Q4 2022 Ziff Davis Inc Earnings Call
Thanks for holding we appreciate your time and patience. Please stay on the line and we'll be back in just a moment.
Okay.
[music].
Uh huh.
[music]. Thank you for holding we sincerely appreciate your patients stay on the line and we'll be back in a moment.
Good day, ladies and gentlemen, and welcome to the Ziff Davis fourth quarter and year end 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.
On this call will be Vivek Shah CEO of Ziff Davis, and Bret Richter, Chief Financial Officer of Ziff Davis.
I will 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 Q4 and fiscal year 2022.
As the operator mentioned I'm, Bret Richter, Chief Financial Officer of Ziff Davis, and I am joined by our Chief Executive Officer, Quebec shot.
The 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 Dot com.
In addition, you'll be able to access the webcast from this site.
After completing the formal presentation, we'll be conducting a Q&A. The operator will instruct you at that time regarding the procedures for asking questions. In addition, you can email questions to investor at 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 could cause actual results to differ materially from the anticipated results.
Some of those risks and uncertainties include but are not limited to the risk factors that we have disclosed in our SEC filings, including our 10-K filings recent 10-Q filings various proxy statements and 8-K filings as well as additional risk factors that we've included as part of the slideshow for this webcast.
We refer you to discussions in those documents regarding safe Harbor language as well as forward looking statements.
Now, let me turn the call over to Vivek for his remarks.
Thank you Brett and good morning, everyone.
These are challenging times, particularly for businesses in the digital media and advertising market.
Our strategy in this difficult environment is uncomplicated.
First focus on earnings and mitigating risks in the portfolio.
Second invest for organic growth to the careful reallocation of resources and costs.
Third.
Tract and retain the best talent in our markets.
And fourth.
Can you to build our balance sheet. So that we're in a position to acquire highly accretive in quality assets.
For the fourth quarter, we grew our adjusted EBITDA by over 4% notwithstanding a nearly 3% decline in revenues.
For the full year 2022, we grew revenue, excluding our divested assets by 1% and adjusted EBITDA by nearly 5%.
We're proud to have generated revenue growth in this climate, while also expanding our adjusted EBITDA margin by nearly 150 basis points.
While we experienced an organic revenue decline in Q4.
That was consistent with what we experienced in Q3.
We take some solace and the flattening of organic decline.
Particularly in the fourth quarter, which represents the largest quarter of our fiscal year.
I'll discuss our 2023 outlook in a moment, but let me provide some texture around our Q4 and fiscal 2022 results.
Advertising revenues declined by 8% in the quarter.
I've described in previous quarters, it's always useful to unpack this by category.
Our gaming vertical which has been a bright spot for most of 2022 saw a mid single digit decline largely due to the delay in the release of AAA titles.
And the shopping vertical we were pleased to see that retail me not grew low single digits. Following up of Q3 that was flat.
Where we continue to see decline is that our smaller offers dot com property, which as I said in our last call. We think can be addressed by allocating some additional resources.
Our health advertising business was down low single digits as the typical high volume of Q4 buying.
Did not materialize as in prior years.
The bright spot is that we're seeing some green shoots in both our consumer and professional pharma AD businesses with 2023 add upfronts up high single digits year over year.
As has been the case for the entire year. The Tech category continues to be our biggest challenge, where we saw yet another double digit decline.
This sector continues to present challenges for us, but as I said last quarter. This is a cycle that will need to play itself out and we believe having diversification across multiple categories, including shopping health care Tech and gaming and entertainment is a competitive advantage.
Subscription revenues grew over 4% in the quarter, we continued to see very strong growth out of our connectivity business with revenues up strong double digits to organic gains and the benefit of the root metrics acquisition.
Connectivity has been a consistent total and organic revenue grower over the last eight years as we believe we have carefully assembled a category leading roster of brands and capabilities and the broadband services market.
Our tools and products are designed to be instrumental in the ongoing development of digital infrastructure and helping individuals and businesses access connectivity solutions to meet their growing needs.
We have made nine acquisitions in the space, including Uccle, ACA, how down detector and root metrics, establishing us as a worldwide leader in network intelligence.
