Q3 2022 Ziff Davis Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the Ziff Davis third quarter 2022 earnings call.
My name is Paul and I will be the operator, assisting you today.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
This call will be Vivek Shah CEO of Ziff Davis, and Bret Richter, Chief Financial Officer of Ziff Davis.
I'll now turn the call over to Bret Richter, Chief Financial Officer of Ziff Davis. Thank you you may begin.
Thank you good morning, everyone and welcome to the Ziff Davis Investor Conference call for Q3 2022.
As the operator mentioned I'm, Bret Richter, Chief Financial Officer of Ziff Davis, and I'm joined by our Chief Executive Officer Vivek Shah.
A presentation is available for today's call a copy of this presentation is available on our website. When you launch the webcast. There is a button on the viewer on the right hand side, which will allow you to expand the slides.
If you have not received a copy of the press release, you may access it through our corporate website at Www Dot Ziff Davis Dotcom and.
In addition, you'll be able to access the webcast from this site.
After completing the formal presentation, we will be conducting a Q&A.
The operator will instruct you at that time regarding the procedures for asking questions. In addition, you can email questions to investor at 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 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 <unk>.
10-K filings recent 10-Q filings various proxy statements and 8-K filings as well as additional risk factors that we've included as part of the slideshow for the webcast. We refer you to discussions in those documents regarding safe Harbor language as well as forward looking statements now let me turn the call over to Vivek for his.
His remarks.
Thank you Brett and good morning, everyone.
Against the backdrop of global economic uncertainty and pressures as well as strong headwinds in the advertising market.
We were able to deliver pro forma adjusted non-GAAP , EBITDA and EPS growth for two and 12, 9% respectively in the third quarter.
Our focus has been and remains generating earnings growth, while managing through a challenging market environment.
At the same time, we're focused on positioning the company for an eventual macroeconomic recovery.
<unk> investments organizational changes and upgrades and a reduced operating cost base.
Finally, we're continuing to strengthen our balance sheet to fund our acquisition program we.
We believe the current climate will ultimately present us with a rich set of targets and opportunities.
Let me share some observations about our advertising business.
Advertising revenues declined 6% in Q3, which was similar to the decline we experienced in Q2.
The combination of tougher prior year comps and the ongoing and well known pressures in the advertising market explain the decline.
At the same time, the AD market needs to be attacked by category.
In our gaming and entertainment vertical we saw AD revenue growth like we did last quarter.
Roughly a mid single digit grower and a continued bright spot for us.
Retail me not was flat in the third quarter, just like it was in the second quarter, which we view as a positive.
The environment and tough comps.
Okay.
We have seen some declines at one of our smaller properties offered stock comp, which we view is reversible.
Our health advertising business was flat in the quarter.
With continued pressure in our direct to consumer pharma business being offset by stability within the direct to provider pharma segment and growth in our parenting and pregnancy business.
Aided by acquisition.
The main drag on our advertising business has been and continues to be intact, while we sustained double digit declines in revenue.
As I said last quarter. The tech category sits at the center of the issues roiling, the global economy, including inflation supply chain.
<unk> interest rates and the strengthening dollar.
As our technology clients experienced challenges they will pare back their advertising expenditures.
As a cycle that will need to play itself out, but we believe that having the diversification across multiple categories, including shopping healthcare check in gaming and entertainment allows us to weather this market.
Subscription revenues grew by 6% in the quarter.
The continued star has been our connectivity business, which includes uccle root metrics and alcohol, which grew close to 20% this quarter through organic gains and acquisitions.
We believe we're very well positioned in the connectivity space as broadband demand continues to surge as well as government pushes for universal broadband continued to strengthen.
We believe we have the most complete and unique data set and tools to allow providers and users to meet their connectivity needs.
The integration of lose it within our health business has gone very well lose it subscription growth remains on a positive trajectory and we have added an incremental advertising revenue stream to the business.
Our cyber security and Martech subscription businesses declined in the third quarter by 6%.
We've now fully lapped the Mars acquisition, and we continue to see revenue pressure in the cyber security business, which we are addressing with an overhaul of our go to market activities.
