KB Financial Group Q2 2023 Earnings Call Transcript

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August 4, 2023

There are 10 speakers on the call.

Operator

Day, ladies and gentlemen, and welcome to Ziff 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. On this call will be Vivek Shah, CEO of Ziff Davis and Brett Richter, Chief Financial Officer of Ziff Davis.

Operator

I will now turn the call over to Brett Richter, Chief Financial Officer of Ziff Davis. Thank you. You may begin.

Speaker 1

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 Zip Davis. And I am joined by our Chief Executive Officer, Vivek Shah. A presentation is available for today's call.

Speaker 1

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 Web After completing the formal presentation, we'll be conducting a Q and A. The operator will instruct you at that time regarding the procedures for asking questions. In addition, you can e mail questions to investorziffdavis.com.

Speaker 1

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 ks filings, recent 10 Q filings, various proxy statements and 8 ks 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 As well as forward looking statements.

Speaker 1

Now, let me turn the call over to Vivek for his remarks. Good morning, everyone.

Speaker 2

Our Q2 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 2nd quarter. As expected, results bore a great deal of resemblance to last quarter's.

Speaker 2

Our revenue decline was dominated by ongoing challenges 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 4th 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.

Speaker 2

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 As we approach the Q4, where nearly a third of the business' 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 that 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.

Speaker 2

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.

Speaker 2

The M and 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 Doctor. Daniel Nadler, one of the world's most successful AI entrepreneurs.

Speaker 2

His last company Kensho Sold 5 years ago in what was a record valuation for an AI company. He formed Zyla 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 Zyla 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, Ziff Davis' authoritative brands and proprietary data with Zyla's AI technology and expertise focused on high value domains. The first initiative in the partnership will be to integrate Zyla'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 1st medical AI platform to score above 90% on the U.

Speaker 2

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 MedPage 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 Zyla.

Speaker 2

It 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 Zyla to pursue them. We're also excited to be a shareholder in Zyla, Joining a very impressive roster of Zyla Investors, including Jim Breyer, Brian Sheff and Ken Moelis. Cyla is a Mayo Clinic platform Accelerate company. Doctor.

Speaker 2

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 Arzyla 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.

Speaker 2

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 increased Wi Fi performance and reliability. Optimizer has been rolled out All of Ekahau's 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.

Speaker 2

IGN's Legend of Tears of the Kingdom game guide NOW offers registered users access to an AI chatbot that can answer their questions about the game. And the chatbot is trained on IGN's original editorial game guide content, so users can be confident that they are getting accurate and helpful information The 3rd 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.

Speaker 2

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 1st 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 3 times that of Bing's traffic overall, Indicating that generative search has had a very positive impact on traffic referrals.

Speaker 2

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 user 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, 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 in securing that compensation and 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.

Speaker 2

AI has the transformational potential to create meaningful value for Ziff 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 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 2,030. We will be working with our facilities teams, building managers and suppliers over the next several years to ensure we meet these targets.

Speaker 2

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 2, SBTI and CDP are a key element in Ziff Davis setting out on a net 0 decarbonization trajectory, while maximizing transparency and accountability throughout.

Speaker 1

With that, I'll hand the call back to Brett to discuss our financial results. Thank you, Vivek. Let's discuss our financial results. Our earnings release reflects both our GAAP and adjusted financial results for Q2 2023. We will focus our discussion today and my commentary will primarily relate to our Q2 2023 adjusted financial results and comparisons to prior periods.

Speaker 1

Slide 4 reflects the summary of our Q2 financial results. We reported revenue of $326,000,000 for the Q2 of 2023 As compared with revenue of $337,400,000 for the 2022 comparable period, Reflecting a decline of 3.4%. FX did not have a meaningful impact on the 2nd quarter's year over year results. Q2222023 adjusted EBITDA was $106,700,000 as compared with $118,000,000 for the prior year period, reflecting a decline of 9.6%. Our adjusted EBITDA margin for the quarter was 32.7%, A 200 basis points sequential increase.

