Ziff Davis, Inc.

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Good day, ladies and gentlemen, and welcome to the Ziff Davis third 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 Ziff 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 Q3 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.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 procedure for asking questions. In addition, you can email questions to investor at zipdavis.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.

Thank you, Brett, and good morning, everyone. Our third quarter financial results reflect solid and encouraging improvement in a number of parts of our business. Most notably, our organic growth rate was flat in the quarter after six consecutive quarters of low to mid single digit decline. We believe our business is turning the corner and is set up for positive organic growth in 2024. Let's begin with our digital media segment, where our organic growth rate in Q3 was positive led by the connectivity business, which grew high single digits in the quarter and continues to be amongst our most consistent performers. Our speed test app continues to be popular with users, having reached an all-time high in monthly iOS installs in the U.S. Ookla also claimed the top spot in CC Group's list of most cited sources by telecom industry analysts. Our Wi-Fi planning tools at Ekahau continue to be market leaders, and we're proud that they're being used for Wi-Fi deployment at the 2024 Summer Olympics. In our health and wellness vertical, we grew mid-single digits with continued strength in both consumer and professional-focused pharma advertising and strong subscription growth at our lose-it weight management and nutritional wellness events. We just passed the one-year anniversary of our Lucid acquisition, and we are very pleased with its financial results and exciting near-term product development roadmap. In gaming, we grew high single digits as IGN is experiencing very strong traffic growth, particularly on social and video-based platforms. While Humble also grew in the quarter, we didn't see the expected benefit from new game releases as we experienced delays with some launches and underperformance in others. In shopping, RetailMeNot was stable, with year-over-year increases in usage of loyalty products such as Cashback and our browser extension, and we're still working on traffic recovery at Offers.com. Our tech vertical continues to be the outsized drag on revenue, down high teams organically. That's an improvement over the first two quarters of the year, which is a reminder of the headwind that it's been for us. And while it will continue to be a drag on revenue growth for the remainder of the year, we believe it can join the rest of our businesses on the path back to positive organic growth. I'll point out that when excluding tech, our advertising revenues grew in Q3. In cybersecurity and MarTech, Q3 revenue declined mid-single digits year over year and was almost flat to Q2. Our email marketing business continued to grow organically, driven by increased usage by customers and strong new business. Our largest decline continues to be in VPN, but we are encouraged by the trends in this business. For the third quarter in a row, we grew our VPN customer ads, and these gains should flow through to VPN revenue in the coming quarters. Now, let me shift to an update on AI. We are actively leveraging our AI partnership with Xyla to fast-track opportunities within our connectivity division. Utilizing proprietary Ookla data, we have made fast progress on our now-casting capabilities, which use machine learning to showcase the value potential of Ookla's insights for the financial services industry. For instance, we are working on a model capable of estimating key financial performance metrics of telecom market participants based on Ookla's unique data sets. We've also launched Ookla's first AI co-pilot, which uses a large language model with global real-time telecommunications knowledge to support our analyst teams in developing customer insights and thought leadership content from Ookla's proprietary data and knowledge base. We are making steady progress integrating AI applications across our Everyday Health Group portfolio, including from our Xyla partnership, in editorial workflow efficiency, new product features, and content personalization. Our cybersecurity business, Vypr, developed a conversational experience for their endpoint detection and response incident management product. We expect Vypr users to be able to utilize an AI chatbot to swiftly