And consumer VPN. This means more focus on market opportunities outside the U S and the underutilized channels, such as mobile App stores.
<unk> security.
Pivoted to a channel first strategy with a new team and a new partner program, which is showing promise, including an uptick in new partners added in Q3.
This will take some time, but we're optimistic about our ability to grow our cyber security unit.
While total revenues for the quarter was slightly down year over year, but slightly up when adjusted for FX, our organic revenues declined by six 5% beforehand percent when adjusted for FX.
This is roughly 130 basis points worse than what we saw in Q2 and informs our view for the balance of the year, which is why we've lowered our revenue guidance.
We had hoped for Q4 recovery, but at this point, we're not seeing any evidence of a marked improvement.
However, we're proud of the work we're doing to continue to deliver pro forma adjusted EBITDA and EPS growth.
Our new guidance shows full year pro forma adjusted EPS growth of eight 7%.
As I said in our last call. It's at times like these that we are particularly adept at margin management.
Our pro forma adjusted EBITDA margins in Q3 with 35, 1%.
An improvement of about 170 basis points versus last year, notwithstanding meaningful FX headwinds.
I will elaborate a bit on what we've done and are planning to do to support earnings.
First we've been very judicious about head count really from the start of the year.
We entered the year with about 5000 employees pro forma for 2022 acquisitions and we're currently at approximately 4500.
We will continue to manage our head count.
I should also point out that our revenue per head has increased by roughly 7% versus last year.
We continue to pursue other cost savings measures as well.
While we established a corporate procurement function in 2020 right at the onset of the Covid pandemic.
We recently enhanced our efforts with the implementation of a number of software solutions to improve our data visibility.
We believe we will identify new savings opportunities with an improved understanding of all of the pockets of spend inside of the company.
We also continue to optimize our real estate portfolio.
We've embraced a hybrid approach to work, which has allowed us to substantially reduce our run rate real estate costs, and we continue to see opportunities for further reduction.
At the same time, we're accelerating organizational development and structure to be well positioned for recovery.
We recently split our technology and shopping assets into two business units and shopping now being led by chart sit away who came to us from Ray's slide and Groupon.
He is a well respected executive in the retail and shopping space.
Mike Finnerty, who has been a long standing key executive of ours took over the technology unit with a clear eyed view towards managing the current challenges and setting the business up for success.
We also welcomed late package of the company as our new Chief Accounting Officer late comes to US from all piece, where he was also CIO and has a long standing working relationship with Brett.
These are just a few of the key hires and organizational changes we've made to drive future success.
With $800 million of cash and investments on our balance sheet and a.
Gross leverage ratio of two times, we continue to have a great deal of capacity to deploy capital for acquisitions.
We're being very selective right now, believing that the best opportunities are in front of us.
We expect to be rewarded for our patience and discipline.
At a time when capital is precious I believe we're being prudent in our assessment of the market.
I believe investors have appreciated our timing and instinct.
For instance, we felt like we had a specific window in which to consummate the tax free spinoff of consensus last year.
And we accelerated our efforts to complete the transaction prior to the end of 2021.
I believe we called correctly read the market.
Similarly, being very selective with our shareholders' capital right now is the proper approach.
Having said that we believe that we will put a significant amount of our cash to work in the next year as the broader M&A market continues to recognize that today's macroeconomic challenges are not likely to be resolved anytime soon.
Let me provide you with an update on our ESG efforts.
In March shortly after we released Ziff Davis inaugural ESG report.
We committed to setting emissions reduction targets at the <unk>.
<unk> based targets initiative known as SP Ti.
SB Ti defines and promote best practices and near term science based target setting and we.
We're about to submit our targets to SB Ti for validation.
This is exciting because we are committing to comprehensive scope, one two and three emissions reduction targets and.
And we'll be working over the next several years to meet and hopefully exceed them.
We are proud to join in the steamed group of companies, who are leading the zero carbon transformation by setting targets.
Rounded in climate science.
It's in times like these in particular that we need to be very focused on supporting our employees.