Speaker 1

We reported 2nd quarter adjusted diluted EPS of $1.27 Our technology business performance continues to weigh on the company's overall performance and this vertical was the most significant contributor to our year over year revenue decline. However, overall, Q2 2023 was better than our expectations And we believe we are building momentum going into the second half of twenty twenty three. On slides 5 and 6, we have provided performance summaries for our 2 primary Advertising and subscription. Slide 5 presents the company's advertising revenue performance. Advertising revenue declined by 7% in Q2 2023 as compared with the prior year period.

Speaker 1

This performance was also heavily impacted by the challenges within tech. Excluding our technology vertical, The year over year advertising revenue decline would have been 2%. Trailing 12 month advertising revenue declined by 8%. In our non tech businesses, we have seen some stabilization in the overall advertising market and strength in certain of our verticals, including our Consumer Health business. We expect our second half advertising revenue to meaningfully improve as compared with the first half, supporting our overall expectations for a stronger second half twenty twenty three performance.

Speaker 1

Our net advertising revenue retention and annual trailing 12 month Statistic measured quarterly was approximately 90% for Q2 2023, which reflects the year over year decline in advertising revenue. As defined in the slide, during the Q2, Ziff Davis served 1920 4 advertisers with an average quarterly revenue advertiser of more than $90,000 Slide 6 depicts our subscription revenue performance. Q2 2023 subscription revenue grew 3% as compared with the prior year period and 4% during the last 12 months, Excluding the contribution from certain businesses that were divested in 2021, the table on the bottom of Slide 6 Includes subscription metrics for the last 6 quarters. We had nearly 3,200,000 subscribers in Q2 2023. The significant increase on a year over year basis primarily reflects the inclusion of Lose It subscribers for a full quarter in 2023 versus a partial quarter in 2022.

Speaker 1

There were sequential gains within Humble Bundle and Lose It offset in part by a modest reduction in cybersecurity subscribers. Our subscriber metrics have been adjusted to reflect greater transparency into a reseller relationship in our cybersecurity and Martech business, Enabling us to identify the underlying subscribers served through this relationship. Historically, we have reflected this reseller as a single subscriber in these metrics. These metrics now reflect the underlying subscribers served by this reseller. Certain other adjustments were also made to subscribers in the cybersecurity and Martech business to Further conform to the company's subscriber definition.

Speaker 1

Please note that the historical subscriber metrics have been recast to conform with the current quarter's data. Our Q2 2023 average quarterly revenue per subscriber was $44.51 This metric reflects the inclusion of a full quarter of Lucid subscribers as compared with the prior year period, which only included a partial quarter. Overall, the June 2022 acquisition of Luzit has significantly raised our number of subscribers and lowered our average quarterly revenue per subscriber As compared with the periods prior to the acquisition. Our overall churn rate increased 18 basis points from Q1 2023. The company's Q2 2023 other revenues declined approximately 9% year over year, primarily reflecting lower Humble Bundle Publishing revenue, which was partly offset by higher Ekahau Hardware sales amongst other smaller factors.

Speaker 1

Our Humble Bundle publishing revenue is highly dependent on the timing of game releases. We expect a stronger release calendar in the second half of twenty twenty three. Slide 7 provides quarterly organic and total revenue growth rates for the last 10 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. 2nd quarter 2023 organic revenue declined 6% consistent with Q1 2023.

Speaker 1

This decline reflects the business unit performance trends discussed earlier. Turning to our balance sheet, please refer to Slide 8. As of the end of Q2 2023, we had $679,000,000 of cash and cash equivalents $150,000,000 of short and long term investments. We also have significant leverage capacity both on a gross and net leverage basis. During the quarter, we repurchased 980,000 shares of our common stock for a cost of approximately $63,900,000 In July, we repurchased an additional 105,000 shares of our common stock at an aggregate cost of $7,500,000 We have more than 5,000,000 remaining shares authorized under our stock repurchase program and we will continue to be opportunistic with regard to future stock repurchases.