Network design development deployment and optimization and connectivity insights.
It's why we recruited a fantastic new precedent Stephen bye to lead it.
Stephen is a broadband and wireless industry veteran having served as the chief commercial officer of dish network.
And where he was recently appointed to its board of directors.
Also president of C spire.
Chief Technology officer of sprint.
And in senior roles at Cox and AT&T.
Steven is widely known and respected in the industry and possesses a rare combination of highly technical engineering skill.
With very strong business and financial acumen.
He has been instrumental in the development and deployment of dishes Standalone five G network.
He has had success at public multinational telecommunications companies as well as that growth oriented private companies.
We're very excited to see Stephen take our connectivity business to the next level.
Our cyber security and Martech businesses had a challenging Q4 with a close to 10% decline in revenues.
Approximately two percentage points of decline was driven by less favorable FX rates versus Q4 2021.
For the year, excluding the divested businesses the business was essentially flat in revenue and up nearly 12% in adjusted EBITDA.
So while we believe we've done an excellent job in growing our bottom line. We continue to have challenges on the customer acquisition front, mainly in direct to consumer cyber security solutions.
We believe we made good progress on this front in Q4, launching our new subscription buying experience on IP vanished Dot com.
With localization new payment options and other enhancements that should help us acquire customers, especially outside of North America.
In our <unk> cyber security business.
Our new sales or start to hit its stride in Q4.
With some nice logo wins for email security offerings.
Just a word about margins.
Obviously, we saw strong margin expansion in 2022.
We were very conscious about head count throughout the year.
We managed our head count down by over 10%.
While we did execute a reduction in force in Q4 more than half of the 2022 FTE reduction was achieved through managing natural attrition.
Doing so allowed us to manage expenses in a manner that wasn't disruptive to the company and further demonstrates that we work hard to not be surprised are unprepared by market shifts.
Notwithstanding our focus on managing head count and costs, it's important to point out there were continuing to hire where we see promising returns and we do plan to continue hiring for key positions in 2023.
There are too many attractive growth opportunities in the company than.
And we want to be sure to pursue.
For instance, in our health and wellness vertical we are leveraging our content creation expertise to build top of funnel qualified traffic to our DTC businesses like lose it.
At our healthy careers job listings business, where we connect hcp's with top health care employers.
We're building a rapidly growing nurse recruitment business alongside our long standing Doctor recruitment business.
And our shopping vertical we're seeing great unit economics with retail me not members, who engage in our cashback offers and install our browser extension.
And Martech, we believe we can unlock value for email marketing customers by leveraging delivery and engagement signals to drive better campaign performance.
And cyber security, we have a growing email security business and with the opportunity to grow this business in new markets and with larger customers and channel partners.
As we think about 2023 we anticipate that the organic growth declines we experienced in the second half of 2022 will continue into the first quarter and then start to improve sequentially, particularly as we get into the second half given the benefit of lower comps.
While it's very difficult to call the bottom in declining markets, we feel that we might be there based on some green shoots.
We're seeing in the business.
We do have some revenue benefit from prior year acquisitions as well.
So from a full year perspective, we could see total revenue growth of about 1%.
But if current challenges persist into the second half than.
And then we could see total revenues decline by low single digits.
I should also point out that we're not including any prospective acquisitions in these estimates, which depending on the timing and scale could represent some meaningful upside.
With respect to our adjusted EBITDA margin, we're confident in our abilities to match 2022s 36, 5% margin at the high end of our range.
Towards the bottom end of our range, we would anticipate margins narrowing by 100 basis points given the high flow through nature of much of our revenues and given our commitment to continue to fund future growth.
We finished 2022 with over $800 million of cash and investments and a ratio of two times gross debt over EBITDA.
Our powder is dry.
We have been patient and.
In fact, we didn't acquire a single asset in Q4 of 2022.
The last time that happened was Q2, 'twenty 'twenty, which was the onset of COVID-19.
But that didn't last long as we deployed nearly $500 million over the remainder of that year.
We are currently very active.
Looking for opportunities at each of our seven platforms Tech gaming shopping connectivity health cyber security and Martech.
As well as acquisitions that could represent an eighth platform.
