Q3 2021 Ziff Davis Inc Earnings Call
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Good day, ladies and gentlemen, and welcomed Ziff Davis third quarter 2021 earnings call. My name is Paul and I won't be the operator, assisting you today.
At this time all participants are in a listen only mode. A question and answer session must follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
This call will be the next shot sealed Ziff Davis, Steve done Chief Accounting Officer Islands fire, a vice president of corporate Finance access Davis.
I will now turn the call over to Steve done.
<unk> accounting officer, that's if Davis. Thank you you may begin.
Thank you good morning, ladies and gentlemen, and welcome to the Ziff Davis Investor Conference call for Q3 2021, as the operator mentioned I'm, Steve done Chief Accounting Officer, Ziff Davis, and I am joined by our CEO. The next shot an R V P of corporate finance Alan Stier prison.
Presentation is available for todays call a copy of this presentation is available at our website. When you launch the webcast and 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 Dot Ziff Davis Dot Com in addition.
And you'll be able to access the webcast from this site.
After completing the formal presentation will be conducting a Q&A session.
Operator will instruct you at that time regarding the procedures for asking a question. In addition, you may email questions to investor at Ziff Davis Dot 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.
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 tend to filings various proxy.
It's an 8-K filings as well as additional risk factors that we have included as part of the slide show for the webcast. We refer you to discussions and those documents regarding safe Harbor language as well as forward looking statements now let me turn the call over to the back for his remarks, Thank you, Steve and good morning, everyone.
Pleased to welcome you to our first earnings call since the successful completion of our spin off of consensus.
And the renaming of our company to Ziff Davis.
Which reflects our position as a leading vertically focus digital media and Internet company.
Detainment consensus are off to a tremendous start.
And we wish them continued success.
Well, Steve will provide an overview of a financial result, including and excluding consensus.
I'm going to focus my comments on the pro forma results.
Exclude consensus and divestitures, including to be to be back up business that we sold in September.
On that basis, we grew revenues by over 35% and adjusted EBITDA by over 23 per cent continuing to string of outstanding quarters.
We're also reaffirming the guidance we provided about two months ago at the Ziff Davis analyst day.
I also want to recommend to those who have not yet done so to watch the analysts day presentation videos, which are posted on Ziff Davis Dot com, yeah very helpful in understanding the company or strategy and priorities.
Advertising revenues in the quarter grew by over 44%.
We saw strong growth in every one of our hurdles, which stands in contrast, with some of our digital media peers.
Health advertising grew by over 18 per cent as we continue to see traditional pharma advertising dollars.
Flowing into digital platforms.
As we've noted in the past we have significant reached with respect to both patients and providers, which makes us strategically valuable to former another health and wellness marketers.
Gaming and entertainment advertising continued its strong growth and momentum as part of the new console cycle.
While screaming platforms continue to invest for subscriber growth and.
And theatrical starts it's slow rebound.
And our tech vertical we saw 49% growth in our enterprise and be to be business as tech vendors glued. The Legion an account based marketing spend with us.
Retail grew over 100 per cent aided mostly by the contribution of retail me not which we had not yet acquired at this time last year.
Over the past couple of weeks, there's been a lot of discussion about the impact of I O S 14, and low opt in rates for IBSA.
As I've said in the past, we generate a lion's share of our AD revenue textually targeted placements as well as leveraging our first party data.
In addition, a vast majority of our advertising is browser based not mobile App based which is another layer of protection from Iowa changes.
Therefore, we believe that the head headwinds associated with I O S 14, and the broader movement to limit AD tracking and targeting based on behaviors don't apply to us.
I'd go further and say that an attractive aspect of our advertising franchise is that we have endemic advertisers value the editorial environments and qualified click some leads we're able to deliver.
Nonetheless in the short term will closely watch for any shifts an advertiser confidence.
Feel that we're in a very strong position over the long term with add products and solutions that don't rely on ad tracking.
And I will say that this has been a long term strategic choice.
Develop business and monetization models that don't rely on third party cookies and tractors.
We're also closely watching for possible cascading effects from supply chain disruptions.
We certainly saw in Q2 2020, how limited product supply led to marketers asking us to reduce the demand we were generating for them.
I know many of our retail partners looking to stimulate online purchasing much earlier this year to give themselves more time to meet demand.
We responded by organizing our programming and efforts to start earlier too odd.
Obviously, we will be closely watching for any headwinds associated with supply chain challenges.
Subscription revenues in the quarter rough over 18% compared to Q3 2020.
Our connectivity subscription businesses, which includes uccle and eka how grew by 34% in the quarter is the demand for broadband network intelligence and Wi Fi planning and deployment continues to strengthen.