analyze and clarify the actions of potentially malicious scripts, thereby enhancing the detection of actual threats to individuals and organizations. We anticipate deploying the beta of this feature by the end of the year. Last quarter, we announced that we launched a new AI-driven chatbot for game help, starting first with the hit game, The Legend of Zelda Tears of the Kingdom, This chatbot was solely trained on IGN's expert content and enabled us to engage users in a new way by allowing logged-in members to ask very specific game help questions. IGN has now rolled out the AI chatbot for game help across nine game titles, and the early results have been encouraging. These are just a few of the examples of AI enablement taking place at the company. At the same time, we continue to closely monitor the role of AI in search. Last quarter, we shared that our organic traffic referral from Bing, which is still the only at-scale search experience incorporating Gen AI, was up. And that continues. This time, we sought to understand the prevalence of AI-generated responses to search queries. To do this, we sampled keywords across our top domains that drive the majority of our search traffic. Within this set, just 20% of keywords prompted an AI-generated response from Bing, meaning that for 80% of the highest value keywords, an AI response was not even generated. Similarly, we sampled keywords in Google's SGE, which is still in Google Labs, and found that only 23% of our most valuable keywords prompted an AI-generated response. Our key takeaways. is that AI generated responses are currently prompted at a much lower rate than some might have contemplated. We also want to understand the click-through rates when our keywords return an AI generated response versus those that do not. On Bing, AI generated responses had a higher click-through rate compared to those that did not. We currently cannot measure click-through rates in Google SGE but don't have any reason to expect a different outcome. We believe this important analysis confirms our view that fears about AI-enabled search have been overdone. Our SEO experts at Moz share similar views based on their experience and expertise in the space. We believe that search operators continue to understand the importance of the value exchange between search providers and publishers, access to content for traffic, and that they will protect this exchange. However, we strongly believe that non-search AI platforms will need to compensate rights holders for their content. We are committed to upholding the rights of content creators and demonstrate this through proactive involvement in industry efforts. Our participation in the News Media Alliance, including holding a seat on the NMA board, an endorsement of their white paper, as well as our contributions to their comments to the U.S. Copyright Office, reflect our stance on preventing unauthorized and uncompensated use of publisher content. Now, just a few words about M&A. The overall deal market continues to hover around 10-year lows in terms of volume and value. And this has certainly shown up in our own M&A activity, where we have closed just two acquisitions this year. We attribute the M&A slowdown to a persistent gap in the valuation expectations of buyers and sellers. However, our philosophy on M&A has not changed, and we are optimistic that as new realities settle in for many businesses in our sector, we will be very well positioned to create shareholder value through M&A. We remain very eager to deploy capital for acquisitions at a time when our powder is especially dry and continue to believe our patients will be rewarded. Let me provide you with an update on our ESG efforts. As mentioned on our last call, our emissions reduction targets were recently validated by 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, effectively committing to cut our emissions in half by 2030. We have already been working with our major suppliers, facilities teams, and building managers, and will continue to do so over the next several years to ensure we meet these targets. It's also worth noting that Zip Davis has obtained independent third-party verification of our 2022 greenhouse gas inventory and will do so moving forward. Next week, we'll host our third annual Purpose Summit, a company-wide event where employees hear from colleagues throughout Zip Davis who are making a difference through their work. and affect change within their communities. It's a highlight on my calendar. With that, I'll hand the call back to Brett to discuss our financial results in greater detail.