Finally, let me provide you with an update on our ESG efforts.
Last March Ziff Davis committed to setting emissions reduction targets with the science based targets initiative.
Known as SP Ti.
S. P T I defines and promotes best practices in near term science based target setting and.
And I'm pleased to share that in November we formally submitted our targets to S. P T I for validation.
This is exciting because we are committing to comprehensive scope, one two and three emissions reduction targets.
And we will be working over the next several years to meet them.
In addition to being a leader in the zero carbon transformation, we remain committed to being a workforce of engaged and compassionate citizens.
And the work we've done to date, our commitments and our prioritization of ESG is beginning to be recognized.
In late December MSCI re rated Ziff Davis, giving us a double E, which they deem a leader and up a remarkable four ranking levels.
I S. S has also given us their top score of a one in both their social and governance quality scores.
I continue to be incredibly proud of the work Ziff Davis has done and continues to do in the area of ESG.
Now, let me hand, the call back to Bret.
Thank you Vivek, let's discuss our financial results.
Our earnings release reflects both our GAAP and adjusted financial results for Q4 and fiscal year 2022.
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 fiscal year 2021, GAAP financials through their respective data sale. However, these divestitures do not impact the presentation of our Q4 or fiscal year 2020 to GAAP results.
Our earnings release also reflects adjustments for the removal of the results of these 2021 divested businesses explanations for and reconciliations of these adjustments are provided in the release.
On October seven 2021, we completed the spinoff of consensus our fiscal year in Q4 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 Q4 2022 adjusted financial results from continuing operations and our comparisons to prior periods, which exclude the contributions from consensus business for the 2021 period prior to the spinoff as well as the divested businesses.
Yeah.
Now, let's review the summary of our quarterly financial results on Slide four we reported revenue of $396 $7 million for the fourth quarter of 2022 as compared with revenue of $408 $6 million for the prior year period, reflecting a decline of 2.9% although there was.
Some improvement during the fourth quarter and the value of certain foreign currencies FX negatively impacted the Q4 year over year growth rate and if the comparable 2021 currency values were applied towards 2022 Q4 results revenue would have declined by approximately 1.3%.
Adjusted EBITDA from continuing operations was $168 $3 million for Q4, 2022, as compared with $161.6 million for the prior year period, reflecting growth of four 1%, which would've been five 5% when adjusted for FX.
Our adjusted EBITDA margin for the quarter was 42, 4%.
We reported fourth quarter adjusted diluted EPS of $2.26. This figure reflects a three 7% increase as compared with our Q4 2021 adjusted results.
Turning to slide five for our fiscal year 2022, total revenue grew 0.6% to 1.391 billion as compared with 2021 revenue excluding divested businesses adjusting for the year over year impact of FX revenue grew two 2%.
Adjusted EBITDA grew 4.6% to $507 $2 million as compared with fiscal year 2021, adjusted EBITDA, excluding divested businesses and we had a 2022 adjusted EBITDA margin of 36, 5%, excluding divested businesses adjusted diluted EPS.
<unk> grew seven 1% to $6.65 as compared with 2021 adjusted diluted EPS.
Overall 2022 was a challenging year for the global economy, and specifically the digital media marketplace. Despite various headwinds, including FX, we were able to report growth in revenue adjusted EBITDA and adjusted diluted EPS.
On slides six and seven we have provided performance summaries for our two primary sources of revenue advertising and subscription as you can see on slide six Q4, 2022 advertising revenue declined by 8% as compared with the prior period 2022 advertising revenue declined by 6% as compared with 2002.
One 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 92% for Q4 2022 also reflecting the recent pressures on digital advertising revenues, including <unk>.
<unk> as defined in the slide in the fourth quarter Ziff Davis had 2044 advertisers within average quarterly revenue per advertiser of more than $118000, a similar figure to the comparable Q4 2021 metric.
Slide seven depicts our subscription revenue performance Q4, 2022 subscription revenue grew 4% as compared with last year's performance and was again negatively impacted by FX subscription revenues grew 9% during the last 12 months as compared with the 2021 subscription revenues.
Excluding divested businesses.