We also acquired a small the strategic asset in the quarter <unk> tell you, which we believe extends fuklah's depth of network measurement capabilities will also broadening our competencies in network building and site assessment.
The cyber security and more tech businesses grew nearly 20 per cent and a quarter driven by the acquisition of mass, which is proving to be a strong addition to a more tech portfolio.
The beginning of 2021, we began investing to establish sustained organic growth that these businesses, which have historically maintained conservative levels of sales and marketing the.
The competition for subscribers his fears and it will take time to scale customer acquisition programs that fit our profitability goals and to see the impact of our investments on recurring revenue.
We're committed however, the finding a path to balanced total growth, while still delivering market leading margins as we believe cyber security and mark that represent two of the most valuable segments in the market today are adjusted EBITDA grew by over 23% with margins close.
To 34%.
About 300 basis points versus last year.
A good chunk of the increased expenses, a subscriber acquisition expenses and cyber security and Martek with the balance coming from lower margins at newly acquired businesses and the return of expenses that were like during quarantine.
We should see margins improved roughly 40% in queue for and.
And bring the fully your margins to over 35%, which is our target for the company now and going forward.
As I indicated earlier.
We are reaffirming a full year guidance, we shot which I should remind you contemplate an expected deceleration in revenue growth to about 10% in queue for three reasons.
Number one.
The year over your benefit from the retail me not acquisition is mostly done given the acquisition took place in November 2020.
Two <unk>.
A difficult year over year Q4 comparison last year's holiday season, disproportionately favorite online sales and many advertising programs paused in queue to at the outset of the pandemic came back and cute for.
And three we saw I, one time benefit from the introduction of the new gaming consoles.
At the mid point of all range are full year guidance represents revenue and adjusted EBITDA growth of roughly 26%.
A key contributor our growth.
Has been and will continue to be.
Our acquisition system.
With our focus on executing the spin we've been somewhat quiet on the buy side for the last year Steve.
Steve will walk you through this but on a pro forma basis we.
We have $726 million in cash.
Three or $68 million of investments and gross debt of 1.217 billion.
Which represents a gross debt to EBITDA ratio of two and a half at the midpoint.
Of our 2021 guidance.
In other words, we're well capitalized and have a very healthy balance sheet.
We will continue to be patient and disciplined and our deployment of our capital and believe there are a number of attractive digital media and internet assets for us to consider.
Just a quick update on our CFO search because of the great finance team, we have including Steven Alan <unk>.
With me today.
I've had the opportunity to be deliberate and thorough and the search.
We're seeing some fantastic candidate and I believe it's realistic to expect a new CFO in place by our next earnings call me.
In the meantime, we shouldn't Miss a b as we have a deep and talented operational finance team in place.
Four and the call back to Steve.
We provide you with an update on R. E S. G efforts.
We are in the midst of our first greenhouse gas audit.
We're we're calculating our carbon emissions 20.
2019, 2020 and 2021 we.
We expect to complete the audit by early January and planned to communicate our findings and our 20th 21 E. S. G report, which will be published in Q1 as.
You may know measuring G. H G emissions is the key element for sustainability reporting in this audit will enable us to set science based targets and net zero goals for the company next year.
In addition, Torah environmental efforts were also heavily focused on the S or sofa and ESG, especially as it pertains as it pertains to D E I.
Since our last earnings call, we released our 2021 diversity report, which highlights key data around our workforce representation hiring and inclusivity senior leadership and management promotions.
An employee resource groups among other topics the.
The diversity report is both comprehensive and informative and can be found on to David Dot com very.
Very pleased with the S. G strides we've made this year and I'm confident that will continue to build upon our efforts and the foundation that we've created.
With that let me hand, the call back to Steve.
Thanks, So I'll be walking you through our consolidated non-GAAP results for Q3 2021 as you recall from our previous earnings calls we sold our ANZ voice assets in August 2020 at our UK voice assets in February 2021, and September 2021, we completed the sale of our be to be back up.
<unk>.
As a result, we will present, our full non-GAAP results, which include these operations for the periods owned and when we refer to are pro forma result, it will exclude the contribution from these divested assets separately. We will also address Ziff Davis performance, excluding the consensus business and the diverse.
<unk> voice of backup assets.
Now, let's review the summary quarterly financial results on slide four let's begin with our revenues inclusive of the consensus business. It was a record third fiscal quarter of revenues for the company. We reported revenue of 443 million in the quarter and $434.7 million of revenue, excluding the divested voice and backup asset.
