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spk09: Good day, ladies and gentlemen, and welcome to the ZIF Davis fourth quarter and year-end 2022 earnings call. My name is Paul, and I will be the operator assisting you today. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. On this call will be Vivek Shah, CEO of ZIF Davis, and Brett Richter, Chief Financial Officer of Ziff Davis. I will now turn the call over to Brett Richter, Chief Financial Officer of Ziff Davis. Thank you. You may begin.
spk01: Thank you. Good morning, everyone, and welcome to the Ziff Davis Investor Conference Call for Q4 and Fiscal Year 2022. As the operator mentioned, I am Brett Richter, Chief Financial Officer of Ziff Davis, and I am joined by our Chief Executive Officer, Vivek Shah. A presentation is available for today's call. A copy of this presentation is available on our website. When you launch the webcast, there is a button on the viewer on the right-hand side which will allow you to expand the slides. If you have not received a copy of the press release, you may access it through our corporate website at www.zipdavis.com. In addition, you'll be able to access the webcast from this site. After completing the formal presentation, we'll be conducting a Q&A. The operator will instruct you at that time regarding the procedures for asking questions. In addition, you can email questions to investor at ZiffDavis.com. Before we begin our prepared remarks, allow me to read the Safe Harbor language. As you know, this call and the webcast will include forward-looking statements. Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results. Some of those risks and uncertainties include, but are not limited to, the risk factors that we have disclosed in our SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements in 8-K filings, as well as additional risk factors that we have included as part of the slideshow for this webcast. We refer you to discussions in those documents regarding safe harbor language as well as forward-looking statements. Now, let me turn the call over to Vivek for his remarks.
spk08: Thank you, Brett, and good morning, everyone. These are challenging times, particularly for businesses in the digital media and advertising market. Our strategy in this difficult environment is uncomplicated. First, focus on earnings and mitigating risks in the portfolio. Second, Invest for organic growth through the careful reallocation of resources and costs. Third, attract and retain the best talent in our markets. And fourth, continue to build our balance sheet so that we're in a position to acquire highly accretive and quality assets. For the fourth quarter, we grew our adjusted EBITDA by over 4%, notwithstanding a nearly 3% decline in revenues. For the full year 2022, we grew revenue excluding our divested assets by 1% and adjusted EBITDA by nearly 5%. We're proud to have generated revenue growth in this climate while also expanding our adjusted EBITDA margin by nearly 150 basis points. While we experienced an organic revenue decline in Q4 that was consistent with what we experienced in Q3, We take some solace in the flattening of organic decline, particularly in the fourth quarter, which represents the largest quarter of our fiscal year. I'll discuss our 2023 outlook in a moment, but let me provide some texture around our Q4 and fiscal 2022 results. Advertising revenues declined by 8% in the quarter. Like I've described in previous quarters, it's always useful to unpack this by category. Our gaming vertical, which has been a bright spot for most of 2022, saw a mid-single digit decline, largely due to the delay in the release of AAA titles. In the shopping vertical, we were pleased to see that RetailMeNot grew low single digits, following up a Q3 that was flat. Where we continue to see decline is at our smaller offers.com property, which, as I said in our last call, we think can be addressed by allocating some additional resources. Our health advertising business was down low single digits as the typical high volume of Q4 buying did not materialize as in prior years. The bright spot is that we're seeing some green shoots in both our consumer and professional pharma ad businesses with 2023 ad upfronts up high single digits year over year. As has been the case for the entire year, the tech category continues to be our biggest challenge, where we saw yet another double-digit decline. This sector continues to present challenges for us, but as I said last quarter, this is a cycle that will need to play itself out, and we believe having diversification across multiple categories, including shopping, healthcare, tech, and gaming and entertainment, is a competitive advantage. Subscription revenues grew over 4% in the quarter. We continue to see very strong growth out of our connectivity business, with revenues up strong double digits through organic gains and the benefit of the root metrics acquisition. Connectivity has been a consistent total and organic revenue grower over the last eight years, as we believe we have carefully assembled a category-leading roster of brands and capabilities in the broadband services markets. Our tools and products are designed to be instrumental in the ongoing development of digital infrastructure and helping individuals and businesses access connectivity solutions to meet their growing needs. We have made nine acquisitions in the space, including Ookla, Ekahau Down Detector, and Root Metrics, establishing us as a worldwide leader in network intelligence, network design, development, deployment, and optimization, and connectivity insights. It's why we recruited a fantastic new president, Stephen Bai, to lead it. Stephen is a broadband and wireless industry veteran, having served as the chief commercial officer of Dish Network and where he was recently appointed to its board of directors, also president of C Spire, chief technology officer of Sprint, and in senior roles at Cox and AT&T. Stephen is widely known and respected in the