Speaker 1

Our 2nd quarter leverage ratios reflect our recent stock repurchase activity. As of the end of the second quarter, gross leverage was 2.1 times Trailing 12 months adjusted EBITDA and our net leverage was 0.7 times and 0.4 times if you include the value of our financial investments. Vivek discussed our recent investment in Zyla, a transaction that we are very excited about. As Vivek noted, During the Q2, our Everyday Health Group acquired Mom Media, an influencer network and events business focused on the pregnancy and parenting space. We acknowledge that our current pace of closed acquisitions reflects a historic low.

Speaker 1

Our M and A program, however, has not changed. We remain very active in sourcing and evaluating transactions and we continue to manage a robust deal pipeline. In the current macro environment has had a chilling effect on M and A activity across the market. But we are patient and we will continue to exercise the discipline That has been a hallmark of our acquisition program. On our last call, we shared that we were exploring strategic alternatives for our B2B business.

Speaker 1

While we do not have a specific update to share at this time, we remain engaged in active exploration. We continue to believe that we are well positioned both operationally and financially to execute upon our M and A strategy and we will support this strategy with Capital allocation when we identify transactions that we believe will generate long term value creation for our stakeholders. We are also nimble and well capitalized And when the right opportunities arise, we believe that we can act decisively. Turning to Slide 10. We are reaffirming the fiscal 2023 guidance range that we originally presented in February 2023.

Speaker 1

While certain of our businesses continue to be challenged by the macroeconomic environment such as our technology business, we are beginning to see stabilization in a number of our other businesses. As we noted on our February call, our 2023 guidance reflects the carry forward impact of our 2022 results And an expectation that the macro economy will stabilize during the second half of twenty twenty three. This view has not changed and our first half of twenty twenty three performance is consistent with this outlook. We continue to expect a stronger second half of twenty twenty three and we expect Q3 to reflect an improvement in our rate of organic growth. Assuming we realize this expectation, second half twenty twenty three revenues would reflect approximately 55% of total 20 23 revenues, With approximately 30% of the 2023 revenue in the 4th quarter, again, consistent with our original expectation.

Speaker 1

We continue to invest in areas of our business where we see opportunity for growth. We expect adjusted EBITDA margins In the Q3 of 2023 to move closer to those experienced in Q3 2022 and for the Q4 to be our strongest quarter As we stated last quarter, in the event we were to consummate a transaction Involving our B2B Technology business, we would anticipate adjusting our guidance. 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 100,000,000 Year to date 2023 free cash flow reflects lower adjusted EBITDA as compared with the 2022 comparable period, similar CapEx, Lower net cash interest and higher cash taxes.

Speaker 1

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. As I noted on our fiscal year 2022 earnings call in February, We recently transitioned to a new company wide financial ERP system and as expected, this transition has impacted our regular timing of receipts and payments. We expect to continue to progress back towards our normal cadence of working capital during the coming months. Overall, we are pleased with our Q2 2023 results. We are excited by our recent strategic transaction with Zyla and believe That we are positioning ourselves to take advantage of the power of artificial intelligence tools and capabilities.

Speaker 1

Our profitable businesses continue to produce cash to strengthen our balance sheet and provide incremental capital for our capital allocation strategy, including in support of our recent stock repurchases. We will continue to thoughtfully and patiently deploy this capital in order to enhance long term shareholder value. With that, I would now ask the operator to rejoin us to instruct you on how to queue for questions.

Operator

Thank you. We will now be conducting a question and answer session. Please. One moment please while we begin. And the first question is coming from Shweta Kajuria from Evercore ISI.

Operator

Shweta, your line is live.

Speaker 3

Thank you for taking my questions. Vivek, you mentioned that you're seeing signs of And hoping for a strong Q4. Could you point to a few things that you're seeing now that gives you more confidence? What specifically were you referring to? And then the second question I have is your partnership with Zyla and you pointed to some examples from Integrating it in everyday health to increasing content velocity, conversational opportunities as well as data analytics, how should we think about the impact Of all this on your business, on your P and L and whether it is cost savings or revenue generating opportunities?