The table on the bottom of slide seven includes subscription metrics for the last eight quarters sequentially total subscription customers were essentially flat, primarily reflecting growth in media subscriptions offset by a decline in our VPN subscribers.
Sequentially, our average quarterly revenue per subscriber declined by 1% to $46.33.
As noted on our prior call since Q3 2022. These metrics reflect the inclusion of a full quarter of our recent acquisition moves it which is characterized by a significant number of monthly subscribers at a significantly lower average revenue than the average of our other subscription businesses overall the app.
<unk> of lucid has significantly raised our number of subscribers and lowered our average quarterly revenue per subscriber as compared with the prior year period.
Our overall churn rate increased 26 basis points from Q3 2022.
Two 3.81% this increase reflects a number of factors, including the impact of lower value promotional holiday bundles sold by humble bundle in November which were not renewed in December and higher VP and churn.
Additionally, the company's Q4 2022 other revenues grew just over 30% year over year to $14 $4 million driven by sales of ACA House, New sidekick, too, which was launched in Q3 2022.
Slide eight provides quarterly organic and total revenue growth rates, which exclude the impact of the divested businesses in the relevant 2021 periods 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 is known.
Earlier 2022 total revenue growth, excluding divested businesses was 1% again in part, reflecting FX headwinds fourth quarter 2022 organic revenue reflects a 7% decline were minus 6% adjusted for FX.
Turning to our balance sheet, please refer to slide nine.
Our balance sheet is strong.
As of the end of Q4, 2022, we had $653 million of cash and cash equivalents and more than $186 million of short and long term investments.
We also have significant leverage capacity, both on a gross and net leverage basis.
As of the end of 2022 gross leverage was two times trailing 12 months adjusted EBITDA and our net leverage was <unk> seven times and only 0.3 times. If you include the value of our financial investments.
During Q4 2022, we continued to monetize our stake in consensus showing 74000 Ccs shares for gross proceeds of $4 $5 million as of December 31, 2022, we held approximately $1 1 million Ccs Ishares and we will continue to be opportunistic with regard store model.
Sensation efforts as a reminder, we have until October 2026 to complete the disposition of our Ccs I stake.
During 2022, we deployed capital to repurchase approximately $181 million par value of our four point, 65% senior notes and more than $71 million of our common shares we did not repurchase additional senior notes of common shares during the fourth quarter.
As noted on prior calls we place a high value on the health of our balance sheet. We believe that this positions us strongly to continue to pursue M&A investments and other capital allocation alternatives, while we did not close any acquisitions during the fourth quarter, we remain highly active and continue to manage a robust pipeline of M&A activity.
<unk>.
During 2022, we deployed $120 million of capital in support of current and prior period M&A activity.
Turning to slides 11, and 12 I'd like to provide a few additional details relating to our guidance range.
As we have discussed on this call and prior calls the current operating environment remains challenging global macroeconomic pressures continue to weigh on the purchasing decisions of our largest advertising clients and the consumer continues to navigate the pressures of inflation and rising interest rates our businesses experience the impacts of these and other factors in 2012.
<unk> two including the change in FX rates and our organic revenue declines were higher in the second half of 2022 as compared with its first half.
Our guidance for 2023 reflects both the carryforward impact of our 2022 results in a measured view as to how the macro economy could stabilize in the second half of 2023.
The high end of our guidance range for 2023 revenue adjusted EBITDA and adjusted diluted EPS reflects growth rates of approximately 1%, 1% negative 2% as compared with the unaudited results we present today.
The low end reflects declines of approximately 3%, 6% 9% respectively.
Our EPS guidance reflects the adjusted EBITDA range as well as higher interest income on our cash balances lower interest expense higher depreciation from our recent investments and acquired assets and slightly higher taxes, each as compared with 2022. It also reflects the absence of the $8 million.
Other income benefit that we reported in 2022.
With regards to certain details underlying this guidance in 2023, the midpoint of our guidance reflects a low single digit percentage decline in advertising revenue subscription revenue growth in the low single digits and other revenue growth of mid single digits year over year.
The midpoint also reflects a low single digit revenue decline in Q1, and Q2 2000 and twenty-three with revenue growth expecting to turn positive in the second half. This in part reflects the comparison of our relatively stronger Q1 and Q2.