Representing approximately 24.5 and 27.7% growth respectively from Q3 2020. Adjusted EBITDA was also a record for a third fiscal quarter was 175.1 billion as reported at 170.8 million, excluding the divested voice and backup.
<unk>, resulting in your over your growth of 13.6 and 16% respectively.
Finally growth in our earnings per share in the third quarter, we had $2.34 of reported non-GAAP adjusted EPS and $2.27 a V. P. S. Excluding the divested voice it back up assets a growth of 15.8 and 16.4% respectively from Q3 2020.
Turning to slide five and Q3, we had strong feel free cash flow generated $110.5 million, which represents nearly 18% increase over the 93.7 million generated in Q3 of 2020.
Over the last 12 months, we have generated in excess of $446 million in free cash flow all of the figures on this slide are inclusive of consensus and the divested assets.
Now, let's turn to the two businesses cloud services and digital media for Q3 as outlined on slide six the cloud services business inclusive of consensus grew 7% auto reported dog got basis to $182.1 million and 12.3% to 172.5 billion.
<unk>, the divested voice and backup assets.
Busted EBITDA was 83.7 million is reported at 79.5 billion, excluding the divested voice a backup assets generating growth rates or minus 4.7, and one <unk> minus 1.7% respectively as.
Rebecca mentioned, the slight decline relates to marketing investments and acquisitions with margins that are not yet optimized the digital media business revenue grew 44% to 262.2 billion I'd experienced double digit revenue growth exclusive of retailing me not which was acquired in Q4 of 20.
<unk> 20th.
The segment sides total adjusted EBITDA increased 37.5% to 103.1 million on slide seven we show the third quarter results for Ziff Davis, excluding consensus and the divested voice and backup asset our organic revenue growth was 12% and our total growth was 35%.
On the $346 million a total Q3 revenues, we had 117 million of EBITDA representing growth of 23% on slide eight we have provided quarterly Ziff Davis financials, excluding consensus and the divested voice and backup assets. We've also provided a disaggregation of revenue by our three.
Types advertising subscription and other.
57% of our two three revenues came from advertising and 30% were derived from subscription and licensing revenue the.
The remaining 4% is another.
Moving to slide nine we wanted to provide an overview of our cash investment in that position, particularly as the consensus spin occurred in early October after our fiscal quarter and had already ended.
For the avoidance of doubt this table only accounts for known adjustments and does not include any impact from cash inflows are outflows since the end of cute three.
<unk> noted earlier and are pro forma cache of 726 million in gross debt of 1.217 billion. Let me walk you through the numbers. We ended Q3 with 546 million of cash 111 million of long term investments, which were <unk>, well talk and 1.785 billion of gross.
<unk>. Please note those don't figures our principal dead.
The spin off distributed $771 million proceeds we tendered for 83 million of principle of our high yield notes and repaid our bridge loan a $485 million the deck premium for those transactions was $22 million.
This results in a pro forma increase in a cache of $180 million.
In addition, the C C S I stake on the day of the spin was worth approximately $257 million total pro forma cash and investments R. One point O nine 4 billion and gross debt cause 1.217 billion.
Finally, before before going to a question and answer session I would like to turn your attention to our business outlook on flight 11, we are reaffirming the full year 2021, Ziff Davis remain coke pro forma guidance give it at our analysts day on September 9th and I've also provided for corporate Guy that fourth quarter Guy.
<unk> of revenues between 400, and 414 million EBITDA between 154, and 162 million and non-GAAP adjusted E. P. S between $2 and $2.14 per share. We are estimating an effective tax rate between 24 and 25% for Ziff Davis.
Q4 and going forward.
Any legislative changes this is higher than historic rate due to the business now having a higher portion proportion of its income in the United States. We're also assuming a sure account of approximately 48.6 billion.
Following our business outlook slight are various metrics and reconciliation statements for the various non-GAAP measures to their nearest GAAP equivalent I would now ask the operator to rejoin us to instruct you on how to queue for questions. Thank you.
[noise]. Thank you we will now be conducting a question and answer session and the interests of time, we ask that you. Please limit yourself to one question. If you would like to ask a question. Please press star one on your telephone keypads.
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One moment, please while we begin.
And the first question is coming from Cory Carpenter from J P. Morgan <unk>.
Cory your line of life.
Good morning, and thanks for the question [noise], Paul you didn't <unk>, losing my voice <unk> on the environment not a lot of calls the last few weeks and if you you know you sounded you know quite positive certainly more suddenly the message we furniture and some other companies. So I was hoping you could talk more broadly uhm it sounds like you're not really seeing any impact will certainly not seeing.