Speaker 3

Thank you.

Speaker 2

Of course. Thanks, Shweta. So to answer your first question about reasons for us to feel The tide is turning and to be optimistic about the second half, I'd point to a few things. So first is just continued growth out of connectivity And the greatly improved pharma advertising market, these are dynamics that we're experiencing In the first half and we believe we'll carry into the second half. As I also pointed out, RetailMeNot is growing and we believe that will continue and obviously the 4th Water, as I mentioned, is all important.

Speaker 2

And so I think overall, e commerce trends seem to be in our favor. We have a number of important Humble game releases that are slated for Q3 and Q4, which we believe will be beneficial From an overall year over year growth point of view, the email business continues to grow and we're seeing some real flattening In the cybersecurity business and so and then of course we do have easier comps, I think particularly in the Q4. So I think that Combination gives us confidence around our views of the second half. With respect to your question on Zyla specifically, What I will say is the Zyla partnership is really all about revenue generation. And so maybe I'll just unpack a little bit of what we intend to do At the outset, Xyla has created a service called Open Evidence and this is a service for physicians That allows physicians to access and have a really a personal reader across 35,000,000 pieces of medical literature That sit in the public domain today and grows at the rate of 2 clinical trials with 2 research papers a minute every day Of every week, of every month, of every year.

Speaker 2

The volume of medical discovery is enormous and beyond The ability of any single individual to really understand and process. And so what Open Evidence does is it allows Physicians to make very specific queries that can be patient based queries to then essentially read the medical literature and Still it in a format and in a way that can be used in really the provision of care. It is a game changer. And so the integration of that into MedPage, which as you know is our physician based brand that does largely use As a tool and utility that we think could be significant in how often How many physicians we reach and how often we reach them. So to me, integrating a tool like that, which will be free to physician As MedPage is today and monetized through advertising and you've heard me say this in the past, the single most valuable media audience in the world Our physicians because you have a 1,000,000 prescribing physicians in the United States that sit on 100 of billions of pharmaceutical scripts a year.

Speaker 2

And as the old practice of detailing, which is to send in a pharma sales rep to see a physician has come down significantly, Digital engagement matters. And so the ability to digitally engage physicians, is significant. It is a significant part of our health business And we believe this will then have an impact. As for timing, I think we're just getting started. So it's not something we're writing into the 2023 guidance, But I think longer term, we feel very bullish about the potential.

Speaker 3

Okay. Thank you, Vivek.

Operator

Thank you. The next question is coming from Cory Carpenter from JPMorgan. Cory, your line is live.

Speaker 4

Hey, thanks for the questions. Vivek, your comments on the Bing referral traffic increase were pretty interesting. Just curious, is there a way to frame how much of your traffic And then for Brett, could you talk about what drove the 200 basis points Sequential margin expansion in 2Q, I think that was above your guide for closer to flat margins. Thank you.

Speaker 2

Thanks, Corey. So the reason we wanted to share the BING analysis is it's really the only current real world Experiment in terms of how a generative search engine could be different than the search engines that we've all come to understand. I myself am pretty pleased to see that the volume of referrals we're getting out of being in a generative experience It's significantly better than it was prior to the integration of AI into their experience. And again, it goes back to what I believe the search operators Fully, firmly understand which is the trade that if you're crawling historically in search terms crawling Content, the trade is traffic. And I so I'm a big believer that, that will continue.

Speaker 2

And if you watch what Google is doing In their search experience, the generative experience in Google Labs, they're clearly demonstrating the need to have links that drive Traffic. As for traffic composition, we don't report out all of the pieces. What I can say though is I know there's a lot of Investor focus on search traffic, as a company, it is one source of traffic. We have a significant amount of app traffic. We have a significant amount of Direct traffic, we have a significant amount of email traffic.