industry and possesses a rare combination of highly technical engineering skill with very strong business and financial acumen. He has been instrumental in the development and deployment of DISH's standalone 5G network. He has had success at public multinational telecommunications companies as well as at growth-oriented private companies. We're very excited to see Stephen take our connectivity business to the next level. Our cybersecurity and MarTech businesses had a challenging Q4 with a close to 10% decline in revenues. Approximately two percentage points of decline was driven by less favorable FX rates versus Q4 2021. For the year, excluding the divested businesses, the business was essentially flat in revenue and up nearly 12% in adjusted EBITDA. So while we believe we've done an excellent job in growing our bottom line, we continue to have challenges on the customer acquisition front, mainly in direct-to-consumer cybersecurity solutions. We believe we made good progress on this front in Q4, launching our new subscription buying experience on IPVanish.com with localization, new payment options, and other enhancements that should help us acquire customers, especially outside of North America. In our B2B cybersecurity business, our new sales org started to hit its stride in Q4 with some nice logo wins for our email security offerings. Just a word about margins. Obviously, we saw strong margin expansion in 2022. We were very conscious about headcount throughout the year. We managed our headcount down by over 10%. While we did execute a reduction in force in Q4, more than half of the 2022 FTE reduction was achieved through managing natural attrition. Doing so allowed us to manage expenses in a manner that wasn't disruptive to the company and further demonstrates that we work hard to not be surprised or unprepared by market shifts. Notwithstanding our focus on managing headcount and costs, it's important to point out that we're continuing to hire where we see promising returns, and we do plan to continue hiring for key positions in 2023. There are too many attractive growth opportunities in the company that we want to be sure to pursue. For instance, in our health and wellness vertical, we are leveraging our content creation expertise to build top-of-funnel, qualified traffic to our DTC businesses like Luzit. At our Healthy Careers job listings business where we connect HCPs with top healthcare employers, we're building a rapidly growing nurse recruitment business alongside our long-standing doctor recruitment business. In our shopping vertical, we're seeing great unit economics with RetailMeNot members who engage in our cashback offers and install our browser extension. In MarTech, we believe we can unlock value for email marketing customers by leveraging delivery and engagement signals to drive better campaign performance in cyber security we have a growing email security business and with the opportunity to grow this business in new markets and with larger customers and channel partners as we think about 2023 We anticipate that the organic growth declines we experienced in the second half of 2022 will continue into the first quarter and then start to improve sequentially, particularly as we get into the second half given the benefit of lower comps. While it's very difficult to call the bottom in declining markets, we feel that we might be there based on some green shoots we're seeing in the business. We do have some revenue benefit from prior year acquisitions as well. So from a full year perspective, we could see total revenue growth of about 1%. But if current challenges persist into the second half, then we could see total revenues decline by low single digits. I should also point out that we're not including any prospective acquisitions in these estimates, which, depending on the timing and scale, could represent some meaningful upside. With respect to our adjusted EBITDA margin, we're confident in our abilities to match 2022's 36.5% margin at the high end of our range. Towards the bottom end of our range, we would anticipate margins narrowing by 100 basis points, given the high flow-through nature of much of our revenues and given our commitment to continue to fund future growth. We finished 2022 with over $800 million of cash and investments and a ratio of two times gross debt over EBITDA. Our powder is dry. We have been patient. In fact, we didn't acquire a single asset in Q4 of 2022. The last time that happened was Q2 2020, which was the onset of COVID-19. but that didn't last long as we deployed nearly $500 million over the remainder of that year. We are currently very active, looking for opportunities at each of our seven platforms, tech, gaming, shopping, connectivity, health, cybersecurity, and more tech, as well as acquisitions that could represent an eighth platform. Finally, let me provide you with an update on our ESG efforts. Last March, Ziff Davis committed to setting emissions reduction targets with the Science-Based Targets Initiative, known as SBTI. SBTI defines and promotes best practices in near-term science-based target setting. And I'm pleased to share that in November, we formally submitted our targets to SBTI for validations. This is exciting because we are committing to comprehensive scope one, two, and three emissions reduction targets, and we'll be working over the next several years to meet them. In addition to being a leader in the zero carbon transformation, we remain committed to being a workforce of engaged and compassionate citizens. And the work we have done to date, our commitments, and our prioritization of ESG is beginning to be recognized. In late December, MSCI re-rated Ziff Davis, giving us a double A, which they deem a leader, and up a remarkable four ranking levels. ISS has also given us their top score of a one in both their social and governance quality scores. I continue to be incredibly proud of the work Ziff Davis has done and continues to do in the area of ESG. Let me hand the call back to Brett.