Thank you, Vivek. Let's discuss our financial results. Our earnings release reflects both our GAAP and adjusted financial results for Q3 2023. We will focus our discussion today, and my commentary will primarily relate to our Q3 2023 adjusted financial results and comparisons to prior periods. Slide 4 reflects the summary of our third quarter financial results. We reported revenue of $341 million for the third quarter of 2023, as compared with revenue of $341.9 million for the 2022 comparable period, reflecting a decline of three-tenths of a percent. FX was slightly favorable as compared with the prior year period. Q3 2023 adjusted EBITDA was $113.7 million as compared with $120.1 million for the prior year period, reflecting a decline of 5.3%. Our adjusted EBITDA margin for the quarter was 33.3%, which is an improvement as compared with Q2 2023's margin of 32.7%. We reported third quarter adjusted diluted EPS of $1.50. As Vivek noted, many of our businesses reflect significant year-over-year performance improvements. In our digital media segment, our gaming, connectivity, and health and wellness businesses each grew organically in the third quarter. RetailMeNot was essentially flat year over year, but shopping was down. Collectively, our digital media businesses contributed positive Q3 organic growth. And while our cyber and martech businesses declined year over year, the quarterly rate of decline decelerated compared with the first half of 2023. Again, our technology businesses, and in particular our B2B technology business, had a disproportionately negative impact on our overall performance. Excluding our technology verticals, Zip Davis revenue would have increased by nearly 2% during the third quarter as compared with our prior year. Adjusted EBITDA margins were up sequentially, but down year over year, reflecting our continued commitment to investing in the headcount that we believe is required to pursue opportunities for growth. The year over year margin decline of approximately 180 basis points equals about 6 million dollars. which, while reflecting a number of factors, is equivalent to our year-over-year increase in staff costs and investment in our growth initiatives. Slides 5 and 6 reflect performance summaries for our two primary sources of revenue, advertising and subscription. Slide 5 reflects the company's advertising revenue performance. Advertising revenue declined by 2% in Q3 2023 as compared with the prior year period. This represents a significant improvement as compared with the first half 2023 decline of 8%. This performance was also heavily impacted by the challenges within tech. Excluding tech, the year-over-year advertising revenue growth would have been more than 1%. Trailing 12-month advertising revenue declined by 7% compared with the prior year. As noted, a number of our non-tech businesses reflect Q3 growth, including gaming and health. Last quarter, we noted that we expected our second half advertising revenue to meaningfully improve as compared with the first half, and Q3 is consistent with these expectations. Our net advertising revenue retention, an annual trailing 12-month statistic measured quarterly, was 89%, primarily reflecting the year-over-year decline in advertising revenue. As defined in the slide, during the third quarter, Zip Davis served nearly 1,800 advertisers with an average quarterly revenue per advertiser of more than $100,000. These metrics reflect a slightly more consolidated set of advertisers as compared with the prior year period with a higher average revenue contribution per advertiser. Slide six depicts our subscription revenue performance. Q3 2023 subscription revenue grew 1% as compared with the prior year period and 3% during the last 12 months. The table on the bottom of slide six includes subscription metrics for the last seven quarters. We had more than 3.2 million subscribers in Q3 2023, reflecting a modest sequential increase. There were sequential gains within Humble Bundle and Lose It, offset in part by a modest reduction in cybersecurity subscribers. Our Q3 2023 average quarterly revenue per subscriber was $44.84, again, a modest sequential increase. Churn also declined sequentially from 3.51% to 3.22%. The company's Q3 2023 other revenues increased approximately 7% year-over-year, primarily reflecting higher revenue from Humble Bundle Publishing, Daily Ohm, and Echo House Sidekick sales. Slide 7 provides quarterly organic and total revenue growth rates for the last 11 quarters. 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. Third quarter 2023 organic revenue was flat, and as expected, reflected a significant improvement as compared with the 6% organic decline during the first half of 2023. Turning to our balance sheet, please refer to slide eight. As of the end of Q3 2023, we had $661 million of cash and cash equivalents and $170 million of short and long-term investments. We also have significant leverage capacity, both on a gross and net leverage basis. Our increase in long-term investments reflects our recent investment in Xyla, which, as discussed on our second quarter earnings call, occurred early in the third quarter. During the quarter, we repurchased 605,000 shares of our common stock for a cost of approximately $41 million. This increased our year-to-date stock repurchases to nearly 1.6 million shares. We have approximately 4.7 million remaining shares authorized under our stock repurchase program, and we will continue to be opportunistic with regards to future stock repurchases. Our third quarter net leverage ratios reflect our recent stock repurchase activity. As of the end of the third quarter, gross leverage was 2.1 times trailing 12 months adjusted EBITDA, and our net leverage was 0.7 times and 0.4 times including the value of our financial investments. We did not have any acquisitions during the third quarter. Still, we remain very active in sourcing and evaluating transactions and sense that the gap between buyer and seller expectations in the current M&A environment may well be on a path to narrowing. Earlier this year, we shared that we were exploring strategic alternatives for our B2B business. We engaged in active dialogue with numerous third parties that ultimately determined not to pursue a transaction with any of those parties at this time. As we discussed on a prior call, portfolio rationalization is an important and healthy exercise for any company. Not all announced pursuits result in a transaction. We appreciate the contributions of so many of our colleagues during this exploration. Going forward, we will continue to work to align B2B's activities and priorities to maximize its potential. Turning to slide 10. We are reaffirming the fiscal year 2023 guidance range that we originally presented in February 2023, as our Q3 results largely reflect the second half 2023 economic stabilization that we were hoping for. Of course, as noted, certain of our businesses continue to be challenged by the macroeconomic environment as well as industry-specific factors, including our technology business and our game publishing business. We currently expect our full year revenue to be between the low and midpoint of our guidance range with adjusted EBITDA and adjusted diluted EPS closer to the bottom end of our guidance range. This reflects the fact that certain of our businesses typically exhibit fourth quarter seasonal strength and that we are still cautiously optimistic that the macro environment will remain stable for the balance of 2023. Following our business outlook slides are certain supplemental materials, including reconciliation statements for the various non-GAAP measures to their nearest GAAP equivalent. This section includes a reconciliation on slide 14 that reflects free cash flow. Year-to-date 2023 free cash flow is approximately $145 million. Changes in working capital negatively impacted year-to-date free cash flow in 2023 as compared with 2022 when the change in working capital contributed to free cash flow. We continue to work to return to our normal cadence of working capital. Overall, we are pleased with our Q3 2023 results. Our businesses are focused on a strong finish for 2023, and we are pleased with the revenue stabilization we saw this quarter as we begin to plan for 2024. With that, I would now ask the operator to rejoin us to instruct you on how to queue for questions.