Speaker 2

So I'll just point out that we're not just search. We've always been diversified because we've always understood that the search algorithm changes all of the time. And so the dynamics there require that we have a diversification of traffic?

Speaker 1

Yes, Gord, thanks for your question. I don't know if Point anything specific with regards to that. I think part of the answer to that is really just stepping back and widening the lens. While we Very much try to frame the company's expected performance over a 12 month period managing the company to within 90 day Sprints is less of a focus. Of course, on a quarterly basis as we progress through the year, we do try to give some sense of a guide.

Speaker 1

It's not Necessarily to the last percentage point. If you look across our businesses, factors that impacted that were the type and the mix of revenue, Some delayed spending in certain areas. We do continue to invest in other areas and maybe the other answer to that is Lots of small pieces across a fairly diverse P and L adding up.

Speaker 2

That's helpful. Thank you both.

Speaker 5

Thank you.

Operator

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

Speaker 6

Great. Thanks guys. Vivek, just to follow-up on the SEO topic. Google just started adding more referral links in the search generative experience. So just have you seen Any evidence of the same kind of uptick?

Speaker 6

I know it's pretty early days, but anything you can comment on that? And then stepping back on the broader topic of AI and AI co pilots. So we've heard from some of our other Companies that have implemented these GitHub co pilots that their engineering departments Have been able to become 30% to 50% more productive than how they operated before using Tools to write code. So if we look at Ziff Davis and maybe look at 1 of the Editorial departments at one of your brands, how much do you think that these tools could improve System wide productivity and how do you guys plan to measure that improvement? Thanks a lot.

Speaker 2

Thank you, Ross. So maybe I'll start with your first question around our experience with Google referrals and Google referrals Year to date and in the quarter are up nicely. Now whether or not I can point to that being the Volume that's coming through the labs based experience and no, I don't know. I think we're just up in Google search, which is always a good thing. So it's probably too early to say on the generative experience.

Speaker 2

It's really impossible for us to track. It could be a contributing factor. I just can't tell you That it is. With respect to your point on productivity gains, I will say that before I even talk about editorial productivity, The same dynamic around productivity for our engineering and development organizations is very relevant to our company too Between connectivity, cybersecurity, marketing technology, shopping and parts of the gaming and health businesses, Those are software led, engineering led propositions. And so the same dynamic certainly applies there.

Speaker 2

And in fact, I would argue that That is possibly as meaningful as the question you're asking, which is so on the editorial side, what can that turn into? And so To me it's about velocity, it's about potentially volume and then it's about making sure That we are as complete as we can be in any unit of content. It's too early for me to put a statistic out there for you, but that's how we think of it. What I will say though In the order of things generally in AI that excite me, I will tell you that it's more about creating the kind of User experiences that we're creating for instance with Open Evidence and Zyla on MedPage, those to me are game changers in terms of The kind of interaction and value proposition that we're going to have with audiences with AI. So I would say that it actually allows us to create New ways to engage and that to me is more exciting than productivity gains that maybe just allow us to increase some output.

Speaker 2

So I think we're obviously looking at all of it, but my bias right now is really around the revenue generation related to

Operator

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

Speaker 2

Hey, guys. In

Speaker 7

the past, you guys have talked about sustainable Long term growth in the mid teens and I think you said half of that being organic. Obviously, right now there's some choppiness in the macro, but Is that still kind of how you're thinking about kind of growth over the long term? And then second question, Vivek, you talked about The AI chatbot for gaming, I think you said, Tears of the Kingdom. It sounds really interesting. Do you have any additional color on just How this is performing engagement?

Speaker 7

How you expect to monetize this? And do you feel like within the gaming space, you have A substantial moat around things like this, you feel like your offerings are unique here or are there Are there potential competitors that could do this as well? Thank you.

Speaker 8

John, thank you for

Speaker 2

the question. So with respect to the first part In terms of what our target growth rates are, you're right. They are unchanged mid teens, roughly half organic, half inorganic, mid-30s margin.