spk01: Thank you, Vivek. Let's discuss our financial results. Our earnings release reflects both our GAAP and adjusted financial results for Q4 and fiscal year 2022. As discussed during our previous earnings calls, our UK voice assets were sold in February 2021, and we completed the sale of our B2B backup business in September 2021. The results related to these divestitures are reflected in our fiscal year 2021 GAAP financials through their respective date of sale. However, these divestitures do not impact the presentation of our Q4 or fiscal year 2022 GAAP results. Our earnings release also reflects adjustments for the removal of the results of these 2021 divested businesses. Explanations for and reconciliations of these adjustments are provided in the release. On October 7th, 2021, we completed the spinoff of consensus. Our fiscal year and Q4 2021 gap income statement reflects the financial activity related to consensus and discontinued operations. We will focus our discussion today and my commentary will primarily relate to our Q4 2022 adjusted financial results from continuing operations and our comparisons to prior periods, which exclude the contributions from consensus business for the 2021 period prior to the spinoff, as well as the divested businesses. Now let's review the summary of our quarterly financial results on slide four. We reported revenue of $396.7 million for the fourth quarter of 2022 as compared with revenue of $408.6 million for the prior year period, reflecting a decline of 2.9%. Although there was some improvement during the fourth quarter in the value of certain foreign currencies, FX negatively impacted the Q4 year-over-year growth rate. and if the comparable 2021 currency values were applied to our 2022 Q4 results, revenue would have declined by approximately 1.3%. Adjusted EBITDA from continuing operations was $168.3 million for Q4 2022, as compared with $161.6 million for the prior year period, reflecting growth of 4.1%. which would have been 5.5% when adjusted for FX. Our adjusted EBITDA margin for the quarter was 42.4%. We reported fourth quarter adjusted diluted EPS of $2.26. This figure reflects a 3.7% increase as compared with our Q4 2021 adjusted results. Turning to slide five. For our fiscal year 2022, total revenue grew 0.6% to $1.391 billion as compared with 2021 revenue excluding divested businesses. Adjusting for the year-over-year impact of FX, revenue grew 2.2%. Adjusted EBITDA grew 4.6% to $507.2 million as compared with fiscal year 2021 adjusted EBITDA excluding divested businesses and we had a 2022 adjusted EBITDA margin of 36.5%. Excluding divested businesses, adjusted diluted EPS grew 7.1% to $6.65 as compared with 2021 adjusted diluted EPS. Overall, 2022 is a challenging year for the global economy and specifically the digital media marketplace. Despite various headwinds, including FX, we were able to report growth in revenue, adjusted EBITDA, and adjusted diluted EPS. On slide six and seven, we have provided performance summaries for our two primary sources of revenue, advertising, and subscription. As you can see on slide six, Q4 2022 advertising revenue declined by 8% as compared with the prior period. 2022 advertising revenue declined by 6% as compared with 2021. And again, this was impacted by negative trends in the foreign currency markets. Our net advertising revenue retention, an annual trailing 12-month statistic that we update quarterly, was approximately 92% for Q4 2022, also reflecting the recent pressures on digital advertising revenues, including FX. As defined in the slide, in the fourth quarter, Ziff Davis had 2,044 advertisers with an average quarterly revenue per advertiser of more than $118,000. a similar figure to the comparable Q4 2021 metric. Slide seven depicts our subscription revenue performance. Q4 2022 subscription revenue grew 4% as compared with last year's performance and was again negatively impacted by FX. Subscription revenues grew 9% during the last 12 months as compared with the 2021 subscription revenues excluding divested businesses. The table on the bottom of slide seven includes subscription metrics for the last eight quarters. Sequentially, total subscription customers were essentially flat, primarily reflecting growth in media subscriptions, offset by a decline in our VPN subscribers. Sequentially, our average quarterly revenue per subscriber declined by 1% to $46.33. As noted on our prior call, since Q3 2022, these metrics reflect the inclusion of a full quarter of our recent acquisition, Lose It, which is characterized by a significant number of monthly subscribers at a significantly lower average revenue than the average of our other subscription businesses. Overall, the acquisition of Lose It has significantly raised our number of subscribers and lowered our average revenue quarterly revenue per subscriber as compared with the prior year period. Our overall churn rate increased 26 basis points from Q3 2022 to 3.81%. This increase reflects a number of factors, including the impact of lower value promotional holiday bundles sold by Humble Bundle in November, which were not renewed in December and higher VPN churn. Additionally, the company's Q4 2022 other revenues grew just over 30% year-over-year to $14.4 million, driven by sales of Ekahau's new Sidekick 2, which was launched in Q3 2022. Slide 8 provides quarterly organic and total revenue growth rates, which exclude the impact of the divested businesses in the relevant 2021 periods. Revenues from businesses owned for at least a full 12 months are included in organic revenue, while acquired revenue relates to businesses we've owned for less than 12 months. As noted earlier, 2022 total revenue growth, excluding divested businesses, was 1%, again, in part reflecting FX headwinds. Fourth quarter 2022 organic revenue reflects a 7% decline or minus 6% adjusted for FX. Turning to our balance sheet, please refer to slide nine. Our balance sheet is strong. As of the end of Q4 2022, we had $653 million of cash and cash equivalents and more than $186 million of short and long-term investments. We also have significant leverage capacity, both on a gross and net leverage basis. As of the end of 2022, gross leverage was two times trailing 12 months adjusted EBITDA And our net leverage was 0.7 times and only 0.3 times if you include the value of our financial investments. During Q4 2022, we continued to monetize our stake and consensus, selling 74,000 CCSI shares for gross proceeds of $4.5 million. As of December 31st, 2022, we held approximately 1.1 