Ziff Davis, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless stated otherwise. Ziff Davis operates Digital Media and Cybersecurity and Martech businesses.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $307.1 million | $315.1 million | Down 2.5% |
| Operating income | $26.3 million | $30.6 million | Down 13.9% |
| Operating margin | 8.6% | 9.7% | Down 1.1 percentage points |
| Net income (loss) | $(7.6) million | $24.5 million | Turned to a loss |
| Diluted earnings (loss) per share | $(0.16) | $0.51 | — |
| Operating cash flow | $115.3 million | $116.5 million | Down $1.2 million |
- Digital Media revenue was $234.2 million, approximately flat year over year. Advertising revenue declined 8.2% to $156.1 million, while subscription revenue rose 24.4% to $69.1 million. Acquisitions completed in 2022 contributed $12.0 million of Q1 2023 revenue.
- Cybersecurity and Martech revenue declined 9.3% to $73.0 million. Segment operating income fell 5.9% to $11.6 million; Digital Media operating income fell 11.4% to $28.5 million.
- Digital Media advertising retention was 91.2%, versus 106.6%; advertiser count decreased to 1,737 from 1,950. Quarterly revenue per advertiser increased to $89,857 from $87,214. Combined subscription and licensing subscribers rose to 3.016 million from 2.131 million, while average quarterly revenue per subscriber declined to $47.14 from $63.85. Churn was 3.28%, versus 3.22%.
- Net loss reflected a $20.3 million unrealized loss on the Consensus investment and a $9.2 million loss from the OCV equity-method investment. The prior-year quarter included a $9.0 million unrealized investment gain. Interest expense, net declined to $4.5 million from $10.3 million, primarily due to higher interest income.
- Cash and cash equivalents were $721.5 million at March 31, 2023, up from $652.8 million at year-end. Total short- and long-term investments were $155.1 million; cash, cash equivalents, and investments totaled $876.6 million. Capital expenditures were $30.0 million.
- Long-term debt was $999.6 million carrying value, representing $1.01 billion principal: $550 million of 1.75% convertible notes due 2026 and $460 million of 4.625% senior notes due 2030. No revolving-credit borrowings were outstanding; the company reported compliance with debt covenants.
Changes, outlook, and notable items
- Revenue weakness came primarily from lower Digital Media advertising and Cybersecurity and Martech subscriptions, partly offset by Digital Media subscription growth. Segment operating costs declined, but not enough to prevent lower operating income.
- Management gave no numerical revenue or earnings guidance. It expects available cash, operating cash flow, and revolving-credit availability to meet anticipated working-capital, capital-expenditure, and potential repurchase needs for at least 12 months. It expects acquisitions to remain part of its strategy but noted the pace is uncertain, particularly given macroeconomic conditions.
- Investing cash outflow was $38.8 million, including $30.0 million of capital expenditures and $8.0 million for acquisitions. Financing cash outflow was $9.5 million. No shares were repurchased under the public buyback program during the quarter; employee share withholding purchases totaled $2.9 million.
- The company recorded approximately $1.8 million of impairment, primarily on operating lease right-of-use assets, amid ongoing evaluation of office needs under remote and partial-remote work arrangements.
- Tax results included a $5.0 million discrete benefit related to the Consensus investment loss and approximately $1.0 million from releasing uncertain-tax-position reserves. The reported effective tax rate was negative 65.6%, reflecting these items.
- Indirect-tax reserves were $25.5 million, and liabilities for uncertain income-tax positions were $39.8 million. Management said additional indirect-tax liabilities are reasonably possible and could materially affect results. Pending securities and derivative litigation remains; management did not accrue material losses, but acknowledged an unfavorable outcome could materially affect a particular period.
- A new risk disclosure addresses potential disruption from bank failures and instability in financial institutions. The company also cited macroeconomic, advertising-demand, customer-retention, acquisition-integration, cybersecurity, regulatory, foreign-exchange, and tax risks. Disclosure controls were deemed effective; Digital Media was migrated to the company’s ERP system during the quarter.
Key facts for investors to verify
- Whether advertising and Cybersecurity and Martech subscription declines persist, and whether Digital Media subscription growth can offset them.
- Whether weaker advertising retention and lower average subscription revenue per subscriber indicate sustained pressure on customer spending or business mix.
- The performance and valuation sensitivity of the Consensus stake and OCV investment, which materially affected reported quarterly earnings.
- Cash-flow generation, debt and covenant headroom, and the company’s ability to meet debt, lease, and investment requirements.
- Potential additional indirect-tax assessments, litigation outcomes, and any effects from financial-institution instability.