Any impact my loss and also not from the macro and supply chain. <unk> is that is that right and then maybe if you could just speak to kind of what your expectations are fourthquarter, especially given your your.
E Commerce Indian vertical exposure. Thank you.
Sure thing good morning, Cory So yeah look I think that from an advertising point of view, we had a really fantastic Q3.
You know I I would say that.
So the principles of our business being vertically driven being performance driven and being contextually driven really has been a clear advantage for us a lot of what's happening is you know in the AD environment has to do with sort of the ongoing and systematic disabling.
The interest based.
Add targeting framework and construct and what I mean by that is over the last decade advertising went from something that was targeted to a very specific audience and a very specific contextual moment to sort of a separation.
The impression N N N N N data and using data harvested in other activities. Other things you did other ways in which he created sort of a digital footprint and applying that to inventory and what you're seeing being done from a regulatory point of view, but more from us.
Self regulatory point of view, where you have platforms large platforms as well as browser companies that are doing various things that are making that more challenging that's not our business and as I said in the prepared remarks, we've been organized around this reality for a really long time understanding that ultimately.
The contextual advertising would you know the value of it in the marketplace embrace of it would swing back as the interest based advertising get undermined now having said all of that the thing that I'm absolutely careful about.
Is that when you have these kinds of headwinds in large part of the AD ecosystem, We Wanna watch to make sure we don't somehow fallen to a receding tide of any form we're not seeing it but it is obviously something worth watching.
On the supply chain side.
As I said in the remarks look we did see how that does directly translate into advertising pressure and that was cute too of 2020.
That was when we ran into a situation where a number of all retail partners and as you know retail's a huge AD category for us.
A number of our retail partners said look I don't have supply I don't Wanna buy your demand I don't want your demand you Gotta turn off your demand and where demand January.
And so if you were to see a replay of that that would certainly have some type of near term effect, but I think it's a little early to really answer that question as to whether or not we're gonna see that play out in the holiday season.
You know and as I pointed out we.
We are seeing a number of market or saying half dot I've got supply right now, let's try to get people to do their holiday shopping right. Now today is cashback day at retail me not so if you're looking for savings I'd I'd encourage you to sign up but we are doing things a little bit earlier this year in in anticipation of what may be.
You know an inventory problem as you get closer to the holidays.
Great. Thank you very very helpful.
Thank you.
And the next question is coming from <unk> from sake Sham Your line is life.
Hey, guys congrats on the quarter and the successful spin.
<unk> had a couple of quick ones <unk> can you talk a little bit about now with the spin how you're thinking about new vertical expansion versus kind of building out existing vertical just just what you know what the priority would be or or urgency or likelihood would be of new vertical expansion.
And then an idea of a you know you guys have a pretty strong gaming franchise.
You think that you could potentially benefit from idea faith since gaming advertisers.
You know now have fewer alternatives than than before in terms of in terms of where they can acquire customers. Thank you.
Thanks, So I'm so I'll take the first question in terms of vertical expansion.
Look we always all looking at adding to all our lineup of verticals, but when you consider the vertical we're in tact shopping entertainment Hell Cyber security and Mark Tech. These are some pretty big verticals with big towns lots of great coat growth doctorate sticks, and we're still we've got a lot of.
Room to grow and penetrating those so if you would've asked me if I had a preference or a fire to buy so I probably have a biased deeper expansion in the existing verticals. We've got platforms successful businesses great teams in place and it allows for all sorts of sized acquisitions, including talk and act.
Physicians, which often are the most accretive acquisitions that we can do so I would say that there is a slight bias towards deepening the existing verticals, having said that.
You know look what we're always open minded and I will say that the pipeline right. Now is pretty strong you know our balance sheet reload has received a fair amount of attention and so we're seeing a lot of things that maybe in the past we might not have seen the we generally saw quite a bit. So there's a lot of inbound coming in and and certainly if.
It it it represents a new vertical with the same kind of digital transformation opportunities. We like the same kind of add in subscription.
Based models that we like and the same sort of opportunity that uniquely create value right and leveraging our platforms, which is key to our our our M and a strategy and certainly we would go you know we would go that way in terms of the question.
And I'll take it even more broadly cause there's IBSA, which is the here and now there's the deprecation of the third party Cookie I would put that all under the larger umbrella trying to really and third party data tracking and utilization for the targeting of advertising I think that's a long term trend.
And and I do think that it will then ultimately in the long term favor those who do the inverse of that and that would be us when that happens I don't know and I will also say that you know the industry is is innovative so wow the mechanisms that may be used today to establish profiles that it.
You used for targeting maybe you know maybe challenged you.