million CCSI shares, and we will continue to be opportunistic with regards to our monetization efforts. As a reminder, we have until October 2026 to complete the disposition of our CCSI stake. During 2022, we deployed capital to repurchase approximately $181 million par value of our 4.65% senior notes and more than $71 million of our common shares. We did not repurchase additional senior notes or common shares during the fourth quarter. As noted on prior calls, we place a high value on the health of our balance sheet. We believe that this positions us strongly to continue to pursue M&A investments and other capital allocation alternatives. While we did not close any acquisitions during the fourth quarter, we remain highly active and continue to manage a robust pipeline of M&A activity. During 2022, we deployed $120 million of capital in support of current and prior period M&A activity. Turning to slides 11 and 12, I'd like to provide a few additional details relating to our guidance range. As we have discussed on this call and prior calls, the current operating environment remains challenging. Global macroeconomic pressures continue to weigh on the purchasing decisions of our largest advertising clients, and the consumer continues to navigate the pressures of inflation and rising interest rates. Our businesses experienced the impacts of these and other factors in 2022, including the change in FX rates, and our organic revenue declines were higher in the second half of 2022 as compared with its first half. Our guidance for 2023 reflects both the carry forward impact of our 2022 results and a measured view as to how the macro economy could stabilize in the second half of 2023. The high end of our guidance range for 2023 revenue adjusted EBITDA and adjusted diluted EPS reflects growth rates of approximately 1%, 1%, and negative 2% as compared with the unordered results we present today. The low end reflects declines of approximately 3%, 6%, and 9% respectively. Our EPS guidance reflects the adjusted EBITDA range as well as higher interest income on our cash balances lower interest expense, higher depreciation from our recent investments and acquired assets, and slightly higher taxes each as compared with 2022. It also reflects the absence of the $8 million other income benefit that we reported in 2022. With regards to certain details underlying this guidance, in 2023, the midpoint of our guidance reflects a low single digit percentage decline in advertising revenue, subscription revenue growth in the low single digits, and other revenue growth of mid single digits year over year. The midpoint also reflects a low single digit revenue decline in Q1 and Q2 2023, with revenue growth expecting to turn positive in the second half. This in part reflects the comparison of our relatively stronger Q1 and Q2 2022 results, as well as the assumption of some stabilization of the economy as we approach the end of 2023. Given the seasonality of our digital media properties and the impact of our second half 2022 operating performance, we anticipate that roughly 20% and 30% of our revenues will be in the first quarter and fourth quarter respectively. At the midpoint of our range, the company expects to have an adjusted EBITDA margin of approximately 36% for the year. We have slightly widened the range for our projected tax rate to an annual rate of between 23% and 25%. Note, these rates are expected to fluctuate quarterly. Additional details related to our share-based comp and anticipated share count are outlined on the slides as well. As noted last quarter, we experienced revenue pressures throughout 2022 as compared with our initial expectations. However, throughout 2022, we focused on managing costs, and as a result, Ziff Davis delivered adjusted EBITDA and adjusted diluted EPS growth despite revenue pressures. As we begin 2023, we will continue this focus on managing expenses as we navigate an uncertain operating environment. Following our business outlook slides are our supplemental materials, including reconciliation statements for the various non-GAAP measures to their nearest GAAP equivalent. This section includes a reconciliation on slide 16 that reflects free cash flow. Our 2022 free cash flow was $230.3 million. Note, as highlighted on our last call, our fourth quarter is typically a seasonally stronger quarter for revenue and adjusted EBITDA, but also typically reflects lower free cash flow conversion rate as a significant portion of our Q4 revenue is expected to be collected in Q1 2023. This fourth quarter also reflects significantly higher cash taxes as compared with the prior year period. certain other cash uses, including M&A and severance expenses, and a higher use of working capital as compared with 2021. With regards to working capital, this fourth quarter was also a bit atypical. We are finalizing the migration to a new financial ERP system. As part of this migration, we accelerated certain vendor and partner payments in the fourth quarter of 2022. This negatively impacted cash flow in the fourth quarter. We also anticipate that our customer invoicing cycle in Q1 2023, which contains our seasonally strong fourth quarter revenue, will take slightly longer to complete, potentially delaying certain Q1 accounts receivables collections. These are timing issues that impact short-term free cash flow. Overall and importantly, we continue to believe in the strong cash earnings potential of our business. While our 2022 free cash flow as a ratio of adjusted EBITDA was less than 50%, we continue to target a conversion rate percentage for our core business in the mid to high 50s, excluding certain non-GAAP cash expenditures, M&A payments, and other discrete uses of cash. Finally, as a reminder, our 2021 free cash flow reflects contributions from both the 2021 divested businesses as well as consensus, and as a result, does not comparable to our current continuing operations. Overall, we are proud of our 2022 performance, having achieved growth in a number of our key financial metrics despite the macro environment. With that, I would now ask the operator to rejoin us to instruct you on how to queue for questions.
spk09: Thank you. As a reminder, slides for today's event can be viewed at www.ziffdavis.com. We will now be conducting a question and answer session. In the interest of time, we ask that you please limit yourself to one question. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we begin. And the first question is coming from Shweta Kajuria from Evercore ISI. Shweta, your line is live.