Speaker 4

That is how

Speaker 2

we think about the company and that's how we think about our longer term models. Obviously, the last handful of quarters has not We achieved those expectations, but these are long term expectations. And as you know in our history, we have had periods where we've exceeded it. So I think if we look over A broader timeframe and open the aperture, we have done this historically and it's our intention to continue to do so. With respect to the gaming question, what I would say is that game guides And game advice and game help is of particular strength for IGN and it has a lot to do with not just our Reputation, but it has a lot to do with the maps that we have that are quite unique.

Speaker 2

So we integrate We some years ago did a very important small acquisition, but has improved to be Part of this mode, which is Map Genie, which brings a series of maps for all of these games That really you need alongside video tutorial as well as text based tutorial. So the combination of video, text and map, I think it's great. And so adding in the chatbot that allows you to ask questions in a certain way that is essentially mining all of that information It's just another way to access this repository of information, which we think is really important for gamers. So we do think it is Significant, it is the largest source of traffic. It is a lot of direct traffic.

Speaker 2

People come directly to IGN For this type of game help. And so, yes, look, I mean, again, this is an example where we're using a tool that essentially allows gamers to better access what is there and if that leads to return frequency dwell time That leads to more ad load, ad load leads to more advertising revenue.

Speaker 7

Great. Thank you, guys.

Speaker 2

Thank you.

Operator

Thank you. The next question is coming from Ygal Arounian from Citigroup. Ygal, your line is live.

Speaker 9

Hey, good morning guys. Just a couple of AI questions from me as well. I want to go back to this point about trading a lot of traffic for Content and then also the point about compensation rights holders and working with other publishers on that. Can we expand on that a little bit? Are you implying that if You continue to get traffic or you're getting better traffic from search or the generative AI search experience.

Speaker 9

Some of these copyright issues that we're hearing about from publishers, including you guys here, About using their content as parameters to teach the LOMs, but that's kind of Yes, more acceptable than that trade off. I think just how do you think about that? And then, you talked a lot about how AI is going to help improve a lot of the products that we haven't touched much about, but the advertising product itself specifically and we've heard a lot about AI tools has been advertising. So I want to get your take on that as well if that's an area where you see potential improvements.

Speaker 2

Yes, it's a great question. So I'll start with Your question around and search and compensation and rights. So this debate Has existed for a long time, well before AI, where publishers early in the days of search were trying to understand Whether or not search engines did truly have the right to crawl content, to index content, to display headlines And now more in recent years more than headlines. And I think the determination has been that You know what, it is a fair value exchange if you crawl our content and we get traffic from it. And search operators have said In the past that if you don't like that trade, you can put a do not crawl sign up and we will not crawl you.

Speaker 2

So there is precedent and that precedent suggests that there's an understanding that there needs to be that value exchange. So yes, I'm saying if that value exchange continues within search experiences, I think that would be a fair value exchange from my perspective and for Ziff Davis. But search operators are not the only ones We've developed and deployed large language models that are predicated on content from companies like ours. And it is those companies that in my opinion need to express what they believe the fair value exchange needs to be. Absent Traffic or some other form of compensation, it really does need to be licensing fees.

Speaker 2

And so we absolutely believe That those entities need to really work with our industry to resolve those. With respect to your question around Using AI to improve ad product and ad performance, it has not been our focus. There are activities In this area, I suspect what's going to happen is the ad tech firms that create a lot of the Strenmentation that exists in the market today, including Google, will start to innovate and offer tools That allow for essentially better ad performance. That isn't to say that we're not monetizing Add inventory that relates to AI consumer facing products, but I think your question was more about using AI to somehow improve efficacy, Better targeting, better messaging, creative optimization, that's not an area that I would say necessarily is at the top of our list because I think there'll be market participants. Well, I know there are market participants who are developing those solutions that would be easy for us to rent And utilized within our app stack today.