Earlier this year Ziff Davis rolled out its global Mentorship program.
And with over 500 mentoring partnerships year to date mental loop recently awarded US as one of their 2022, most impactful mentoring programs.
Engagement in our employee resource groups continues to grow with over 700 employees participating and we recently added a family group to support employees, who are involved with the caregiving and family life.
Moreover, next week, we will host our second annual purpose summit for our employees.
Today, we will hear from colleagues throughout Ziff Davis, who are making a difference at our company.
In effecting positive positive change within our communities.
Needless to say I continue to be incredibly proud of the works. If Davis has done and continues to do to respond to the enormous environmental social and societal challenges of potash.
Let me conclude by reiterating that our long standing focus as a company has been on profitable growth.
As a total growth company.
We pursue growth both organically and through M&A, but always with a focus on the bottom line, regardless of the business cycle.
We're demonstrating our ability to deliver bottom line growth in a challenging market.
We're not needing to pivot or change our approach is just simply how we've always operated our business wishes to protect ourselves on the downside, while being poised to exploit the upside.
Now, let me hand, the call back to Brian .
Thank you Vivek, let's discuss our financial results.
Our earnings release reflects both our GAAP and non-GAAP financial results for Q3 2022.
Our earnings release also reflects pro forma adjustments for the impact of various 2021 asset dispositions explanations for reconciliations of these adjustments are provided in the release.
As discussed during our previous earnings calls our UK voice assets were sold in February 2021, and we completed the sale of our <unk> backup business in September 2021, the results related to these divestitures are reflected in our year to date 2021 financials through their respective date of sale and the result.
Of our B to B backup business are reflected in our Q3 2021 results through its sale date.
However, these divestitures do not impact the presentation of our Q3 or year to date 2022 results.
On October seven 2021, we completed the spin off of consensus our year to date in Q3 2021, GAAP income statement reflects the financial activity related to consensus in discontinued operations.
We will focus our discussion today and my commentary will primarily relate to our Q3 pro forma non-GAAP financial results from continuing operations, which exclude the contributions from the consensus business and exclude the contributions from our divested businesses for the portion of the Q3 2021 period that they were owned by.
Ziff Davis now, let's review the summary of our quarterly financial results on slide four.
We reported pro forma revenue from continuing operations of $341 $9 million for the third quarter as compared with $345 $6 million for the prior year period, reflecting a decline of one 1% the strength of the U S dollar and the decline in value of certain foreign currencies negative.
Lee impacted this growth rate and if the comparable 2021 currency values were applied to our 2022 Q3 results revenue would have increased by approximately one 1%.
Pro forma adjusted EBITDA from continuing operations was $121 million for Q3, 2022, as compared with $115.3 million for the prior year period, reflecting growth of four 2%.
Our adjusted EBITDA margin for the quarter was 35, 1%.
We reported third quarter pro forma adjusted non-GAAP earnings per diluted share of $1 58 sets. This figure reflects a 12, 9% increase as compared with our Q3 2021 pro forma non-GAAP results.
On slides five and six we have provided performance summaries for our two primary sources of revenue advertising and subscription.
As you can see on slide five Q3, 2022 pro forma advertising revenue declined by 6% as compared with the prior period.
Advertising revenue declined by 1% during the last 12 months and again this was impacted by negative trends in the foreign currency markets.
Our net advertising revenue retention and annual trailing 12 months statistic that we update quarterly was approximately 94, 1% for Q3 2022, reflecting the recent pressures on advertising revenues, including FX.
As defined in the slide in the third quarter Ziff Davis at approximately 1900 50 advertisers with the average quarterly revenue per advertiser of nearly $96000.
Slide six depicts our subscription revenue performance.
Q3, 2022 pro forma subscription revenue grew 6% as compared with last year and was again negatively impacted by FX subscription revenues have grown 11% during the last 12 months.
The table on the bottom of slide six includes subscription metrics for the last seven quarters.
Sequentially, our average quarterly revenue per subscriber decreased by $10.77 to $46 87 since the primary driver of this decline was the inclusion of a full quarter of our recent acquisition lose it which is characterized by a significant number of monthly subscribers at a significantly lower.