2022 results as well as the assumption of some stabilization of the economy as we approach the end of 2023 given.
Given the seasonality of our digital media properties and the impact of our second half 2022 operating performance, we anticipate that roughly 20% and 30% of our revenues will be in the first quarter and fourth quarter respectively.
At the midpoint of our range the company expects to have an adjusted EBITDA margin of approximately 36% for the year.
We have slightly widened the range, where our projected tax rate to an annual rate of between 23 and 25% note. These rates are expected to fluctuate quarterly.
Additional details related to our share based comp than anticipated share count are outlined on the slides as well.
As noted last quarter, we experienced revenue pressures throughout 2022 as compared with our initial expectations. However throughout 2022, we focused on managing costs and as a result, Ziff Davis delivered adjusted EBITDA and adjusted diluted EPS growth despite revenue pressures as we.
Begin 2023, we will continue this focus on managing expenses as we navigate an uncertain operating environment.
Following our business outlook slides of our supplemental materials, including reconciliation statements for the various non-GAAP measures to their nearest GAAP equivalent.
This section includes a reconciliation on slide 16 that reflects free cash flow.
Our 2022 free cash flow was $233 million.
Note as highlighted on our last call our fourth quarter is typically a seasonally stronger quarter for revenue and adjusted EBITDA, but also typically reflects lower free cash flow conversion rate as a significant portion of our Q4 revenue is expected to be collected in Q1 2023.
This fourth quarter also reflects significantly higher cash taxes as compared with the prior year period, certain other cash uses including M&A and severance expenses and a higher use of working capital as compared with 2021.
With regards to working capital. This fourth quarter was also a bit atypical we are finalizing the migration to a new financial ERP system as part of this migration, we accelerated certain vendor and partner payments in the fourth quarter of 2022.
This negatively impacted cash flow in the fourth quarter.
We also anticipate that our customer invoicing cycle in Q1, 2023, which contains our seasonally strong fourth quarter revenue will take slightly longer to complete potentially delaying certain Q1 accounts receivables collections.
These are timing issues that impacts short term free cash flow.
Overall and importantly, we continue to believe in the strong cash earnings potential of our business, while our 2022 free cash flow as a ratio of adjusted EBITDA was less than 50%. We continue to target a conversion rate percentage for our core business in the mid to high fifty's, excluding certain non-GAAP cash expenditures M&A payments.
And other discrete uses of cash.
Finally, as a reminder, our 2021 free cash flow reflects contributions from both the 2021 divested businesses as well as consensus and as a result is not comparable to our current continuing operations.
Overall, we are proud of our 2022 performance having achieved growth in a number of our key financial metrics. Despite the macro environment with that I would now ask the operator rejoin us to instruct you on how to queue for questions.
Thank you.
As a reminder, slides for today's event can be viewed at www Dot Ziff Davis dotcom.
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.
Confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to be if you would like to remove yourself from the queue for.
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 Chouette Tech as urea from Evercore ISI.
<unk> Your line is live.
Okay. Thanks for taking my question Vivek.
You mentioned in your prepared remarks that in Q4, you are seeing flattening of decline so perhaps if you could comment on.
How what kind of trends did you see through the quarter as the quarter.
Went through from October through December and then what Youre seeing so far.
Yes.
Mid February this year.
You also commented on it.
Sure.
That's the question, yes, what do you mean by flattening of decline and then what green shoots how are you seeing right now.
Thanks for the question <unk>, so with respect to <unk>.
Q4 <unk>.
I think we had at least with the shopping business in particular retail me not as I mentioned, some slight growth, which I think would helpful and offsetting some of the pressures we add in technology and as I also pointed out.
What we typically see in health advertising in Q4 is a pretty significant release of budgets that didn't really take place in Q4 now as we think about 2023.
I am cautiously optimistic is early of the advertising business, where we have more than a near term view that's really in the health business. So in the health business. We have what are called upfront, where we are booking programs in advance for the remainder of the year. It is relevant.
Because the health category for US is 40% of our advertising revenues, so with with respect to that 40%.