And if you're always comes up with new ways. So I suspect that you know a lot of the folks who on the interest based advertising side are not gonna lay down and and just you know not respond to it so I suspect you'll see some sort of response I think in the end I think what's gonna really matter or platforms that have real registered.
Users users who have volunteered information if provided that information that can be used to create the most relevant advertising messaging. So I think you're gonna see if a if a platform can I have a true direct relationship.
With their user base I think that will be to some some advantage.
Great. Thank you for like.
Thank you.
Thank you and the next question is coming from Richy January Yeah.
Rishi Your line is like.
Alright, what wonderful thanks, so much for taking my questions in a nice to see continued strength in the in the business organically I wanted to get a sense with you know maybe if you could talk a little bit more about the cloud businesses and and and then they give us a little bit more color on on how they.
They're kind of doing and what the outlook for those going for those and I'm, particularly interested in you know the the Mark type space as well as you know what your soon on on on the V. P. M side of the equation. Thanks.
Yeah, Good morning, where she thank you. So look I think that let me describe what the the the you know the division formerly known as cloud services is today. It is our cyber security, which goes to market at the Viper group and are Martek group, which goes to market as the mosque.
And I met I mentioned those brands because they're really great brands, you know Viper represents a very strong cyber security and well respected cyber security brand underneath the Viper group or component brands, including IP vanish, which is the V. P. M business and then the Mas group.
And you know Mars as a as a reasonably recent acquisition consists of not just Mars, which is the leader in S. C O analytics, and and and software, but but also I contacting campaigner and and our email marketing services. So both groups right now we feel very good about the portfolio in the brands in the capable.
<unk> inside of each group and as you know, particularly on cyber security size with the disposition of the bee to be back up business that was part of making sure that the go Ford portfolio with the businesses that we felt had the most amount of potential and promise and could work together I would characterize these businesses I still going through a transition they hit.
Historically were managed not unlike a lot of the other class services business is entirely for profitability and and and very little focus on organic growth and certainly not enough investment in sales marketing and product to generate the kind of organic growth that others in the market are seeing now those others in the market.
Don't sport the same profitability and so we have a strategic question that that we have answered for ourselves that show up in our financials, which explain you know the margin differences, but we are investing and have been for the last several quarters and will continue to identify ways to put to put money to work <unk>.
Spencers to work to generate organic growth. It is early in the process. As you know it takes time to build up subscription revenues, but we're committed to it because look what I, what I would say is.
Both of those verticals are white-hot both of those vertical we have great assets, we have enviable scale in these in these verticals and enviable margins. What we don't have is a real organic growth story <unk> gross story has been largely M&A and that's the aspect.
Like we've done in other parts of the company that we would like to see changed and we all willing to invest because ultimately when we get that equation right I think the the valuation of those businesses will be quite significant if you watch what's happening in cyber security, what's what's happening and more.
<unk> you know you see revenue multiples that looked like our EBITA multiples and so you know that there's an aspect for us which says we can participate in that and so we're very focused on that and I will tell you.
It absolutely reminds me of the same observation, we had a 2018 on the consensus business.
Where we sat there and said pay minute this real growth opportunities in here, we need to invest we did to unlock those growth opportunities and today. Obviously consensus is on its own as a successful public company. So there's a lot of lessons from that experience that we we've learned and that we think we can apply to both the cyber security and more tech business.
His.
I wanted to hook on <unk>.
Thank you.
Thank you for the next question is coming from James Fish from Piper Senator James Your line is life.
Hey, guys. This is clinton on for Jim. Thanks for taking our questions first you know a really a really strong quarter of monetization and take rates in the digital media business. How much of this is retail me not driven verses core driven and then maybe more housekeeping any idea of the breakdown of advertising versus subscription and the <unk>.
Farmers versus display and a quarter. Thank you.
Yeah sure thing so what I'll do is just because I want to get my colleagues in here I'll take the the first part of the question now and maybe you can take the second part of the question. So you know.
With respect to the advertising outperformance obviously the contribution of retail me not in the third quarter as compared to last year's third quarter was meaningful as it wasn't in last year's third quarter, but even adjusting for that I believe the growth was close to 20% Alan can correct me if I'm.
If I'm wrong it just in terms of the <unk>.
The existing asset so the growth rates were great now I'm also going to point out.
That Q3 for US last year was really good so.
So you know we kind of got ended the quarter a little concerned about the cop and you know we're happy to and then obviously with all the add environmental issues. You know that we we've talked about we we have some concerns at least going in of what this might mean and what would happen. So we're super pleased with where we came out and again I just do think that the verb.
Pickles, a very strong that were operating in and I should point out because it is such an important driver and it's just been a consistent.