<unk> average revenue than the average of our other subscription businesses.
Excluding the impact of lose it and it's roughly 1 million customers sequential average quarterly revenue per subscriber actually increased slightly due to higher subscription revenues and a slightly lower customer count.
Our overall churn rate increased 63 basis points from Q2, 2022, 235, 5%, primarily reflecting the timing of sales of certain data licensing contracts. Because this is a revenue churn metric. These data contracts, which were often in excess of six figure sums.
Can impact revenue churn in any given period disproportionately as compared with other subscription revenue activity.
Additionally, the Companys Q3, 2022, other revenues grew 5% year over year to $12 2 million driven by sales of <unk>, New sidekick, too, which was launched in Q3 2022.
Slide seven provides quarterly pro forma organic and total revenue growth rates revenues from businesses owned for at least a full 12 months are included in organic revenue while acquired revenues relate to businesses, we've owned for less than 12 months.
For the last 12 months total revenue growth was 4% again in part, reflecting FX headwinds and while third quarter organic growth reflects a six 5% decline or minus four 5% adjusted for FX. This is compared with our 2021 third quarter during which organic growth.
12%.
Turning to our balance sheet, please refer to slide eight.
Our balance sheet continues to be extremely strong.
As of the end of Q3, 2022, we had $622 million of cash and cash equivalents and nearly $180 million of short and long term investments. We also have significant leverage capacity both on a gross and net leverage basis gross.
Gross leverage declined to two times trailing 12 months adjusted EBITDA at quarter end, our net leverage was 0.8 times and only 0.4 times. If you include the value of our financial investments.
During Q3 2022, we again completed a complex transaction to further delever, our balance sheet by monetizing half a million of our consensus cloud solution shares as we have discussed on prior calls to the extent completed prior to the first anniversary of the spin off we had the opportunity to.
Monetize these shares on a tax free basis. However, this could only be achieved through very specific transaction steps and the tax re monetization required us to exchange their shares for certain outstanding Ziff Davis Securities in light of these considerations during the third quarter, we completed a second debt for equity exchange.
Actions, resulting in Ziff Davis, realizing approximately $22 million of value in respect of half a million of our consensus shares.
In Q3 2022, we applied the value of these consensus shares along with a portion of the value realized during Q2 2022 from the prior transaction towards the repurchase of our four point, 65% senior notes.
In all during the third quarter, we applied $94 million of this value towards these repurchases retiring $105 million of the senior notes. We believed the repurchases of these notes at a discount to par reflects an accretive transaction for the company, reducing our gross leverage and future cash interest expense, while providing us with additional.
<unk> financial flexibility.
Moving forward, we will be opportunistic with regards to considering alternatives to realizing value for our remaining $1 2 million shares of consensus including potentially holding these securities for a period of time.
As a reminder, we need to dispose of these securities prior to the fifth anniversary of the spin off of consensus which is approximately four years from now.
Through the end of Q3 2022, we deployed capital to repurchase approximately $181 million par value of our 4.625% senior notes and more and more than $71 million of our common shares we did not repurchase our common shares during the <unk>.
Third quarter.
We continue to face a challenging macroeconomic environment and we will continue to prioritize the health of our balance sheet. We believe that we have the flexibility to continue to pursue various capital allocation alternatives in an effort to enhance shareholder value with a continued priority of pursuing attractive M&A investments during the third quarter, we closed two <unk>.
All transactions the acquisitions of cell level, which we believe will enhance <unk> already formidable ability to collect and analyze data related to mobile user experience and service quality and certain assets of $1 24, which we believe will further deepen ign's relationship with certain film television and streaming.
<unk> service marketers and enhance its creative social and product integration capabilities.
Year to date, we have deployed nearly $119 million of capital in support of current and prior period M&A activity.
Turning to guidance.
As Vivek noted we are revising the 2022 guidance range that we presented in August and if you refer to slide 10. The details of this revised range are presented.