Mentioned on the prepared remarks, we are seeing.
Single digit increases year over year on bookings and we feel good about that if the shopping vertical also maintained.
Modern come up growth, that's the second largest AD category. So those are those are the pieces that give us.
Some foundation for cautious optimism as we as we enter into 2023, obviously a lot depends on the general operating environment and climate, but right now we feel that in fact, we have hit stability and things should improve from here on out.
Okay. Thanks, and if I may add one more question. Please any comment on the overall M&A environment you mentioned.
Very active but any thoughts on timing or opportunities.
Yes look I think again the activity that I referred to is really a function of our approach to how we source deals and we do it across all seven of our platforms and we do it at the corporate level to see you've got eight organizations inside of the company who are all actively looking at opportunities to really create a pretty significant.
The pipeline, that's not new that's what we've always done but it ensures that we see.
And right now our focus is great businesses at fair prices. We do believe the market is rotating towards that point of view and I think that we will be active this year I can't give you.
Specific timing, obviously at this point, but we do see a lot and I think a lot of sellers view us as a great home because they also look at our balance sheet as often they have opportunities that they're looking to acquire and add to their businesses and so I think for a variety of reasons I think we're and attract.
And place for a lot of businesses.
Okay. Thanks Vivek.
Thank you.
Thank you. The next question is coming from Sean Patil from Sig Xiaomi Your line is life.
Hey, guys. This is Jared on for Sean Thanks for taking the question.
Thanks for all the color that you've provided around top line and potential pacing as we roll through the year as Youre thinking about the bottom line is there anything that you could share with us on pacing there, maybe how youre thinking about opex growth through the year, if that might pick up a bit as do you expect the second half.
<unk> two.
Improve a bit in that.
Got one more after that if that's okay.
Yes, so I'd, just say with respect I'll, let Brent jump in here in a moment I think with respect to margins as we said look I think the margin expansion. We experienced in 2022 I think was quite remarkable when you consider the organic decline that we suffered right close to five points or about five points in the year and so that often is very.
Punitive from a bottom line point of view. So the fact that we were able to drive bottom line growth notwithstanding organic revenue pressures I think is a great statement around how we had I think really optimize the cost base that will continue into next year, having said all of that we are investing in the business that the capex level at the Opex level and we're going.
We continue to do that because we see a lot of growth opportunities.
I listed a few of them during the prepared remarks. So we're going to continue to do that so we're not going to overly precious about it but to me. We're in as we say I think in the guidance of 35% to 36, 5% EBITDA margin range I don't know, Brad if there's anything you'd add to that sure yes.
We're just being thoughtful with regards to our spend as we traffic through 2022, we obviously uncovered pressures at various points in the year and we slowed our spending we talked about how we had operating expense savings with regards to our employee base, mostly through just natural attrition.
<unk>, we did take a small action at the end of the year. What we wanted to do is find a balance of <unk>.
Allowing each of our businesses to pursue opportunities in the marketplace, but and fund those pursuits, but funding with the degree of confidence rather than hope so as we see the marketplace being more receptive.
The spending in the case of advertising to grow through the case of subscriptions, we have $1 there to fund those opportunities, but we're being thoughtful about when to spend them.
Great. Thank you and then maybe a broader picture question in the past we have discussed the longer term shift towards zero clicks their agenda.
<unk> back given all the recent generative AI developments, how are you guys thinking about that at best point and what type of impacts might we be able to expect on your digital media properties in particular.
Eddie I think you're specifically asking if generative AI turning to search engine to answer engines and fair answer engines will we get there is that essentially the question.
That certainly acquired the question and then just any broader impacts that you might expect from that as well.
Yes, so look I think from a traffic point of view.
Depending on whatever the underlying algorithms are of any search experience I believe every of the search operators, whether it's Microsoft or Google understand that the underlying content providers need to get value and that value as expressed in traffic flow and I don't think thats going to change.
The engines they use in the algorithm.
Algorithms they use rough find the answers I think properties like ours, who can provide I think the highest value of intellectual property in that in that equation will do best So I don't I don't view the evolution of search engines, our answer engines or whatever you want to call them as being anything but really positive for high quality.