Performer or health and wellness assets everyday Elk Grove, Babycenter Uhm, what to expect med page they've all done so exceedingly well and I just really proud of those colleagues because they just keep putting up points, but alan on the on the splits.
Recently not was when you exclude Retold me not we still grew in excess of 18%.
So roughly roughly around the 20% that you quoted of that in terms of the splits between display performance.
Subscription for digital media <unk>.
Roughly 41%, 34% and 20% respectively.
And then Steve mentioned.
Mentioned in his prepared remarks, but when you do the breakdown between advertising subscription licenses. Another it was roughly 57%.
39 per sandwich came from subscriptions, and then 4% which is categorized as other.
Super helpful. Thank you.
Thank you.
Thank you.
Just a reminder, ladies and gentlemen, if you wish to join the queue in a queue. You can do so by pressing star one on your telephone keypad at anytime once again. Please press star one on your telephone keypad, if you wish to enter the queue.
The next question is coming from James Breen from William Blur, James Your line is nice.
Thanks for taking the questions just a couple of when you look at the pro forma numbers you gave.
For the Standalone Ziff Davis, now and you'll get sort of year over year growth and then gross and EBITDA versus growth in revenue seemed to EBITDA was sorta outpacing revenue growth through the first couple of quarters of this year than sort of reverse this quarter and will reverse next quarter based on the guidance can you talk about sort of what's happening there and what's causing that and then.
Just strategically you know looking at the balance sheet and what you're going to have for cash pro forma that you know what are the thoughts on bringing gross debt down holding cash for them in a and and any sort of color you can give us around you on.
Projected you know 1.3 plus billion revenue line, you know what the free cash flow dynamics will look like for the pro forma sent through his business. Thanks.
So thanks for the questions you have so I'll I'll do I'll do margins uhm and balance sheet and maybe see if you can talk to the free cashflow will get you in here too. So so with respect to margins on a on a year to date basis for the Romain co, which is what what I think you're asking about.
We are ahead from a margin point of view, so there's been a little bit of Choppiness between Q1, Q2 Q3 part of it has to do with the return of some some expensive that would light during peak quarantine much of it has to do with investments, we're making that I referenced in cyber security and <unk>.
<unk> around sales and marketing and then some of it has to do with acquisitions like moths that have come in with revenue contribution, but but not EBITDA contribution yet that we're optimizing as we often do four four EBITDA contribution. So I would say that you know nothing really surprising here.
And obviously was built into our our own expectations and again last year's I think margin was a little bit are artificially high because of of spend levels being off and so I think long term.
I think the way to think about margin isn't that 35% to 36% that seems to be the comfortable margin for the remain calm and by the way historically consistent so when you thought about the the whole call where margins where roughly 40% that was the it was biased up by the consensus business so not a change.
I think it's still a very healthy margin level against balanced against you know our own growth expectations.
On your question around so the balance sheet in an in depth look I think that right now we feel very comfortable with where we said, we we feel comfortable uhm with the cast it sits on the balance sheet and and leveraging that cash and deploying that cash for acquisitions to generate returns I think that.
You know the demand for that capital will be very strong and so you know from our point of view it'll be best used to do the acquisition program for the most part I'll also point out we are reasonably well below sort of our policy around you know maintaining a quote unquote.
Ceiling of three times, you know gross debt over EBITDA. So we're we're you know we're well under that will continue to as we grow continue to be under that and then you know one thing I'll just point out on the cause I do get asked about this and so I Wanna make sure that you know.
I I I I answer this which is what we're planning to do with the routine stake in consensus which is Steve pointed out at least that spin was it was worth $257 million.
I'll say <unk>, we add any decisions, yet, but remember that in order for it to be tax free.
We would need to execute a debt for equity exchange or an equity for equity exchange within a year, we can decide to hold the stake for up to five years.
But at which point, we would end up having to pay tax on mistake. So so you know just wanted to lay that out and <unk>, maybe just a little bit on free cash flows if davis, what we think a little bit maybe on the tax rate.
Yeah, absolutely thanks for that and thanks for the question James Yeah, I figure out what you'll see with 50 of US going forward. You know if you look at our revenue. We are as perfect. Previously mentioned, we are looking to continued towards the 60 per cent EBITDA conversion rate on our revenue down a little bit from the mid sixties because of <unk>.
Investments in the business and higher Capex, and then sorry 40 per cent.
Give it a conversion on a revenue and then from that I believe we're gonna be at about 60 per cent conversion habiba data free cash flow going forward.
Like I mentioned, we will have some investment in the businesses were driving that organic growth.
And adding a little capex to achieve that but I think those are kind of the members Directionally, we're headed for in the future.