Our revised guidance reflects our Q3 performance our updated views of Q4 2022 performance as well as continued macroeconomic pressures, including the strength of the U S dollar rising interest rates and certain recessionary indicators and concerns.
Yeah.
We lowered the midpoint of our fiscal year revenue guidance by 2% for adjusted non-GAAP EBITDA, we narrowed the range by lowering the high end, but keeping the low end in place for adjusted non-GAAP EPS, we raised the midpoint of our guidance by 1%. This is attributable to a number of factors, including higher year to date other income and lower.
Interest expense, reflecting our year to date bond repurchases.
We have experienced revenue pressures throughout 2022 as compared with our initial expectations. However throughout 2022, we have been focused on managing our cost structure as well as our balance sheet in an effort to continue to support our earnings growth goals.
As we prepare to conclude 2022 and prepare our expectations for 2023. These efforts will continue.
We believe that our continued expectation of strong year over year earnings growth is notable given all of the factors we have discussed today.
Following our business outlook slides or our supplemental materials, including reconciliation statements for the various non-GAAP measures to their nearest GAAP equivalent.
This section includes a GAAP reconciliation on slide 13 that reflects free cash flow from continuing operations. Our Q3 2022 year to date free cash flow was $212 $5 million.
Nope.
Our fourth quarter is typically a seasonally stronger quarter for revenue and adjusted EBITDA, but also typically reflects a lower free cash flow conversion rate as a significant portion of our Q4 revenue is expected to be collected in Q1 2023.
This slide also reflects the company's free cash flow from continuing and discontinued operations for the nine months ended September 32021. This figure reflects contributions from both the recently disposed b to b backup in UK voice assets through their disposal dates as well as consensus.
And as a result is not comparable to our current continuing operations.
Overall, we are proud of our Q3 2022 performance having achieved growth in a number of our key financial metrics, including adjusted EBITDA and adjusted non-GAAP EPS in a challenging environment with that I would now ask the operator rejoin us and instruct you on how to queue for question.
Yes.
Thank you we will now be conducting a question and answer session in the interest of time, we ask that you. Please limit yourself to one question.
If you would like to ask a question. Please press star one on your telephone keypad are.
A confirmation tone will indicate your line is in the question queue.
You May press star two if he would like to remove yourself from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment. Please while we begin.
And the first question is coming from <unk>.
<unk> <unk> from RBC.
<unk> Your line is live.
Wonderful. Thanks, so much for taking my question just one for me.
As we think about looking out into Q4, given everything going on in macro and the like how are you thinking about the e-commerce environment I know around this time. This year you had some some comments that proved to be pretty forward looking inaccurate.
As it pertains to kind of a challenging E. Commerce season last time around so how should we think about it heading into.
The season, this time and kind of what's embedded into your expectations that you can give us the implied Q4 guidance. Thanks.
Sure. Good morning, reshape so look I think that I would characterize our view of E Commerce and holiday shopping season in particular in Q4 as cautious I think we.
Recognize that the environment really hasn't seen any improvement I do think the comp is a little bit easier in the sense that last year's Q4 as you point out.
As we had thought showed some signs of weakness I think we'll know a lot more obviously in the coming weeks as to what the.
The combination of what consumer demand looks like and what the nature of the deals and and different.
Opportunities are in the retail marketplace. So it's too early to say, but I think our guidance I would say character I would characterize our view as being cautious we see opportunities, where we can convince ourselves where there may be upside and then there are scenarios, where you could see potential risk. So I think we've kind of gone center.
Of the fairway in terms of our.
Our guidance and what's built into our revenue guidance.
On.
And that we shared earlier in the call.
Okay wonderful. Thank you so much.
Thank you.
Thank you and the next question is coming from Willpower from Baird.
Your line is live.
Okay, great. Thanks.
But that probably.
For you would just love to get your.
Our perspective on the broader M&A pipeline I know you've been a little quieter there and it sounds like you still expect to be.
More active is it.
Is it principally a function of valley.
Valuations meeting given the current.
The macro environment is it getting comfortable what the just the operations and results of the targets that you're looking at given macro I mean, just any broader color on.