Content providers, who provide the underlying information.
For that for that.
Great. Thank you.
Thank you.
And the next question is coming from Cory Carpenter from J P. Morgan.
Corey your line of life.
Hey, thanks for the questions.
I had two maybe first for you.
And that kind of volatility in the AD market, but just kind of stepping back how do you think about the right level of longer term growth and margins for the business.
Is your view changed here at all.
And then secondly connectivity been a big bright spot for a while but it's also kind of hidden within the subscription segment could you just help frame how big this business is or maybe what its margin profile looks like thank you.
Thanks, <unk>, so look I think with respect to the advertising market in terms of long term growth rates and margin profile. My views are unchanged I continue to be bullish on the AD market I continue to be bullish about the categories. We're in and then the types of AD solutions, we can provide which as you know our performance.
And so I think if we took a non linear view on our advertising business into a multi year view you'd actually see that it is not inconsistent with the kind of growth rates that we're looking for which we've talked about as a company. We look forward total growth of 15% top and bottom line with a mixture of half and half roughly of organic and inorganic so our views.
Round two.
Market growth rates for the company in the advertising business around that are unchanged, we've been through cycles before I've been in the advertising business now coming on almost 30 years I've seen it and the pendulum swing and so nothing changes in terms of my views there with respect to connectivity, obviously, we don't break it out.
As a business unit, but I will tell you that I am incredibly excited with the addition of Stephen by as I described a little bit on the call. His background is sensational. He is a very well respected respected established and no name within the telecom and <unk>.
<unk> band and wireless industries generally I think this was a.
This was an announcement in that industry that that got a lot of attention.
And a lot of inbound calls as to things that people can do with us and understanding the broader range of our connectivity businesses. It has always been a growth engine for us, but I think it will continue to be even more so it does operate at a very high percentage margin.
Higher than the average of the company and as a growth rate that is higher so is eight whatever rule. It is at the high rule of something and I think that'll continue.
And then I think with Stephen I think it's going to get to the next level and I think when that happens we'll have a lot of interesting option.
Alright, thank you.
Thank you.
The next question is coming from Ross Sandler from Barclays. Ross Your line is live.
Hi, This is Joey penetrating answer Ross. Thanks for taking the question. So a follow up on the generator AI question could you kind of talk about how chat GTT type products could lower the cost of editorial content on the advertising business and then if I can squeeze in a second question. Thanks for the breakout of category perform.
Within advertising.
And <unk> any call outs to categories that are especially stronger week in <unk>, whether that's historically or what you've seen this year. Thanks again.
Sure So with respect to AI I think we look at it in two ways. One is what you described which is generative AI AI technologies to assist in the creation of content and when you think about the editorial workflow there are a lot of elements to it from from.
Nation of story idea to assignment of story to outline a story to drafting of story to copy editing of story I, certainly believe that artificial intelligence.
A role in parts of that editorial workflow and we've been using it and we'll continue to use it.
Will say, though that I think for high quality content generation human plus artificial intelligence I think yields the best outcome. So I think that.
The answer to your question is that generative AI will allow us to produce more better content over the long term, it's a productivity gain more than anything else, which we're excited about and we currently used and have been using the second part of AI, which is as if not more exciting from my <unk>.
A view for our company is how you can take AI model. So right. Jack GPT is an AI model and how do you then train it on proprietary data the experiences. We're all seeing right now are training AI model on non proprietary broad acceptable data AUC.
The power of that imagine no training AI models on proprietary datasets not available to others and I think a three datasets within our company that are very relevant to the discussion. The first is the connectivity data set the data center.
And that family of businesses as you know that this is a data business the ability to use AI to generate even greater more frequent and acceptable insight I think it a big idea.
Do you think about our retail me not in shopping business, we have a multi merchant.
View into shopping behaviors shop shopping traffic pattern. So from a shopping insights and analysis point of view analysis point of view training AI models on that proprietary dataset is compelling and then our mod business as a third example.
Hits on a universe of SCO data that is that is very valuable and in fact has already been licensed.
The basic the largest AI model, we've all heard of have licensed months' data already so we are actually in the business and we think that had long term an interesting potential for both generative AI and proprietary data that AI models can be trained up.