Speaker 9

Okay, thanks. Yes, that is exactly what I was asking and that makes A lot of sense. And just a quick follow-up on not M and A specifically, I understand what's going on in the market and that's slow there, but just Given that updates on capital allocation thoughts and buybacks, can you be more aggressive on buybacks if things remain slow? Any updates there? Thanks guys.

Speaker 1

I'll take that. I didn't quite catch the end. Hopefully, I'll cover Your question. Our approach to capital allocation hasn't changed. I mean, our approach to capital allocation is 4 prongs.

Speaker 1

1st and foremost, Feed the business with the capital it needs from an operating and capital expenditure standpoint, give our Business units, the tools they need to compete in the marketplace. 2nd is keep a healthy balance sheet, which we've obviously built a tremendous amount of capital on the balance sheet In the last couple of years, 3rd being return capital to shareholders and 4th being our M and A program. We in this quarter Shifted a significant degree of capital over $70,000,000 in our buyback program. It's always been a tenant of this capital allocation strategy and will remain so. We took a slightly different task last quarter given that we were active in the market at the time of the call and we noted then that We were and would be actively buying our stock.

Speaker 1

I think here we will put that right back into our capital allocation decision making and make That allocation decision on a go forward basis, it's a very important tool. We think the stock's attractive. I think our activity in the last quarter pointed towards that. But again, we are anticipating greater activity in the M and A market. It's almost tired to say, might be tired to hear it's been several quarters, But nothing's changed with regards to our acquisition program.

Speaker 1

What's changed in the last 12 plus months, it's harder to get deals closed. We've discussed the various reasons for that From a macro perspective, from a micro perspective, it's a deal to deal basis. It disconnects between buyers and sellers in terms of expected growth rates and expected value. It's disconnects between buyers and sellers with regards to short term, near term performance that may or may not reflect underlying business fundamentals or the macro economy and how to unpack that, But we have capital to deploy and we intend to deploy it.

Speaker 9

Great. Thank you.

Operator

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

Speaker 8

Wonderful. Thanks so much for taking my questions. I'm I'm just going to stick to one question. I want to go a little bit more on the Zyla investment in the strategy there and maybe more How does it play into your broader generative AI strategy? So Xylla obviously has strength in the healthcare vertical, Seems like a great fit with Everyday Health.

Speaker 8

Is the strategy beyond this to work with Zyla to bring that kind of verticalized AI To other parts of your business or would you also be working with some kind of the off the shelf LLMs out there and integrating that with your data allowing maybe on the To reassign people to query against it, right, the GPTs and Anthropics and even Lomas of the world. Maybe help us understand how you kind of think about the broader generative Strategy especially with all these different models out there and as well with the partnership with Zyla. Thanks.

Speaker 2

It's a great question, Rishi, and You nailed it. Our intent is to work with Zyla on a verticalized basis across the company. Daniel Nadler He is an incredible AI mind. What he built with Kensho still is one of the most valuable companies In artificial intelligence and what he's doing with Zyla, I think is groundbreaking and the evidence is not only Is the medical AI the best medical AI in the market? It's the best AI period.

Speaker 2

I have not experienced anything like this. It is behind registration for physicians, but I can tell you If we can continue to create this kind of experience, I think it is game changing. And so when we start to think about Leveraging Zyla with OOPLA and OOPLA's data and Moz and Moz data and RetailMeNot and its data, We start to get very, very excited. And so that I think needs to also be understood, which is Zyla and Daniel Nadler, this is a real company and there are a lot of businesses We would love to be in the position we're in with them. And I think part of the reason that well, I think the reason they are with us is they see the We are unique as a company having depth in multiple verticals with Proprietary datasets and audiences and that combination does make us unique and I think it's why In the end, Zyla chose to work with us and to do this.

Speaker 2

And so we're super excited for it. And I do think it's a Statement about the opportunity beyond just healthcare.