Whats, creating some some reticence, if I'm reading that right and just what the broader pipeline actually looks like here.
Yes, no listen it's a great question and I go back to what I said earlier in the call, which is I think we've done.
A really good job of understanding the markets in which we operate I think back over a year ago. When we effected the consensus spin we saw a window.
We obviously time that well and that's been a great success for our shareholders.
Our head Count management, I don't want to underestimate that or understate that piece of it we have been on top of bid head count down 10% from the beginning of the year.
As we were starting to see some of the sign and so I put our M&A discipline and our patients into that category of thinking which is we do believe that they are going to be sensational opportunity for us we want to be very precious with capital at a time when capital is precious.
So I think that's the reason why we have to use your word we've been reticent.
But I view it as more being patient and as I also said, though I do think the market is turning and I think maybe earlier in the cycle. There was a view that this cycle would be short lived macro economically I mean.
I don't think anyone has that view now and I think the market views. This as something that they need to settle into and so I think whether the word is capitulation whatever word you want to use from a seller's perspective.
Think we're approaching that and so from my point of view, it's an exciting position for us to be in as you know we have been and acquisition driven company for the last decade in what it's only been a seller's market and I think this rotation I think we will we hope to time as well.
And I think our patience is going to be rewarded.
Well the only thing I'd add is I believe we that we've had the opportunity.
In 2022 to close some deals but for all the reasons Vivek mentioned, but also.
We are actively managing human capital and in some of these deals we have to consider kind of effort versus impact and whether or not we want to take on the integration of this deal and move on to something else and some of them are attractive in many ways, but you just look and say is that we're we want to allocate our energy for the next six to 12 months.
There are opportunities out there and we've had them.
But we believe patients as an asset in this environment.
Alright, Thank you that makes sense.
Thank you.
And the next question is coming from James Breen from William Blair James Your line of life.
Thanks for taking the question just on the subscription side you talked about the customer lost there. So would you say this is sort of a low point in terms of the revenue quarterly revenue our.
Average monthly revenue per subscriber and the churn rate there and we will see that start to come back down as we move forward. Thanks.
Yes, James I think there's a lot going on in these metrics and I think we've tried to highlight a couple of these calls I mean, obviously these metrics are relatively new to the company I think we started about a year ago and formally early this year and.
Even at different points in this year, we've tried to evolve them I mean, the biggest impact to the subscriber metrics was the acquisition of lucid and we acquired lose it at the end of the second quarter characterized by a significant number of customers.
Some figures.
Low average revenue and Thats really changed the mix of what you see but on the other end.
We also have.
Book was impact, particularly in the churn rate the revenue churn rate, which is characterized by the opposite dynamic.
Very few customers relatively at very large average revenues and we're seeing some.
Timing impacts if you will as we prepare these quarterly metrics, we're going to continue to analyze them and make sure they're as helpful as possible, but taking a step back I mean, this is a way for us to try to characterize a customer a revenue per customer and an activity a churn rate.
Cros.
Our subscription revenue base, that's characterized by many many different types of customers. So there is a lot going on in there that said I do think just to give you. The simple answer to your question now that we have a full quarter of lucid and there the numbers should begin to settle down relative to the quarters without it.
The other impact is the relative growth rates.
The consumer oriented subscriptions like lucid versus the non consumer oriented subscription to lose it business is on a nice trajectory and so if the overall mix of subscribers starts to weigh more towards lose it you will see that show up in the average revenue per subscriber, but then you'll also see that show up.
In terms of total revenue and then just one thing on churn churn is revenue based I think what Brent pointing out it's not customer account base. So.
Any kind of simple movement of the contracted <unk> glass.
And that goes from one quarter to another can influence that and we did have that in Q3.
Great. Thanks.
Thanks Jade.
Thank you and the next question is coming from Jon <unk> from CJS, John Your line is live.
Yes, hi, good morning, it's Pete Lucas for Jon.
You guys covered a lot just one question on the cyber security business, you mentioned optimistic about your ability to grow there can you provide us with any update on the programs that will help drive growth going forward and where you expect to see some traction in the near term.