spk07: Okay, thanks for taking my question, Vivek. You mentioned in your prepared remarks that in Q4 you were seeing flattening of decline. Perhaps if you could comment on what kind of trends did you see through the quarter as the quarter went through from October through December and then what you're seeing so far as of mid-February this year. You also commented on seeing some green shoots. So that's the question. What do you mean by flattening of decline and then what green shoots are you seeing right now?
spk08: Thanks for the question, Shweta. So with respect to Q4, I think we had, at least with the shopping business, in particular retail, as I mentioned, some slight growth, which I think was helpful in offsetting some of the pressures we had in technology. And as I also pointed out, what we typically see in health advertising in Q4 is a pretty significant release of budgets that didn't really take place in Q4. Now, as we think about 2023, You know, I am cautiously optimistic. You know, it is early. Of the advertising business where we have more than a near-term view, that's really in the health business. So in the health business, we have what are called upfronts where we are booking programs in advance for the remainder of the year. It is relevant because the health category for us is 40% of our advertising revenues. So with respect to that 40%, As I mentioned on the prepared remarks, we are seeing single digit increases year over year on booking. So we feel good about that. If the shopping vertical also maintains its modicum of growth, that's the second largest ad category. So those are the pieces that give us some foundation for cautious optimism as we enter into 2023. Obviously, a lot depends on the general operating environment and climate, but right now we feel that, in fact, we have hit stability and things should improve from here on out.
spk07: Okay, thanks, Vivek. And if I may add one more question, please. Any comments on just the overall M&A environment? You mentioned you're very active, but any thoughts on timing or opportunities?
spk08: Yeah, look, I think, again, the activity that I refer to as really a function of our approach to how we source deals. And we do it across all seven of our platforms and we do it at the corporate level too. So you've got eight organizations inside of the company who are all actively looking at opportunities. So we create a pretty significant pipeline. That's not new. That's what we've always done, but it ensures that we see a lot. And right now our focus is great businesses at fair prices. We do believe the market is rotating towards that point of view. And I think that we will be active this year. I can't give you specific timing, obviously, at this point. But, you know, we do see a lot. And I think a lot of sellers view us as a great home because they also look at our balance sheet as often they have opportunities that they're looking at. to acquire and add to their businesses. And so I think for a variety of reasons, I think we're an attractive place for a lot of businesses.
spk07: Okay. Thanks Vivek.
spk09: Thank you. Thank you. The next question is coming from Sean Patil from SIG. Sean, your line is live.
spk11: Hey guys, this is Jared on for Sean. Thanks for taking the question.
spk12: Thanks for all the color that you've provided around the top line and potential pacing as we roll through the year. As you're thinking about the bottom line, is there anything that you could share with us on pacing there? Maybe how you're thinking about OpEx growth through the year, if this might pick up a bit as you expect this second half to improve a bit, and then we've got one more after that, if that's okay. Yeah.
spk08: Yeah, so I just say with respect, and I'll let Brett jump in here in a moment. I think with respect to margins, as we said, look, I think the margin expansion we experienced in 2022, I think was quite remarkable when you consider the organic decline that we suffered, right, close to five points or about five points in the year. And so that often is very punitive from a bottom line point of view. So the fact that we were able to drive bottom line growth, notwithstanding organic revenue pressures, I think is a great statement around how we have I think, really optimize the cost base. That will continue into next year. Having said all of that, we are investing in the business at the CapEx level, at the OpEx level, and we're going to continue to do that because we see a lot of growth opportunities. I listed a few of them during the prepared remarks, so we're going to continue to do that. So we're not going to be overly precious about it, but to me, we're in the, as we say, I think, in the guidance of 35% to 36.5%, even a margin range. I don't know, Brett, if there's anything you'd add to that. Sure, yeah.
spk01: And I think we're just being thoughtful with regards to our spend. As we traffic through 2022, we obviously uncovered pressures at various points in the year, and we slowed our spending. We talked about how we had operating expense savings with regards to our employee base, mostly through just natural attrition. We did take a small action at the end of the year. What we want to do is find the balance of allowing employees each of our businesses to pursue opportunities in the marketplace and fund those pursuits, but fund them with a degree of confidence rather than hope. So as we see the marketplace being more receptive to spending in the case of advertising, to growth in the case of subscriptions, we have dollars there to fund those opportunities, but we're being thoughtful about when to spend them.
spk05: Great, thank you.
spk12: And then maybe a broader picture question. In the past, we've discussed the longer-term shift towards zero-click search and the potential there. Given all the recent generative AI developments, how are you guys thinking about that at this point, and what type of impacts might we be able to expect on your digital media properties in particular?
spk08: So I think you're specifically asking if generative AI is turn search engines into answer engines? If they're answer engines, will we get click-throughs? Is that essentially the question?
spk11: That's certainly a part of the question, and then just any broader impact that you might expect from that as well.
