Ziff Davis, Inc.

Good day, ladies and gentlemen, and welcome to ZIF Davis second quarter 2023 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.

Thank you. Good morning and welcome to the Ziff Davis Investor Conference Call for Q2 2023. 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.ziffdavis.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 and 8-K filings, as well as additional risk factors that we have included as part of the slideshow for the 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. Good morning, everyone.

Our second quarter financial results came in ahead of expectations, and we're increasingly optimistic about a stronger second half. We're also very enthusiastic about our recently announced strategic partnership with Zyla, which we believe will accelerate AI enablement across our portfolio. More on that later. Let me provide some perspective on the second quarter. As expected, results bore a great deal of resemblance to last quarter's. Our revenue decline was dominated by ongoing challenges in our technology vertical. The tech ad category continues to be mired in a cyclical downturn, but we're seeing signs of recovery and remain optimistic about a stronger fourth quarter. which is historically the largest quarter for tech ads. Once again, we saw solid growth from both our connectivity and health and wellness verticals. Connectivity revenue growth reflected healthy demand for both our core data products and related services, as well as Ekahau's Wi-Fi network planning and optimization software. In health and wellness, we continue to see growth in pharma advertising as the buying cycle has returned to its pre-pandemic cadence and the drug launch pipeline remains strong. Also, our Lose It weight loss app is generating record revenues. In gaming, we were happy to see IGN return to growth, which we're hopeful will carry into the second half. Humble Games is expecting to release a number of new titles in the second half, which should also help with gaming growth. In shopping, RetailMeNot grew again in the quarter and is on a nice glide path, as we approach the fourth quarter, where nearly a third of the business's revenues are generated. We're also close to resolving the technical issues that have created growth challenges for Offers.com. In cybersecurity and MarTech, we believe that we have found the bottom, with Q2 revenues a tick ahead of Q1, and with a view towards revenues in the second half consistent with the first, We once again saw year-over-year organic growth in our email marketing business in Q2, offset by declines in VPN. We expect email to continue growing in the second half, coupled with an easing of declines in our VPN business and modest growth across the rest of our cybersecurity business. Overall, our view is that the second half will reflect recovery and sequential improvement. but we're watching closely for any signs of a hard landing with respect to the broader economy. As you know, we expect to generate growth organically and through acquisitions. We continue to be very judicious and selective with our capital. We acquired a small tuck-in called Mom Media for our parenting and pregnancy unit in the quarter and continue to assess a number of opportunities. The M&A environment is still sluggish generally, and we believe that the market will pick up once there's clarity on the broader economic environment. Market uncertainty has created increasingly divergent views on valuation, creating a chilling effect on deal-making. As we've described on our last two calls, we have been very busy experimenting with and exploring AI applications across our company. Our work led us to Dr. Daniel Nadler, one of the world's most successful AI entrepreneurs. His last company, Kensho, sold five years ago in what was a record valuation for an AI company. He formed Xyla in late 2021 to be at the forefront of the development of large language models across accuracy-critical domains. The strategic partnership we announced this week with Xyla should not only allow us to accelerate AI opportunities across our portfolio, but it should also push our boundaries and allow us to reimagine entirely new business models by combining the strengths of both businesses. SIF Davis's authoritative brands and proprietary data with Xyla's AI technology and expertise focused on high-value domains. The first initiative in the partnership will be to integrate Xyla's open evidence technology into the everyday health group with the mission of turning medical information into medical knowledge for healthcare professionals. Open evidence was the first medical AI platform to score above 90% on the U.S. medical licensing examination. With open evidence, healthcare professionals can access and analyze vast amounts of medical information, published research and clinical trial data, assisting them in making informed decisions to improve patient outcomes. Open evidence technology should drive enhanced and personalized engagements with healthcare professionals as part of Everyday Health Group's physician-focused med page today. a trusted digital source for clinical news coverage across medical specialties. While the health vertical is where we're starting, we've signed a long-term collaboration agreement with Xyla that establishes a framework for us to rapidly define, develop, and deploy AI at brands and businesses across our portfolio. We see meaningful potential in several of our businesses and markets and look forward to working with Xyla to pursue them. We're also excited