Sure. So look from a product point of view as I Might've mentioned in our last call.
We're looking to rollout.
Some some features.
On.
In Q1 that we think are important features.
<unk>.
Our b to B endpoint disaster recovery piece of the business. So we're excited.
For that we have also.
<unk> much gone through an entire change in the sales and marketing organization from leadership on down has been quite a significant amount of turnover as we move to a channel first.
Model within within the Viper group, our cyber security business and then I think.
We've brought on a bunch of new distribution partners in the channel now this is going to take time and I've said. This before these are businesses that you don't particularly subscription business, particularly cyber security businesses, where unless.
This is someone coming to the cyber security market for the first time, you generally dislocating someone else and these are really sticky implementations and this is a sticky space, which is why I think people like it but it's also why it will take some time for us to generate what we believe can be some really good growth. The only other piece I will add which is <unk>.
Stink, we call cyber security it includes.
Endpoint. It includes E Mail security includes security awareness training in those three kind of go together really well often shared customers lots of bundling and cross selling opportunity the thing that sets apart from that as the VPN business, which is our privacy business, establishing a privacy tunnel largely for consumers and that's a part of that.
Business that when we initially got into it was a great growth engine for the company really hit on what consumers were looking for it is become a much more competitive space. There's been a fair amount of adventure that's gone into it thats allowed some of our competition frankly outbid us on marketing.
Our pay on bounty based and customer acquisition programs and that we've suffered from we haven't tried to compete in that world I think its defeat denominate, we don't like the CAC to LTV. So what we've really got to do it.
Is innovate from a customer acquisition point of view or see some more sobriety kind of return in terms of what people are willing to pay for customers. What competitors are willing to pay per customer so a little bit of a different dynamic also.
A work in progress, but again, new leadership, new ideas and new product. This reminds me of where consensus was when I first took on the CEO role of the company and said you know if we can dial a few of these pieces it could be a really attractive growth story.
Very helpful. Thanks, I'll jump back in the queue.
Thank you.
And once again, ladies and gentlemen, if you wish to enter the Q&A queue. Please press star one on your phone at any time.
The next question is coming from Sean Patil from Sig.
Your line is live.
Hey, this is Aaron on for Sean Thank you for taking our questions.
Maybe just one more on the M&A strategy. Thanks for all the color. So far are there any categories, where the M&A environment looks particularly attractive right now and could you also talk a bit about the opportunity for potential larger acquisition and a new category.
And then secondly, just wanted to ask about the Opex declines, we saw that sales and marketing and R&D came down meaningfully sequentially and year over year can you dig a bit more into what's driving the declines there is it mostly the head count declines or is there anything else to call out. Thank you.
Yes, no. Thanks, Aaron so so to take your first set of questions just on an M&A.
Obviously anyone in the advertising ecosystem is feeling this and those that were quick to respond.
You may feel currently under capitalized on probably the most target rich.
Types of acquisition.
At the same time, what I would say is that I think.
Those that have predicated their AD business is more on interest based advertising and AD targeting which as we know through changes being made in the Apple ecosystem that humming deprecation of the third party Cookie has put that whole segment of the digital media and AD market.
<unk>.
In sort of.
Tenuous space, So we see opportunities there and the trick is do we think those models can transition to a more first party contextual and data driven type monetization, which is what we specialize in so I would say we're looking at those at the same time I will say that we are very interested.
And companies that are actually weathering. This storm like we are well and those types of companies that are proving their resilience that can grow earnings in an environment. Like this are really interesting to us. So to me. It's both sides of that coin as for larger deals look I wouldn't say that.
Anything's changed in our view, which is we tend to spread our capital around we tend to look to feed a number of our different verticals and business unit, we have a general bias toward feeding our existing platforms versus creating new platforms, but we're always open to a new platform or level.
Conviction that just needs to be really high because if we're going to make concentrated bets in the size of the company then we need to really be confident in the ROIC that we're going to see from that particularly in an environment.
Like this that is somewhat of a capital constrained.