spk08: Yeah, so look, I think from a traffic point of view, depending on whatever the underlying algorithms are of any search experience, I believe every of the search operators whether it's Microsoft or Google, understand that the underlying content providers need to get value. And that value is expressed in traffic flow. And I don't think that's going to change. If the engines they use and the algorithms they use refine the answers, I think properties like ours who provide, I think, the highest value intellectual property in that equation will do best. So I don't view the evolution of search engines or answer engines or whatever you want to call them as being anything but really positive for high-quality content providers who provide the underlying information, you know, for that query.
spk05: Great. Thank you.
spk09: Thank you. And the next question is coming from Corey Carpenter from J.P. Morgan. Corey, your line is live. Hey.
spk02: Thanks for the question. I had two. Maybe, Vivek, first for you, there's been a ton of volatility in the ad market. But just kind of stepping back, how do you think about the right level of longer-term growth and margins for the business? And has your view changed here at all? And then secondly, connectivity has been a big bright spot for a while, but it's also kind of hidden within the subscription segment. Could you just help frame how big this business is or maybe what its margin profile looks like? Thank you.
spk08: Thanks, Corey. So look, I think with respect to the advertising market, in terms of long-term growth rates and margin profile, my views are unchanged. I continue to be bullish on the ad market. I continue to be bullish about the categories we're in and then the types of ad solutions we provide, which, as you know, are performance-driven. So I think if we took a nonlinear view on our advertising business and took a multi-year view, you'd actually see that it is not inconsistent with the kind of growth rates that we're looking for, which we've talked about as a company. We look for total growth of 15% top and bottom line with a mixture half and half roughly of organic and inorganic. So our views around target growth rates for the company and the advertising business around that are unchanged. We've been through cycles before. I've been in the advertising business now coming on almost 30 years. I've seen this and these pendulums do swing. And so nothing changes in terms of my views there. With respect to connectivity, obviously we don't break it out as a business unit, but I will tell you that I am incredibly excited with the addition of Stephen Bai. As I described a little bit on the call, his background is sensational. He is a very well-respected, established, and no name within the telecom and broadband and wireless industries generally. I think this was a this was an announcement in that industry that got a lot of attention and a lot of inbound calls as to things that people can do with us and understanding the broader range of our connectivity businesses. It has always been a growth engine for us, but I think it will continue to be even more so. It does operate at a very high percentage margin, higher than the average of the company, and has a growth rate that's higher. So it is a Whatever rule it is, it's a high rule of something. And I think that'll continue. And then I think with Stephen, I think it's going to get to the next level. And I think when that happens, we'll have a lot of interesting options.
spk05: Great. Thank you. Thank you.
spk09: The next question is coming from Ross Sandler from Barclays. Ross, your line is live.
spk04: Hi, this is Joey Petrolino. I'm for Ross. Thanks for taking the question. So a follow-up on the generative AI question, could you kind of talk about how chat GPT-type products could lower the cost of editorial content on the advertising business? And then if I can squeeze in a second question, thanks for the breakout of category performance within advertising during 4Q. Any call-outs to categories that are especially stronger week in 1Q, whether that's historically or what you've seen this year? Thanks again.
spk08: Sure. So with respect to AI, I think we look at it in two ways. One is what you described, which is generative AI. How do you use AI technologies to assist in the creation of content? And when you think about the editorial workflow, there are a lot of elements to it, from origination of story idea to assignment of story to outline of story to drafting of story to copy editing of story. I certainly believe that artificial intelligence has a role in parts of that editorial workflow, and we've been using it and will continue to use it. I will say, though, that I think for high-quality content generation, human plus artificial intelligence, I think, yields the best outcome. So I think the answer to your question... is that generative AI will allow us to produce more better content over the long term. It's a productivity gain more than anything else, which we're excited about and we currently use and have been using. The second part of AI, which is as if not more exciting from my point of view for our company, is how you can take AI models, so write ChatGPT as an AI model, and how do you then train it on proprietary data? The experiences we're all seeing right now are training AI models on non-proprietary, broad, accessible data, and you see the power of that. Imagine, though, training AI models on proprietary data sets not available to others. And I think of three data sets within our company that are very relevant to the discussion. The first is the connectivity data set, the data set of Ookla, Ekahau, and that family of businesses. As you know, that business is a data business. The ability to use AI to generate even greater, more frequent, and accessible insights I think is a big idea. If you think about our RetailMeNot and shopping business, we have a multi-merchant view into shopping behaviors, shopping traffic patterns. So from a shopping insights and analysis point of view, training AI models on that proprietary data set is compelling. And then our Moz business as a third example sits on a universe of SEO data that is very valuable and, in fact, has already been licensed. So basically the largest AI model we've all heard of has licensed Moz data already. So we're actually in the business, and we think that has long-term and interesting potential. So both generative AI and proprietary data that AI models can be trained on.
spk05: Thank you.
spk09: And the next question is coming from James Breen from William Blair. James, your line is live.
spk10: Thanks for taking the question. Can you talk a little bit about the subscription business and what you're seeing there? Obviously, we've seen the quarterly revenue per sub coming down over the last couple of quarters, turning this up a little bit. But where are you gaining and losing subs there across several different businesses? Thanks.