Thank you. 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 start keys. One moment, please, while we begin. And the first question today is coming from Shweta Kajuria from Evercore. Shweta, your line is live.

Thanks a lot for taking my questions. I've got two, please, one for Vivek and one for Brett. So the first one, Vivek, could you please talk about general ad demand trends that you saw through the third quarter and then the fourth quarter so far as the quarters progressed? And then did you see any impact from the war, from the Israel war geopolitical issues going on starting in October? And then question for Brett is on M&A. Vivek talked about the M&A environment. Seems like there's not a lot of change. But at a high level, could you please remind us some of the opportunities and verticals that you think you are thinking about or could be incremental to the Ziff Davis portfolio? Thank you.

Great. Thank you, Shweta. So I'll start with your question around the advertising market and some of the trends that we're seeing. So again, I think always helpful to unpack this by category. And so our single largest category, as you know, about 40 plus percent of our overall advertising business is health and wellness. And that continues to be very strong for the reasons I outlined earlier in the call. So we feel very bullish about where the pharma ad market is in particular and where our assets and how we're positioned within that market near and long term. The second biggest vertical is our retail and shopping vertical, which again, I think the challenges we have are not really macro there. It's really just some of the issues we've had with offers.com, which is this much smaller of our shopping properties, but where we're really focused on some recovery, but RetailMeNot is holding up really nicely. And obviously the all-important holiday season, which it's hard to answer now what we're going to see in the holiday shopping season, but we're cautiously optimistic. And then the next largest category is gaming. And again, I think gaming has been an area of strength for us, you know, from an advertising point of view. So I would say that of the four categories, main categories we're in, we're feeling reasonably good about three of them. The tech category continues to be a challenge. It is, as I said, you know, sort of a, you know, mid to high teams problem for us in Q3. It is narrowing from a decline point of view. as we go through the year, and we anticipate it to narrow into Q4, but that's going to continue to be a headwind. But as I've said in the past, I view that as largely cyclical, and I think it's not uncommon from the other, you know, from the other, you know, media and advertising players who have large concentrations of tech advertising.

Brett? Thank you, and thanks for the question, Shweta. I think I'd answer it in two ways. I think the first way is sort of the macro view, which is, When we think about M&A across the company and our investable resources and liquidity to deploy, we're actually looking at all seven of our platforms for growth and recognizing the markets that they're in and the specific dynamics. Since I've been with the company, which is nearly two years, the concentration of our M&A has been in connectivity and health and wellness, which have been and continue to be two of our strongest performing segments. We could look at acquisitions like Lose It and Emma's Diary in the UK for our health business. We've done several acquisitions. in our connectivity business, including CellRebel last summer, where we picked up new data capabilities to round out our portfolio and make our overall proposition for our customers stronger. So to some degree, you know, we play to our strengths and there are opportunities in the market for our strong businesses. But we've also fortified our gaming business, which, you know, has an incredible platform through IGN, and we've supplemented that platform with acquisitions like Map Genie, which extends our game help and our ability to serve that vertical and customer base. But surprisingly, if you look back, and we haven't done a lot of M&A, obviously, in 2023, one of our two acquisitions was in our tech vertical, Lifehacker, because we saw a platform there that we believe that, you know, in the current weekend market for tech, there was opportunity there to supplement its growth. And similarly, as we continue to see stability in our cyber and martech businesses, we can turn and start to look at those businesses to find opportunities for further M&A. So while immediately I'll use the word we're frustrated by the current environment to a degree, you know, we know how to do these deals. I think that we are going to ultimately be rewarded for our patience and our pipeline continues to be robust. And it's just a matter of time before we start closing transactions.

Okay. Thanks, Vivek. Thanks, Brad. Vivek, did you see any impact from the Israel war on the advertising business? No.

No. No. Okay.

Thank you.

Thank you. The next question is coming from Ross Sandler from Barclays. Ross, your line is live.

