460m due 2030. No borrowings were outstanding under the revolving credit agreement. Cash, cash equivalents and investments exceeded debt by about $170m.
Material changes and operating trends
- Total revenue was down 0.3% in Q3 and 2.0% year to date. Digital Media revenue rose 1.5% in Q3 to $268.0m but was down 0.3% year to date to $755.0m. Cybersecurity and Martech revenue fell 6.6% in Q3 to $73.1m and 7.7% year to date to $219.3m.
- Digital Media advertising revenue declined 2.1% in Q3 and 5.9% year to date; Digital Media subscription revenue grew 10.9% in Q3 and 16.7% year to date. Cybersecurity and Martech subscription revenue declined 6.6% in Q3 and 7.7% year to date.
- Q3 and year-to-date results included a $56.9m goodwill impairment in Digital Media, compared with $27.4m in the comparable 2022 periods. The affected reporting unit had no fair-value cushion after the charge, so further deterioration in assumptions could cause additional impairment.
- Nine-month operating cash flow declined $65.4m year over year, to $227.8m. The company attributed the decrease mainly to collections timing, lower earnings before noncash adjustments and higher prepaid expenses, partly offset by income-tax payment timing. Investing used $104.7m; financing used $116.8m.
- Cash flow from operations funded $82.5m in capital expenditures. The company repurchased 1.59m shares for $104.9m during the first nine months; 4.74m shares remained authorized for repurchase at quarter-end.
Outlook, risks and unusual items
- No specific numerical revenue or earnings guidance is provided. Management expects cash on hand, operating cash generation and revolver availability to cover working capital, capital expenditures and potential repurchases for at least the next 12 months. Management notes Digital Media typically has seasonal strength in Q4.
- Management cited uncertain economic conditions, customer acquisition and retention, advertising demand, competition, acquisitions and integration, cybersecurity and system risks, regulation and privacy, foreign exchange, and tax exposures as risks to results.
- The company recorded a $29.6m year-to-date unrealized loss on its Consensus investment, compared with a $14.2m loss in the prior-year period. The Consensus holding was valued at $26.0m at quarter-end; a $2 change in its share price would change fair value by about $2.1m.
- Convertible-note interest included $7.7m of additional, nonrecurring interest expense year to date; the company reported that the relevant indenture conditions were satisfied as of August 1, 2023. Nine-month net interest expense declined to $17.8m from $28.4m, partly reflecting higher interest income.
- Indirect-tax reserves were $25.5m, and the company said additional liabilities are reasonably possible and could materially affect results. Uncertain income-tax-position liabilities were $41.4m.
- A securities class action dismissal is on appeal, and derivative litigation remains. Management said the matters are not expected to have a material adverse effect based on current knowledge, but an unfavorable resolution could materially affect a particular period. No material loss contingency was accrued for these proceedings.
- The filing added a risk concerning possible disruption from bank failures and instability at other financial institutions. Management said it was assessing potential exposure but could not guarantee against adverse effects.
Important facts for investors to verify
- Whether advertising weakness, particularly the lower advertiser retention rate (88.9% versus 94.1%), stabilizes and Digital Media subscription growth continues.
- Whether Cybersecurity and Martech can reverse its organic revenue decline, and how subscriber trends translate into revenue: reported subscribers increased to 3.231m from 3.146m, while average quarterly revenue per subscriber declined to $44.84 from $45.45.
- Whether the impaired Digital Media reporting unit’s forecasts and valuation assumptions support carrying value, given the absence of fair-value headroom.
- Whether operating cash flow and liquidity remain adequate alongside roughly $1.0bn of debt, planned investment and share repurchases; also review debt maturities and covenant compliance.
- Potential variability from the Consensus investment, indirect-tax assessments, uncertain tax positions and pending litigation.