The environment.
On the cost side I would say that largely it is head count as I mentioned about 40% of the company's expenditures are in head count and we've been managing that really really well and we're going to continue to manage that well we have looked at nonproductive marketing and dialing back what we view it.
Nonproductive marketing that isn't generating the kind of CAC LTV.
That we'd like.
Yes.
I would reiterate that the clear.
On a sequential basis and even on.
For those categories, it's clearly the head count in our efforts of managing the cost base in an environment, where revenue is precious but I'd also point out and I am assuming you are focused on the pro forma but obviously in the year over year comparison, if youre looking at our GAAP P&L, we still have an impact of the divestitures from 2020.
One which factors into some of those line items, but with regards to this year, it's really our cost focus and managing our expenditures relative to our revenue opportunities.
Very helpful. Thank you very much guys.
Thank you.
Thank you and the next question is coming from <unk> <unk> from Evercore ISI shall I tie your line is live.
Thank you for taking my question.
Thank you have.
This is a high level question, you have relationships with larger advertisers in a pretty good sense of where the sentiment is at a high level.
Any any thoughts on.
What.
Advertisers and agencies are thinking in terms of win.
The sentiment change or are we thinking Q1 Q2 of next year.
And what are you hearing from from those folks. Thank you.
Sure.
It's the question.
And I would say that I think it's human nature for many to say that it's around the quarter and I've heard that but I heard that earlier this year about the present quarter I hear about sort of returns in Q1 Q2, some say back half I think the reality is no one knows.
And I think the more important point is that we are operating from the point of view that we are not going to rely on a market recovery in the near term, we're going to manage the business as well as we can we're going to focus on driving earnings growth building, our balance sheet being <unk>.
Very smart about our precious capital and just expecting the macroeconomic environment to remain unchanged not because we know that to be true, but I think it's the only responsible way for us to manage our business when the market starts to recover we will be at a very strong position because what I've also said is.
We're bringing in new talent, we're feeding opportunities inside the company that we think have promise and so its an allocation.
Possibly a reallocation of our resources that were very very focused on and that's one thing I am proud of I am proud of the fact that we continue to generate EBITDA growth we've done it three successive quarters.
Obviously, our guidance for Q4 implies the same look we're talking about.
Mid single digit organic decline for the company in revenue with a high single digit earnings growth.
Reality, which I think is that is not easy to do.
I think for any business I, certainly don't think it's easy to do for media businesses, which can have gross margin flow through impacts. So look I think all the same I wish I could tell you I wish the crystal ball to tell you a date certain quarter certain when things are getting a return but in some ways I think in an environment like this.
Towards us the opportunity to.
<unk> really put capital to work I think in ways that are going to be ample supply from a returns point of view a few years down the road. So no one likes it but I would say we are built for this.
That makes us one of the only thing I'd add is it's also sectors and subsectors. So the biggest impact to the company. This year has been tech and we all see what's happening in the tech market.
There's a lot of negative commentary about human capital and lay offs from some of the big players, but I feel pretty comfortable saying that if we were going to take a multi make a multiyear bet betting on tech.
It seems to make sense, it's one of the strongest parts of our economy overall clearly not at the moment, our gaming business is largely tied to release cycles and on a quarter by quarter basis, If we see more.
More releases more quality releases delays pushes it is going to impact and on our health and wellness advertising business, it's been a mix.
Consumers been hit.
This year, while pro our professional businesses performed better than a lot of that's tied to specific decisions by large advertisers, particularly pharma. So I think overall the advertising environment has been a headwind in in a meaningful way, but it's not consistent in every aspect of our advertising business.
That makes sense, thanks, Brian Thanks Vivek.
Thank you.
Thank you and there were no other questions in queue. At this time I would now like to hand, the call back to Bret Richter for any closing remarks.
Thank you Paul we appreciate you all joining us today for our Q3 2022 earnings call our upcoming conference participations detailed on our Investor Relations website, we hope to see some of you were.
Where we participate and thank you all and have a good day.
Thank you ladies and gentlemen, this does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.
Goodbye.