Great. Vivek, two questions. I know it's early to be talking about guidance for next year, but maybe just the framework for thinking about how you guys can grow above or below the premium display market. Let's say the ad market grows 5% next year. What's the equation for your advertising business to be above or below that now that we're kind of lapping the tech issue and the offers.com issue this year? So how do we think about that? And then the second question is, have you guys looked at how AI services embedded within RetailMeNot and Everyday Health might improve kind of the user interface or any opportunity that you see to kind of infuse chatbots or other AI-like services in those websites? Any thoughts there? Thank you.

Thank you, Ross. So let me start with 2024. Obviously, you're right, it's early. But what I will say is that I do view Q3 as an inflection point for us. Just as a reminder, I mean, we've had six consecutive quarters of, you know, low to mid single digit organic decline as a company organically flat in Q3, but in the digital media segment, actually organically up. So I think that's a very positive sign and I think an indication of where we think things are going to go for 2024. You also rightly point out that the comps benefit us from a year-over-year growth perspective next year. So we're looking for that. And as I said, the part of the advertising equation that has been most problematic, which is the tech piece, is narrowing. So for all of those reasons, we feel reasonably bullish about our ability to grow at or better than market. We think that, again, market has to be taken from a category point of view, not from an overall point of view. And then also remember, we have a fairly even balance between display and performance marketing. But what I'll also say about our display business is that our display business is 65% health. So the part of the largest part of our display business is the category that while we call it display, I actually kind of view it as performance. Remember the delineation that we make between display and performance is actually a pricing delineation. Do we charge on ad serve or are we charging on clicks, options, or bounties? That is the delineation in our company between display and performance. It doesn't mean that display isn't performative and it is performance driven. So look, I think overall we feel good about that. On the AI question, absolutely. So in my own opinion and what's infused in the company strategically is AI really is a way to improve user interfaces. And it's more than just content. So accessing content like complicated game guides as I described with IGN or complicated medical information as I described at Everyday Health or even within kind of stacking savings within RetailMeNot where you take cash back here, a coupon code here, and then a product on sale here for sure. But also on the software side of the equation, what you will find is that UI and improvements in UI using AI will make things like MozPro, Campaigner, and Viper, our software businesses, really, I think, engage customers in a different and better way. So I am very bullish on it. We talked about a few of them in the prepared remarks, but there are a long list of activities aligned with what you just asked about across the company.

Thank you. The next question is coming from Sham Patil from SIG. Sham, your line is live.

Hey, guys. Good morning. I had a couple of questions. First one, with cookie deprecation slated to start next year within Google's ecosystem, how are you thinking about this and whether or not you think how you're prepared for it and how the industry is prepared for it? And then for next year, just in terms of the revenue seasonality, do you expect it to kind of be similar to what we've seen in 23? Do you expect to be more back-end loaded? Just maybe talk about revenue seasonality next year. Thank you.

Yeah, no, Sean. So with respect to cookie deprecation, again, remember, our advertising model doesn't rely on or really involve the collection of cookies to then target people outside of our properties. And that's where that makes a lot of sense. Or you're using third party cookies to inform the placement of advertising on your properties. That is not what we do. So our advertising is a function of context. We place advertising based on the contextual relevance. When we do use data to further refine targeting on our own properties, it's our own data set. So on that sense, None of what's happening with cookie deprecation has an impact or effect on what we do. What you could start to think is, well, it may have an impact and effect on what everyone else does. And does contextual targeting regain its footing and currency in the overall ad market? If that happens, that's only good for us. And then remember, on our performance marketing, it really is about driving clicks, conversions, leads, bouncy based activity from our property directly to another property. Having said all that, one of the things that I think as a company we've done an exceptionally good job at is building our database of users, database of information around those users email addresses we probably have one of the larger email databases within the marketplace that when you think about the value of email is persistent it is actually identity and can be used in a very you know in a variety of ways in which to reach customers whether it's in the inbox or you know on other platforms so look I think I think you know, it is the cookie deprecation issue doesn't affect us, but at the same time, I don't want to leave you with the idea that we're not database marketers in mindset. We are, we just do it within, within our closed ecosystem on the question around quarters. If 2024 is too early to talk about, quarters are probably really too early to talk about. And so, you know, probably wait another quarter to really get into that. But, look, the seasonality is a known seasonality. You know it. You know, Q4 is always going to be heavy. Q1 is always our lightest quarter. And, you know, the middle quarters are kind of in between. And so it's going to resemble that, I think, again, too.