Just two one housekeeping and the guidance for the fourth quarter for revenue is there any facts revenue in that guidance.
No the one week of <unk>.
Consensus is excluded.
From the business outlook.
And just a touch of Rebecca asked me to touch on the tax rate sorry, J. We're looking at 24 to 25 per cent is are effective tax rate slightly up from where we've been in the past with the spin off it's increasing our domestically sourced income at a higher tax bracket.
Okay. Thanks, and then just one one last one just uhm.
Around the subscription based revenue that you guys broke out when you think about growth there. How <unk> is there a way for that grew up to come from existing customers or is it all new sign ups.
I mean, it's <unk>, it's a combination really I think it depends on the service in some instances, it's gonna be bigger share of wallet, where you know the subscription service is more of a S. M. B type service, but then also penetration of more customers in some cases it could be price.
We actually you've been experimenting in cyber security of taking up price, it's cost us a little bit on cancelled, but it's it it seems to be driving better unit economics. So I think that's it the answer is it depends because there are a number of different subscription businesses in their <unk> just similarly situated at times.
But I think in all cases, you know I think we can get more sobs.
In some cases higher price points and then in some cases higher share of wallet.
Great. Thanks.
Thank you.
Thank you and the next question is coming from Willpower from Bird will your line is life.
Hey, this is charlie around the country well thanks for taking my question.
I just wanted to ask about the queue for guidance specifically the revenue Uhm is there anything to call out on sort of you know.
<unk> versus advertising split maybe and then going forward into 2022, how should we kind of think about the organic growth profiles of both the subscription segment of media advertising segment.
Yeah, no. It's a really it's a good question and and and I want to point out that from.
Go forward basis, we are actually thinking through what are the right segments for Ziff Davis, what are the right disaggregation of revenue probably advertising subscription another won't be segments cause you can't get down to to you know to our bottom line on those but I think they are the most relevant ways to model and think of.
About the company. So we're trying to work through that a little bit, but you know in terms of the queue for the queue for guide you know, we obviously had a beaten two three and then and and and not taking up our guidance and that reflects you know a lot of the dynamics that are going on in the AD market and and you know any potential.
Harmful effects around supply chain disruptions, principally so I think we are appropriately keeping you know keeping that guidance in place and so I think those are some of the factors that we think about we're not we don't really <unk>. Obviously, we don't typically quarterly guidance for the last order and we certainly don't God.
<unk> bye revenue tight.
So, but I will say that the fourth quarter as as I think you know and you can see this in our historical financials, you know slide eight of the presentation you see the queue for advertising number typically is a very large numbers so Q for.
Historically in queue for in 2021 will really be about the advertising business more than more than anything else and then you know with respect to next year, Yeah. It's probably premature for me to to give you a an answer on that we're working through our our budget processes looking through understanding <unk>.
Where organic growth sits where where you know where the acquisition pipeline sits and I just want to point out to us that you know ultimately again you know our definition of organic growth is is an interesting one and that it's very conservative one and that we exclude the asset. So the first full year and then we we include.
And the challenge with that is in the 13th or 14 months. When you walk comparing to the first or second month, and we are doing a fair amount of of restructuring and and shrink to grow that has a fairly dilutive effect on on on organic growth rate. So you know that's something to keep in mind as we as we as we think.
[noise] about that so what we typically do is we'll exclude and our own modeling those assets cause we know what that path is and then the organic growth on the assets that we've owned for awhile. So working through that process I think long term as I've said I expect the company to grow you know me.
<unk> to high teens total half of that organic at a 35% margin that is our target that is what our long range plans call for and so you know there'll be that they're gonna be years, where I suspect we do better as we are this year and they're gonna be years, where we come a little bit under that and I think that's fine.
Okay, great. Thanks, as I can and just if I can just ask one more on maybe just M&A kind of the philosophy around is there any change relative to you know J calm before the spin maybe like two years ago is there any change in terms of the frequency you guys plan on making acquisitions the size and since this past year due to the.
Spin you haven't been as active as in the past is is it possible. There's maybe some ketchup M&A in in the following year, how should we think about that.
Yeah, No. It's a great question and it would you know you're absolutely right as much as we would.
Attempting to stay very active and the M and a market during the the the consensus then.
Got to tell you that this was all hands on deck.
Seven days, a week 24 hours a day. This is probably not set enough, but you know we executed this spin really within five months from the announcement, which is probably some kind of record somewhere.
And that is a function of the hard work of our team and the focus and dedication and I do think that it took away from some of the activity on them and a side I do think though that we all gonna be careful and disciplined as we always are and and you know not not be not be too too you know feeling like we starburst.