spk08: Yeah, I mean, I think, look, Jim, I think in the subscription business, you know, on the upside, our connectivity, as we described, continues to be a bright spot for us. On the downside has been, you know, cybersecurity principally, and that's been in our direct consumer business, and that is largely our VPN business. As I think, as we've described in the past, we find customer acquisition in the VPN space challenging. the CAC LTV equation continues to evade us. It's not profitable from our point of view. We do run a high margin VPN business, probably in contrast to maybe others in the space. One thing I am optimistic about, and I mentioned on the prepared remarks, is that we have improved our buying experience and principally taking foreign currencies, foreign language, and including other payment options that should allow us to start acquiring outside of North America. Most of the consumer VPN market is actually outside of North America, yet the majority, the vast majority of our business is inside North America. So we have been geographically disadvantaged because we didn't have a buying experience that appealed to those outside of principally the United States. So we're hopeful that that can help overall buying experience. We continue to test different sources of customer acquisition to try to find a CAC LTV equation that can work for us. I'll also point out of the part of the company that has had the most FX headwinds, it has also been within the cybersecurity and MarTech segment.
spk01: And Jim, the only thing I'd add, your comment about some of the trends, is just a reminder that these are sort of an amalgamation or a consolidation of different businesses across the company on an inorganic basis. And if you look at the number of subscribers and the average quarterly revenue per subscriber, In the middle of 2022, we added Lose It. And Lose It is a business within our health and wellness business that's a subscription business and characterized by a large volume of subscribers at a low average revenue per subscriber. So we brought those in in the second quarter for, I believe, about a month. And then in Q3 and Q4, those were full quarters of that change. So that did have a more significant impact on the quarter-over-quarter changes than really any other factor.
spk00: Great, thanks.
spk05: Thank you.
spk09: As a reminder, ladies and gentlemen, please press star 1 on your phone if you wish to enter the queue. Once again, you can still enter the queue by pressing star 1 on your phone. And the next question is coming from Egal Arunian from Citigroup. Egal, your line is live.
spk14: Hey, good morning, guys. I want to go back to... and then what you led the call off with and talked about focusing on organic growth, reallocation of resources. And I guess the ad market is well understood here at this point as we've gone through earnings and heard a lot of commentary. Can you talk a little bit more about what you're doing and the things you control you know, maybe how you guys are setting yourselves up to benefit better as we rebound and, you know, kind of the things that are happening within the organization outside of the macro?
spk08: Yeah, no, look, it's a great question. And again, I go back to categories because, you know, we do talk about the ad market as a monolith. And as you know, it's not a monolith. It's got different pockets and it's got different dynamics and different categories. Given that 40% of our advertising business is health and wellness, it is worth really focusing there and and that's where we believe the solutions we're building for pharma the nature of the pharma pipeline the pharma's embrace of really targeted advertising away from mass market print and and television all benefits us and so we're focused across the board on ways to create ad solutions for for the pharma category i'll also tell you that you know part of uh our our health and wellness business is actually recruitment advertising for doctors and nurses. And as you may know, in the healthcare industry, there is a huge labor shortage, particularly around nurses. And so our ability to help healthcare and help systems find nurses through our platforms and through recruitment advertising solutions is another example. And I think I mentioned that, you know, that's our healthy careers business. And then in our shopping business, where we've seen really great success is with membership. So historically with RetailMeNot, which has had a significant amount and continues to have a significant amount of users who come to the platform, whether it's the website or the app, to find a coupon code to then transact and we get compensated on utilization of a code, that will continue. But our membership business, where it's largely cash back as well as the browser extension, the unit economics there are super compelling. And so we are investing in improving the product experience, removing friction and sign up and making it super simple and investing in member acquisition. So those are just a few examples of where I think we can control what we're doing to better position ourselves in the overall ad market.
spk14: That's helpful. Thanks. And then shifting just over to cybersecurity for a second and Can you update us on the sales to New York and the new go-to-market strategy and how that's evolving and if it's starting to improve the trends and results there?
spk08: Yeah, no, listen, in the B2B part of the cybersecurity business, and I just want to remind everyone that it's the B2C part, which is largely IPVanish and the VPN businesses where we're having our significant struggles, but in the B2B security business, You know, the new sales org started to hit its stride really in Q4. A lot of nice logo wins for our email security offering. We've got a product called SafeSend that has signed a bunch of multi-year deals with some significant enterprise customers, actually. So we're happy with that. We've got some new partners and distributors, both in the United States and in Europe. you know, our email, just overall the email security business. Email is the leading attack vector, and it's the primary delivery mechanism for phishing and ransomware and other malware attacks. And I would say that of our cybersecurity offerings, I think our email security offerings are the strongest. So good progress in B2B, continuing to claw and think through B2C, And I think we'll get there. I think we'll, you know, once we find, you know, a formula that works on the B2C side, I think some interesting things will start to develop for cybersecurity.
spk05: Great. Thanks so much. Thank you.
spk09: Thank you. The next question is coming from Rishi Jaluria from RBC. Rishi, your line is live.