Great. Thank you. Thank you.

Thank you. The next question is coming from Corey Carpenter from JP Morgan. Corey, your line is live.

Good morning. Thanks for the questions. I had two on AI. I wanted to dig a little more into the 20% of keywords prompting AI responses you mentioned on the call. So two questions here. First, just curious what you learned in terms of which of your verticals or properties were being directed or were not being directed to the AI experience and any learnings there. And then second, curious if you think this 20% level is perhaps uniquely Lotus at Davis, excuse me, or in your portfolio or broadly consistent across the industry. Thank you.

Yeah, great questions, Corey. And so I'm glad you asked about this because I did think and find it to be a very interesting analysis. So remember last quarter, the analysis was, well, Bing is the only at-scale generative search product in the marketplace. How's it going for us? And the analysis said, it's going really well. And by the way, that's continued into this quarter. But then we wanted to dig in deeper and say, okay, but how often is the SERP, the search engine result page, how often is it actually infused by AI versus non-AI? And I think we were somewhat surprised at the low incidence and prevalence levels of that with respect to the keywords that matter to us. Now, the next And by the way, we did that for Google also, because that we could see in Google SGE. The next analysis probably, Cory, is what you're asking, which is, is this dissimilar to other keyword categories and to other properties? And we haven't done that yet. So that's an interesting question. It's something we should analyze and understand. But at least with respect to us, the incidence levels were lower than expected and were consistent between being and Google, which I also found somewhat interesting. But then we looked at, well, when there's a generative search component and non-generative search component, non-generative AI component, are there differences in the clicks that we're getting out of that page? And the difference is the generative search was actually higher. And so, again, I'm not saying surprising to me. Based on my own observations, I think, in the past, I would say consistent. But so in some senses, you can say, well, huh, the generative piece might actually be accretive to click-through rates. It's early days. We couldn't do this on Google SGE, by the way, because you cannot separate in reporting the Google SGE experiences from natural Google or from default Google. You can do it with With Bing, obviously, because it's now one experience, right? So we can attribute entirely to the Bing experience. Look, all to say that, and I've said it before, and I'm, you know, attempting to bring to the marketplace real data around this, which is I think the concerns that I hear are really overdone. And I think are overly simplistic. and really is not the area that we're really thinking about. I know it's on the minds of a lot of investors, which is why we want to accommodate this through all of this analysis. But more to come. We're going to continue to unpack this. And last thing I'll say on this is just, you know, on Moz, we own a leading SEO authority and essentially think tank. And they confirm everything that I've described. So that's another data point internally that's kind of, you know, we have a, you know, SEO Brookings institution or something inside of our company, and that's always valuable.

That's helpful. Thank you.

Thank you. The next question is coming from Igal Arunian from Citi. Igal, your line is live.

Hey, good morning, guys. Ziv Max, I'm for Igal. Just you mentioned the, uh, you know, investing more in headcount and growth initiatives for next year. So, um, you know, maybe you could walk us through, you know, where you're investing in, um, you know, what aspect, where are the business you're hiring in, um, you know, uh, the growth initiatives for next year. And then just one on Zyla, maybe, um, you know, it sounds like it's the partnerships going well, uh, expanding in a kind of activity, but, um, you know, anything you could share on the, you know, first, uh, partnership into health and wellness, and then just where you see that going next year. Thanks.

Great. Thanks for the question, Max. I think the macro point we're making about our headcount spending is that we did not view and don't view 2023 as a year where our marginal point of margin is sacrosanct, and that we have to deliver that last bit of profitability as we navigate what has been an improving quarter-to-quarter but an uncertain environment macro and for certain our businesses. I think Q3, as Vivek noted, is, you know, to a degree, a turning point, a milestone as we brought, you know, organic growth back to flat. And we, you know, are leaning in to finish 2023 strong. And throughout the year, where we saw pockets of opportunity in our businesses, we spent. And, you know, some of that didn't That spending is concentrated in pockets of our businesses that are growing. We talked about health growing. We talked about connectivity growing, you know, gaming, although tied to the product in the marketplace, you know, strength this year. So we are loosening the reins on the business where we believe there's opportunity to pursue. As we complete 2023, you know, some of that talent's in place. dynamic business. We constantly need more talent. We'll continue to lean in. And then, you know, we'll have to find areas of, you know, pull back from time to time. But it's really across the business, wherever we see that opportunity.