And we're at the buffet, we don't want to overeat, we're gonna be disciplined and and thoughtful about it asked for the M&A mindset strategy approach Nothing's changed and you have to remember that while the companies separated the M&A system for the last decade has been 95% the remainder.
So that will change.
Okay. Thanks very much.
Thank you.
Thank you and the next question is coming from a <unk> a ton one tank from a C. G. S Securities John Your line is five.
Hi, Good morning, everyone. Thanks for taking my questions and you know congrats what is supposed to spin out of a great quarter and it really must feel good to be vindicated on you know putting your items with contextual basket as as he seemed to play out in the AD industry. So good. Good work. There there are a lot of my questions have been answered already I was wondering though if within the more tech business.
Uhm does any of that actually rely on these tracking and cookies and and things that you know aren't aren't so popular these days or is it a completely different business and that I'm I'm wondering how you generate leads and and you know extend your reach on those platforms.
Yeah, No. It's actually you know in some ways. It it should be a it should be a beneficiary because the the two principal things at the Mark Tech business does.
Or one help companies right in search engines organically.
So again as you are looking for <unk>.
Ways to generate traffic for yourself.
Ways to generate customers, you're gonna focus on SCO more.
Then you might have in the past.
Because if you can't get it out of the social platforms did the targeting is perfect and the the C. P. As you know the cost per acquisition is a great you're going to <unk>. So I think that helps us from an S. D O point of view and then the other part of what we do within my Tech is email marketing help you build a list help you generate and compose emails to send to that list.
Optimized delivery and open right track performance and and optimize performance you Gotta do that too so in many ways I actually thing.
It's it's a great question and it's something we've talked about internally, which is well we start to see.
That paid media, which is.
Interest based moved too and media, which is really what we're trying to do when we're trying to get U S. C O.
<unk> and and get your email platforms. Knowing we're trying to help you generate earned media outside of paying us for the platform.
There really isn't a specific expense you're not buying AD inventory. So hopefully it's actually it it it's a tailwind for us.
Gotcha, that's helpful and has there been any incidents or an anecdote of actual explicit benefits two guys with a customer come do that hey, we're not getting the results. We want in and paid you know add paid media and we wanted to come to you read the congestion there through the more tech uhm and increase our budget. So just to get what we're looking for.
You know.
The honest answer is I don't know that discussion has happened.
Because I don't know if they would necessarily say it that way I think it just shows up it have got more budget. What can we do you know it may well be they have more budget because of that dynamic uhm. You know often the buyers are you know keep close to the vest. The dynamics that are going on cause remember every every AD contract isn't negotiation.
But I suspect some of that is absolutely happen now the key for US is can we deliver right. We have to be in a <unk> have the ability to take the incremental money and deliver.
Unit economics that are consistent with what we've delivered them.
And more importantly, as good if not better than what they may be switching from.
Got it one last one for me I was wondering you you provided some good color on the risks of I guess inventory be short later this year you know just because supply chain inflationary issues. I was wondering if you have you how may impact your internally just labour inflation as you go through that you're being able to retain people N as we get into 22.
How that uhm adds up with you know cost and maybe coming back into the fold, which is traveling and such like that.
Now listen it's a great question and obviously this is as tight a job market in the competition for talent is frankly, unlike anything I've ever seen and given that many companies certainly in our industry I'll work from anywhere you know people are a lot more options in terms of where they can go I think we've done a very good job from a retention point of view and we'd.
Been very sort of focused on the employee experienced the on boarding experience with <unk> all sorts of virtual programming to keep the employees engaged in and really our focus on profits and purpose are focused on E. S. G on social value creation for our workforce is a huge retention vehicle. So I think we've done.
Well with all of that all we going to pay more for talent, probably I think that is happening I think you're seeing some inflation in terms of of wages. We've seen it in in some places, but you know look I think it's it's manageable and I think it's you know probably in <unk>.
Offset possibly to other expenses that may be overtime uhm, we can remove from our our equation. You know, we're we're thinking through what our real estate footprint ultimately needs to be and what that looks like and there may be some savings there that can essentially get redeployed into people's hours.
That's helpful. Thank you.
Thank you.
Thank you there are no other questions and chew at this time I would I'd like to have to call back to affect shop for any closing remarks.
Great. Thank you very much fall so listen we appreciate you all joining us today for our two three earnings call I'll be participating in an Investor conference in the coming weeks. So hope to see some of you there and have a great day. Thank you.
Thank you ladies and gentlemen, this does conclude today's conference you may disconnect off this time and have a wonderful day. Thank you for your participation.