to be a shareholder in Xyla, joining a very impressive roster of Xyla investors, including Jim Breyer, Brian Sheff, and Ken Mollis. Xyla is a Mayo Clinic platform accelerant company. Dr. Nadler has many options when it comes to choosing partners, so his decision to work with us is a strong vote of confidence in our company and our potential. I'm particularly gratified that he chose to take a bulk of our Zyla investment in ZD shares, making him a valued and important ZD shareholder. Beyond the strategic partnership, we've continued to make meaningful progress against specific AI opportunities across the company. The first is enhancing the value proposition of our proprietary data to deliver predictive analytics and insights. This past May, in our connectivity business, we launched a new AI-enabled product feature within Ekahau Insights called Optimizer, an entirely new way for Ekahau customers to manage their wireless networks. Optimizer automatically detects poor configurations and provides step-by-step recommendations, leveraging machine learning-derived insights drawn from our proprietary data that significantly increase Wi-Fi performance and reliability. Optimizer has been rolled out to all of Echo House customers worldwide and can be used for ongoing health checks and performance optimization of any Wi-Fi system. The second area of opportunity is creating new conversational experiences across our consumer-facing brands. In July, we launched our first conversational experience for users on IGN. IGN's Legend of Zelda Tears of the Kingdom game guide now offers registered users access to an AI chatbot that can answer their questions about the game. The chatbot is trained on IGN's original editorial game guide content, so users can be confident that they're getting accurate and helpful information from the authoritative experts in gaming. The third area of opportunity is about increasing our content velocity and gaining efficiencies in our content production process. As mentioned below, Our editorial teams have integrated generative AI across multiple steps in the editorial workflow to produce more high-quality content with a human plus artificial intelligence approach. For example, we leveraged AI for content tagging thousands of pages, saving significant hours of time. There's been a lot of investor interest in the impact of AI on search traffic. We've been analyzing organic traffic trends from Bing, after it implemented GenAI into its search experience. While Bing has a relatively lower search market share, they have the first generative search experience in wide circulation, so it is worth studying. Our organic traffic from Bing increased by 60% year-over-year in the period of March through June. According to industry estimates, year-over-year total visit growth for Bing was only 19%. In other words, the number of visitors to our websites increased at a rate of three times that of Bing's traffic overall, indicating that generative search has had a very positive impact on traffic referrals. This provides some early positive signals supporting our perspective that while GenAI probabilistic responses are well-positioned to respond to users' fact-based or how-to queries, they do not fully resolve users' search intent when seeking an expert's experience or perspective. This preliminary data also positively confirms Google's perspective that their new search generative experience is a jumping off point for exploring the web versus a final destination, enabling users to go deeper to learn about a topic. As importantly, I believe the major search operators have always understood that when copyrighted content is used, there must be compensation for the rights owners. In the case of search, that compensation has come in the form of referred traffic, and we believe that must continue as search evolves. However, we strongly believe that non-search AI platforms will also need to compensate right holders for their content. We fully support industry efforts at securing that compensation, have recently joined the News Media Alliance, and are considering other industry efforts to address the clear infringement of our copyrights. Fundamentally, we believe both of these statements to be true. AI has the transformational potential to create meaningful value for Zip Davis and that AI companies must respect our copyrights. Finally, let me provide you with an update on our ESG efforts. I'm happy to announce that just a few weeks ago, we received validation of our emissions reduction targets from the Science-Based Targets Initiative. SBTI defines and promotes best practices in near-term science-based target setting, and we now have comprehensive scope 1, 2, and 3 emission reduction targets in place, committing to cut our emissions in half by 2030. We will be working with our facilities teams, building managers, and suppliers over the next several years to ensure we meet these targets. It's also worth noting that Ziff Davis submitted the CDP Climate Change Questionnaire last month for the first time. CDP supports companies to measure and manage their risks and opportunities on climate change, and in doing so, has created a system that has resulted in meaningful engagement on environmental issues worldwide. Our engagement with and commitment to SBTI and CDP are a key element in Ziff Davis setting out on a net zero, decarbonization trajectory while maximizing transparency and accountability throughout. With that, I'll hand the call back to Brett to discuss our financial results. Thank you, Vivek.