And Max, just on your question on Zyla, I'm happy you picked up on the point, which is Zyla as a partner is helping us across the entire company, which has been really exciting. They've got a perspective and a skill set, a set of capabilities that are really helpful for us across all the various businesses and real concrete things are happening. With respect to health and wellness, nothing's been launched yet. We're hopeful that early part of next year we'll start launching and rolling out products. We're very careful in health. And obviously you've seen or know of the executive order. We have to be very careful in the health space with respect to whatever we do in AI. So we want to be measured, thoughtful and deliberate. We're certainly, I think, on the front edge of this, but we have to be awfully careful in this space.

Thank you. The next question is coming from Kunal Medukar from UBS. Kunal, your line is live.

Hi. Thanks a lot. This is Jason. I'm for Kunal from UBS. A couple questions for me as well. The first one is on capital allocation. You guys have been consistently buying back stocks year to date, and curious to hear about your capital allocation priority at the moment, given that you guys also seem pretty engaged in any immediate M&A opportunity as well. So where do you guys expect to allocate your capital, say, in the next six to nine months? And on the long-term outlook, I understand that you guys are focusing on turning the business around to return to growth, but from a long-term perspective, what would you highlight as the main drivers for you to potentially grow more than new single-digit organically, as in in which verticals do you see the most attractive opportunities in the future, apart from the internet? Thank you.

Great, Jason. Well, thanks for the question. Welcome to the call. Our message on capital allocation, I hope, has been very, very consistent. Four pillars. First and foremost, healthy balance sheet, which I believe we continue to maintain and continue to achieve. We have a tremendous amount of flexibility and liquidity in our balance sheet. capital allocation strategies are built on the back of balance sheet health. The three areas that we allocate our investable capital are to the business, M&A, and shareholder capital returns. For the prior question, we believe we're giving the business the capital it needs to pursue its opportunities. We're thoughtful about that capital allocation. You can imagine debates within four walls of institutions about where that capital goes, but we like to believe that we're judicious but thoughtful about how we give our businesses the capital that they need to pursue their growth opportunities. And we talked a little bit about how some of that money was spent this year. So then that leaves M&A and shareholder returns primarily, you know, stock buybacks. You know, we've also, if you look back over the last two years, bought back certain debt securities. We're prioritizing M&A. It's been challenging to close transactions in this environment. That's a known dialogue, you know, within this group. But we supplement that with capital returns, particularly through our stock buybacks. And we've done that this year. We've bought back almost 1.6 million shares. So as we move forward, I don't think those dynamics change. The mix may change. You know, it's certainly our ambition to see more capital deployed through M&A. It's beyond an ambition. It's an expectation. Again, you know, rewarded for our patients, but we have the capital. We have the pipeline. We're in the dialogues. The gap between buyer and seller expectations will close, and we'll announce deals, and we'll supplement that with stock buybacks as we think is appropriate for the overall mix.

Thank you. The next question is coming from Rishi Jaluria from RBC. Rishi, your line is live.

Oh, wonderful. Thanks, guys, for taking my question. I'll keep myself to one. I wanted to dig a little bit deeper into Moz Group a bit during one of the answers you brought up, kind of the data and usage there. Can you talk a little bit about momentum you're seeing within Moz? Because I got to say, when I was recently at MozCon, I was really impressed with some of the enterprise traction that you're getting there. and the opportunity both to continue to move Moz upmarket, as well as the opportunity with GenAI and Moz, because I think there is a little bit of a misnomer that generative AI is going to completely replace SEO, and you and I know that's absolutely not true, but maybe expand a little bit on kind of your opportunity there with GenAI. Thank you.

