Ziff Davis, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Ziff Davis operates Digital Media and Cybersecurity and Martech businesses. The 2021 comparison reflects the cloud fax business as discontinued operations following its October 2021 separation into Consensus Cloud Solutions.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $341.9 million | $355.1 million | $994.3 million | $1,008.1 million |
| Gross profit | $289.3 million | $305.4 million | $849.6 million | $865.8 million |
| Operating income | $29.0 million | $45.0 million | $105.5 million | $81.9 million |
| Continuing-operations net income (loss) | $18.2 million | $6.8 million | $(3.7) million | $22.5 million |
| Total net income (loss) | $18.2 million | $42.6 million | $(3.7) million | $136.2 million |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $293.2 million | $430.3 million |
Q3 gross margin was approximately 84.6% versus 86.0%; operating margin was approximately 8.5% versus 12.7%. For the nine-month periods, operating margin was approximately 10.6% versus 8.1%. Prior-year total net income included discontinued-operations income of $113.7 million for nine months and $35.8 million for Q3; continuing-operations results are the more comparable measure of ongoing performance.
Q3 segment revenue was $263.9 million for Digital Media, up 0.6%, and $78.2 million for Cybersecurity and Martech, down 16.0%. Digital Media operating income fell 45.0% to $27.3 million, including a $27.4 million goodwill impairment. Cybersecurity and Martech operating income rose 29.5% to $13.8 million.
- Cash and cash equivalents were $621.9 million; cash, cash equivalents and investments totaled $801.0 million at September 30, 2022, down from $1,046.6 million at year-end 2021.
- Debt had a carrying value of $998.5 million, with approximately $1.010 billion aggregate principal outstanding. No Credit Facility balance was drawn at quarter-end. The company repurchased $181.2 million principal amount of 4.625% Senior Notes during the first nine months.
- Nine-month capital expenditures were $80.8 million. Operating cash flow was $293.2 million, down from $430.3 million; the company attributed the decrease primarily to lower earnings before noncash adjustments and the prior-period cloud fax business.
Changes and unusual items
- Revenue declined 4% in Q3 and 1% for the first nine months. Advertising revenue fell while Digital Media subscriptions grew; Cybersecurity and Martech revenue was affected in part by the prior-year B2B Backup divestiture. Acquisitions and organic growth partly offset declines and divestitures.
- Q3 operating income included a $27.4 million goodwill impairment in a Digital Media reporting unit, following a forecast reduction and higher discount-rate assumptions. Goodwill impairment was $27.4 million for the nine months, compared with $32.6 million in 2021.
- For the nine months, the company reported a $47.8 million realized loss on investments, primarily from exchanging Consensus shares for debt settlement, and a $14.2 million unrealized loss on retained Consensus shares. Q3 included a $4.2 million unrealized gain on those retained shares and a $10.1 million gain on debt extinguishment, mainly from senior-note repurchases.
- Income tax expense was $33.2 million for the nine months despite a pretax continuing-operations result near break-even. Management said discrete Consensus-related investment losses and an $11.3 million deferred tax charge on retained shares disproportionately affected the effective tax rate.
Outlook, risks and contingencies
Management expected 2022 revenue to be slightly below 2021 and operating profit as a percentage of revenue to be generally consistent with 2021. It expected Digital Media revenue to be higher year over year, supported by acquisitions and organic growth, and Cybersecurity and Martech revenue to be lower, primarily reflecting divestitures. Management stated existing cash and expected operating cash flow should cover anticipated working capital, capital expenditures and potential repurchases for at least the next 12 months. These are expectations, not guaranteed results.
- Management cited macroeconomic uncertainty, inflation, customer acquisition and retention, advertising demand, competition, acquisition integration, cybersecurity and service reliability, privacy regulation, foreign exchange and tax exposures as risks to results.
- The company had a $24.3 million reserve for indirect taxes and said additional liabilities could arise with potentially material impact. Tax audits and uncertain tax positions also remain; the company said the amount of any potential change could not currently be estimated.
- Several legal matters remain pending. Management did not consider materially unfavorable outcomes probable and reported no material loss-contingency accrual for those proceedings, while cautioning that an unfavorable resolution could affect a particular period.
- Disclosure controls and procedures were deemed ineffective at September 30, 2022 because of an unremediated material weakness concerning accounting for elements of the Consensus spin-off. Management expected remediation by December 31, 2022, subject to controls operating effectively and successful testing.
Important facts for investors to verify
- Whether the Digital Media impairment signals further pressure on the affected reporting unit’s revenue, EBITDA or valuation.
- Whether advertising retention and revenue per advertiser stabilize; Q3 net advertising revenue retention was 94.1%, versus 114.1% a year earlier.
- How operating cash flow, cash and investment balances, debt repayments and future repurchases evolve, including the composition and market exposure of investments.
- Whether the indirect-tax reserve and ongoing income-tax audits require additional charges or payments.
- Whether management completes and tests remediation of the material weakness and restores effective disclosure controls.