Speaker 1

And I think it's important to unpack some of the financial elements of the deal because this deal is Multi layered and each of the layers interplays with the other. Not only did we make an investment in Zyla, a company for all the reasons Vivek just outlined, we're excited about. This commercial agreement is side by side within a media product identified in the longer term set of opportunities. By using an element of our own stock, Zyla's investors have become ZD investors and There's an alignment there that puts the companies on a path to work together to achieve value and to a degree and I can't speak for them, it's a vote of confidence in Ziff Davis. So I think we look At all these elements of the deal as the whole being greater than the sum of the parts, that being said, it's opportunity rich.

Speaker 1

It's going to take some time. This is not something that impacts, as Vivek said, the back end of 2023, but there is more than just a Conceptual foundation to build on here and we're very excited about it.

Speaker 8

All right. Wonderful. Thank you so much guys.

Speaker 5

Thank you.

Operator

Thank you. And the next question is coming from Jon Tanwanteng from CJS Securities. Jon, your line is live.

Speaker 5

Hi, good morning. Just another question on Zyla. How do you evaluate the investment into it? Was it on the same metrics as you do with your Traditional M and A was kind of a different animal given that it's going to be more of an integration into your whole business?

Speaker 2

Yes. No, it's Good question. So in terms of the valuation of Xyla itself, it was a function of its last round and I listed some of the Investors who participated in it, it is a who's who cap table of some of the, I think, most Intelligent and effective investors and business people around. So the valuation of ZYLA is a function Premium to that last raise. I think our view of the Zyla Relationship is its impact on the operating performance of our company?

Speaker 2

Yes. The ultimate Value of the investment as well. So it is both pieces where we think of Zyla as being a driver Value, revenue and earnings to be very precise within the context of ZD, in health and across the other verticals And at the same time, being a participant in the value that Zyla itself is creating, Not just with us, but in its other activities. We're not the only thing it will be focused on. It has other Sources of revenue and opportunity.

Speaker 2

So we think it's a potential win win.

Speaker 5

Okay, great. And then at a high level, It was great to hear the Bing data. Is there any reason to believe that might change significantly as models evolve or as automated Content generation proliferates, number 1. And then number 2, have you seen any use of your data being scraped by AI companies without benefit to you? And How easy is it

Speaker 2

to find that evidence even if it's out there? Yes. No, look, I think there is a significant amount of evidence. Many of the LLMs use Common crawl, we are a significant data source, tokenized data source in Common crawl, Not at our option, just the way it works. So we have a clear view into a lot LLMs and our data is being used the public data, not our internal mass data, which I think I pointed out in the past earlier we had licensed To OpenAI, but the MOD data, the Ookla data there are certain proprietary data sets that we are very Careful about making sure they don't seep in to training or surfacing.

Speaker 2

And the data I'm referring to is our content on the open web. So our content on the open web is actively used. And so I think we have a real basis for discussions with those who have been using that data without compensation to us.

Speaker 5

Got it. And just on the models changing or the ability to differentiate as more of

Speaker 2

this generated content appears just on the web itself? Yes. No, look, again, I think this is all good. I mean, I know that there are those who have A different view about what search is going to look like. I don't think search is a destination.

Speaker 2

I think search is I actually think generous search begets more Search and more search gets more traffic and that's what we've seen and that's what I said at the beginning of all of this and I think Coming into it, that's what we're seeing. So I don't I look at to us as search is a vibrant source of traffic, But there are many sources of traffic and we continue to look for many sources of traffic. I didn't even mention social traffic when I was talking earlier about different sources of traffic. I think that that's something that maybe investors should understand is that there are lots of ways we generate engagement.

Speaker 5

Got it. Great. Thank you.

Speaker 2

Thank you.

Operator

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.

Speaker 1

Thank you, Paul. We appreciate you all joining us today for our Q2, 2003 earnings call. We expect to continue our conference participation in the fall and we'll post our plans as they become available on our Investor Relations website. And again, thanks for joining, and have a great day.

Operator

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

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KB Financial Group Q2 2023
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