Yeah, no, thank you, Rishi, and I'm glad. I know you've taken the time and energy to attend MozCon, which we really do appreciate, and sometimes seeing some of our brands in live, give you a sense of their power. And again, I'll say we have multiple different ones across different events. So if anyone's ever interested, you know, in witnessing themselves, they should reach out to us and we can be helpful there. What I will say is that, you know, I think all of the attention that generative AI has generated, I actually think puts Moz in a very interesting space because I think with change and questions come opportunities. And so I think Moz and others in this space, and there are a few other really good players in this space, will all benefit. So I think there's going to be a rising tide phenomenon. What I'll also say is that the broader MarTech portfolio of Moz and our email marketing assets really are a powerful set of entities. And we're really excited about all of those because look, I think We say SEO, we say email. A lot of this means basically using software tools and content to extract traffic versus paid media where you're buying traffic. And so for SMBs and even enterprises, you want to do the first before you get to the second, right? You want to get quote unquote earned media before you get into paid media. And so we think that the Moz group really has an opportunity around paid earned media and driving earned media. And then the last thing I'll just say is that Moz is a unique entity because it is both a business for us, but it is an internal resource for us as a company that is always focused on earned media and and ways in which we can drive earned media, whether that's search, whether that's social, whether that's email, Moz becomes a strategic resource for us. So it's kind of interesting, and I will say that it was part of our underwriting thesis, our acquisition thesis was this would be good to have in-house and to have the Moz scientists, frankly, on our side.

Wonderful, thank you.

Thank you, and the next question is coming from John Tanwanting from CJS Securities. John, your line is live.

Hi, good morning. I just wanted a quick clarification on one issue and then a follow-up after that. Vivek, just the 20% AI-enabled search hit ratio, were you surprised by how low that was and kind of does that imply to you that there's more upside as the AI experience has rolled out some more search terms and capacity has upgraded? Or is that more that AI is already just choosing the ones that are going to return more and get a better hit ratio to start with?

So I think here's what I'd say, John. So the queries that not all queries generate AI, right, a gen AI result. In my own experience, I thought it would come up more, and it hasn't. But remember, when it does, it actually has a higher click-through rate. So I'm not in this one is good versus one is bad, one is positive versus one is negative. It is what it is. that the incidence rate of AI is less than I thought, and the click-through rate on AI is higher than none. That's just a fact set. Why it is, how it is, not entirely sure. We have our own theories. Honestly, we're using our own scientific method around trying to understand and verify causation and correlation. So it's early days. I guess what I will say is that I think The search operators are very careful to not just inject AI every time if it's not going to make something more productive and better. And I think that's what they're probably seeing. In fact, I would say in some of our analysis, but don't go to the bank with this, that the rates of AI injection are actually coming down. That if we looked at this earlier, it was higher. I'm sure they were looking at it and wondering where does it have click-throughs better, where does it not? What is the right success metric? Is a non-click a success metric because they got the answer? Is a click a success metric? I'm sure the search operators are spending a lot of time thinking through all of this. All we wanted to present was data based on our properties where we have perspective to just give a sense of scale and context.

Okay, great. That's great, Collin. Thank you. And then just second, I wanted to ask about your pharma businesses. I was wondering how much of the momentum you're seeing there is related to these new weight loss GLP-1 drugs. And second, is there a risk for other drugs to be disintermediated by that over time? And is that a net positive or net negative in your view, or is it too early to tell?

Yeah, so look, I think the GLP-1 category is an interesting opportunity for us in two ways. One, I think it's going to unleash a significant amount of spend as there's now competition for customers. So I think that's only going to be good for us. But I also believe it's going to actually drive our loser business. And the reason for that is that nutrition is an important companion to these GLP-1s. And what you don't want to have happen is weight loss but bad nutrition. Then different knock-on effects. In fact, I think there's a lot of momentum around, you know, using an app like Lucid and others and attaching it to a GLP-1 prescription to ensure nutrition and ongoing weight management. Because if you get off the GLP-1, you can have a rebound very quickly. If you can change behavior and habits, then good things happen. And so there's an adherence piece to it, too. So it's actually, it might even seem counterintuitive, which is, well, do you need a Luzit when you have a GLP-1? And the answer is actually yes. And I think that's also seen by the pharma industry as well. So I think there's some interesting ways in which we're going to benefit. from their new therapies today. A new one got FDA approval. So I actually think this is going to be a good opportunity for us.

Okay, great. Thank you. Appreciate the commentary.

Thank you. There were no other questions in queue at this time. I would now like to hand the call back to Brett Richter for closing remarks.

Great. Thank you very much, Paul. And of course, we appreciate All of you joining us today for our Q3 2023 earnings call. We'll continue to participate in conferences. We announced some upcoming ones are on our website. And as we work through the next couple of months in the winter, we'll continue to inform you of our participation. Thanks for joining us and have a great day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.