Ziff Davis, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Ziff Davis is a digital media and internet company operating Digital Media and Cybersecurity and Martech businesses. Cloud fax results are presented as discontinued operations; the comparison period includes that business, which was spun off as Consensus in October 2021.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Revenue | $315.1 million | $311.7 million | Up 1%; acquisitions and organic growth partly offset declines and divestitures |
| Gross profit / margin | $269.0 million / 85.4% | $267.8 million / 86.0% | Gross profit up 0.4%; margin lower |
| Operating income / margin | $30.6 million / 9.7% | $26.9 million / 8.6% | Operating income up 13.7% |
| Continuing-operations net income | $24.5 million | $38.8 million | Diluted EPS was $0.51 versus $0.83 |
| Net income | $24.5 million | $77.9 million | Prior period included $39.1 million from discontinued operations |
| Operating cash flow | $116.5 million | $178.7 million | Lower, reflecting the separation, collection timing, lower deferred revenue and prior-period investment income |
| Cash and investments | $988.7 million | $1,046.6 million at Dec. 31, 2021 | Includes $629.0 million cash, $238.2 million short-term investment and $121.6 million long-term investment |
| Debt | $1.123 billion carrying value | $1.091 billion at Dec. 31, 2021 | No principal due within 12 months; credit facility undrawn |
Segments and material changes
- Digital Media: Revenue was $234.8 million, up 3.5%; operating income was $32.1 million, up 4.8%. Advertising revenue declined to $170.1 million from $177.3 million, while subscription revenue increased to $55.6 million from $45.6 million.
- Cybersecurity and Martech: Revenue was $80.5 million, down 5.3%, primarily due to the B2B Backup divestiture, partly offset by acquisitions. Operating income increased 3.9% to $12.3 million as expenses declined.
- Sales and marketing expense rose 9% to $117.8 million; general and administrative expense fell 10% to $102.2 million. Net interest expense fell to $11.5 million from $21.5 million, partly due to debt repayment and adoption of a convertible-debt accounting standard.
- Cash from operations was lower year over year; investing outflows were $58.6 million, including acquisitions and capital spending, and financing outflows were $120.7 million, including share and debt repurchases.
Outlook, risks and unusual items
- Management expects 2022 revenue to exceed 2021 revenue and operating profit as a percentage of revenue to be generally consistent with 2021. No specific numerical forecast was provided. Acquisitions and organic growth are expected to contribute; acquisition pace and integration remain uncertain.
- Management believes cash and operating cash generation will cover working capital, capital expenditures and potential repurchases for at least 12 months. It reported $81.0 million of minimum lease payments, including approximately $26.7 million due within 12 months.
- The retained 19.9% Consensus interest was valued at $238.2 million and generated a $9.0 million unrealized gain in Q1. Its market-price movements affect earnings; a $2 change in Consensus share price would change the investment value by approximately $7.9 million.
- The company repurchased 554,289 shares for $58.7 million under its buyback program and repurchased $54.6 million principal of 4.625% Senior Notes for approximately $55.4 million, recording a $1.2 million extinguishment loss. The company reported compliance with senior-note covenants.
- A $24.0 million reserve covers certain indirect-tax matters; additional liabilities and expense could be material. Tax audits and legal claims remain ongoing; management said it had not accrued material litigation losses because unfavorable outcomes were not considered probable.
- Disclosure controls were deemed ineffective at quarter-end due to a material weakness in accounting controls over the Consensus spin-off. Remediation was underway, with completion expected no later than December 31, 2022, subject to successful testing.
- Q1 acquisitions had total consideration of $36.6 million and contributed $2.1 million of revenue. Subsequent to quarter-end, the company invested $15.0 million in Group Black and entered a strategic content partnership.
Important facts for investors to verify
- Progress and testing of remediation for the material weakness in internal controls.
- Underlying organic growth and advertising trends, including whether subscription gains can offset advertising and divestiture-related declines.
- Cash-flow generation, acquisition spending, buybacks and debt reduction relative to management’s liquidity expectations.
- Changes in the value of the Consensus stake and the potential outcomes of indirect-tax matters and tax audits.
- Acquisition integration, performance against the stated 2022 outlook, and whether operating margins remain consistent with 2021.