spk03: Oh, wonderful. Hey, Brett. Thanks so much for taking my question. I'll keep it to one question. which is just drilling a little bit more into the cybersecurity and MarTech business. You know, we'd love to hear a little bit more about kind of what you've seen so far from a macro perspective. And, you know, for simplicity's sake, we can keep it at the B2B level and kind of strip out the IP vanish business. But what have you seen so far in terms of, you know, churn and, you know, maybe even businesses that are just kind of disappearing? And maybe more importantly, as we think modeling 2023, what sort of assumptions are you making from a macro perspective on those businesses? Thanks.
spk08: Yeah, no, all good questions. I would say that with respect to churn in B2B cybersecurity, we don't see much of it. It's very sticky, right? Once a company installs any of our solutions, they generally stay installed for a while. The switching costs and the difficulty can be significant. So we don't see it there. You know, within MarTech, because we have more of an SMB audience, there are some churn dynamics where just business failure leads to not needing to do really any more email marketing. But what I will say that what we're excited about from a Moz point of view is that we're building technologies to help our customers build their email list attach signals to their email initiatives and so that they're better targeted and getting better ROI, integrating demographic data across the larger demographic. The data management platform of Zip Davis is basically going to be plugged into our eye contact and campaigner units so that there can be more insight into the various customer databases that we have with our customers. So there's a lot of different things think going on in both cybersecurity and more tech? I think with respect to maybe I'll let Brett talk a little bit about just subscription revenue in general and sort of how we're thinking about guidance and where we think subscription revenue may fall for 2023.
spk01: Yeah, I mean, we gave some color on that, you know, as part of our prepared remarks. I mean, we're looking at subscription revenue as sort of, you know, a contributor in 2023, and we've you know, projecting growth in the low single digits. And I think it's important to kind of, you know, almost widen the lens because we've been talking about our B2B go-to-market approach for several quarters now. And it's the timeline sort of on track. Like, you go back to the end of 2021, we sort of re-envisioned a go-to-market strategy. Somewhere around the end of the first quarter, beginning of the second quarter, we bring in leadership. Q2, Q3, we're rebuilding the go-to-market teams and the actual sort of feet on the street, if you will, to reach out to customers simultaneously with upgrading elements of our product set. Vivek just noted some of those products we're bringing to market. And then as we get into the fourth quarter, we start to see some of the fruits of that labor beginning to grow, and we enter into 2023 with you know, the beginnings of momentum. So we believe if you look across, you know, our subscription revenue, there's a drag with regards to our consumer privacy business. But then, you know, we've talked about how excited we are about connectivity. We've talked about some of the momentum that we're seeing in B2B within Cyber and MarTech. We're excited about our Lucid acquisition, both from a subscription standpoint, but also the ability to expand the revenue base there by adding advertising. We haven't had that business under our leadership for a full year yet. You know, contributions in the gaming market. There's excitement in our subscription businesses and being a business that's levered to the digital advertising market and the digital advertising market being so sensitive to macro activity, you know, we think it's a very strong positive that a significant portion of our revenue has a subscription characteristic.
spk03: All right, great. Really helpful. Thank you so much, guys.
spk09: Thank you. Thank you. And the next question is coming from John Tanwanteng from CJS Securities. John, your line is live.
spk06: Hi, guys. Thanks for squeezing me in. Vivek, just one for you. You mentioned getting closer to more and bigger deals in the M&A pipeline and most interesting, perhaps an eighth vertical. What kind of scale and returns would you need to see to take on an additional risk and bandwidth requirement of
spk08: know running another business uh right now and if it would need to be you know synergistic with any of the other pu's um to get there just to help us understand what you're looking at and kind of the kinds of opportunities that are out there yeah look i think if we were going on a platform it would likely be aligned with just our overall theme of decision media we like being in a position where providing content and tools to inform high value decisions, purchase decisions. That's why it's a lot of what we do, whether it's in health or it's in technology or it's in gaming or it's in shopping. We like to be at the transaction. We like to be between buyer and seller. That's where we can extract the best value and rent. And so obviously there are a lot of categories in which we don't do that. And so I think that's how we would think about in a platform. I think it would have to be something that we do believe that we have technology and we have know-how and we have business models to create sort of an unfair advantage. It can't just be a good business that we're adding to the portfolio. There needs to be value creation that is just in excess of that. It has to be the first thing, but we need to have a path to creating value that is unique to us, that is a function of know-how, a function of skill, a function of technology platform, a function of leadership that we may have here that we can deploy into the business.
spk05: Okay, great. Thanks a lot. Thank you.
spk09: Thank you. There are no other questions in queue at this time. I would now like to hand the call back to Brett Richter for any closing remarks.
spk05: Thank you, Paul.
spk01: We appreciate everybody joining us today for our Q4 and our fiscal year 2022 earnings call and results. Our upcoming conference participation is detailed on our investor relations website. We recently put out a release on that. The details are there. We hope to see some of you in the coming weeks and continue our dialogue. Thank you all and have a great day.
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