Thank you and the next question is coming from James Breen from William Blair. James Your line is live.
Thanks for taking the question can you talk a little bit about the subscription business and what Youre seeing there obviously, we've seen that the quarterly revenue per sub coming down over the last couple of quarters churn was up a little bit but.
Where are you gaining and losing subs are across several different businesses.
Yeah, I mean, I think look Jim I think in the subscription business on the upside our connectivity as we described continues to be a bright spot for us on the downside has been cyber security principally and thats been in our direct to consumer business and that is largely our VPN business is.
Thank you.
As we've described in the past, we find customer acquisition in the VPN space challenging the CAC LTV equation continues to abate us it's not profitable from from our point of view, we do run a high margin VPN business, probably in contrast than maybe others in the space One thing I am optimistic about and I mentioned on the prepared remarks.
Is that we have improved our buying experience and principally taking foreign currencies.
Foreign language and including other payment options that should allow us to start acquiring outside of North America. Most of the consumer VPN market is actually outside of North America, yet the majority the vast majority of our business is inside North America. So we have been geographically.
Disadvantage because we haven't we didn't have the buying experience that appeals to those outside of principally the United States. So we're hopeful that that can help overall buying experience. We continue to test different sources of customer acquisition to try to find a CAC LTV equation that can work front I'll also point out of the part of the company.
That has had the most FX headwind. It has also been within the cyber security and Martech segment.
And Jim the only thing I'd add your comment about some of the trends is just a reminder that these are.
Sort of an amalgamation of a consolidation of different businesses across the company on an inorganic basis and if you look at the.
Number of subscribers and the average quarterly revenue per subscriber.
In the middle of 2022, we added lose it and moves it is a business within our health <unk> wellness business, it's a subscription business and characterized by a large volume of subscribers at a low average revenue per subscriber. So we brought those into the second quarter for I believe about a month and then in Q3 and Q4.
Four of those were full quarters of that change so that did have a more significant impact on a quarter over quarter changes than really any other effect.
Great. Thanks.
As a reminder, ladies and gentlemen, please press star one on your phone if you wish to enter the queue. Once again, you can still enter the queue by pressing star one on your phone.
And the next question is coming from Egalet Iranian from Citigroup.
Your line is live.
Hey, good morning, guys.
I want to go back.
And then what you buy the pall up with and talked about focusing on organic growth.
Reallocation of resources.
Yes.
The AD market is well understood here at this point.
As we've gone through earnings and heard a lot of commentary.
Can you talk a little bit more about what youre doing and the things you can control.
Maybe how you guys are setting yourselves up.
Benefit better as we rebound in kind of the things that are happening within the organization outside.
Macro.
Yes, no look it's a great question and again I go back to categories, because we do talk about the AD market as a mono lift and as you know it's not a monolith, it's got different pockets and it's got different dynamics in different categories, given that 40% of our advertising business is health and wellness. It is worth really focusing there and thats where.
We believe the solutions, we're building for pharma the nature of the pharma pipeline and farmers embrace.
We targeted advertising away from mass market print and television all benefits us and so we're focused.
Ross the board on ways to create AD solutions for the pharma category I'll also tell you that part of <unk>.
Our farm or health and wellness business is actually recruitment advertising for doctors and nurses and as you may know in the healthcare industry. There is a huge labor shortage, particularly around nurses and so our ability to help.
Health care and health systems find nurses to our platforms into recruitment advertising solutions. As another example, and I think I mentioned that that's our healthy careers business and then in our shopping business, where we've seen really great success is with membership so historically with <unk>.
Tell me not which has had a significant amount and continues to have a significant amount of users who come to the platform, whether it's the website or the app to find a coupon code to then transact and we get compensated on utilization of the code that will continue but our membership business, where it's largely cashback.
As well as the browser extension the unit economics, there are super compelling and so we are investing in improving the product experience, removing friction and sign up and making it super simple and investing in member acquisition. So those are just a few examples of where I think we can control what we're doing.
Wing.
Better position ourselves in in the overall ad market.
Okay. That's helpful. Thanks, and then shifting over to cyber security for a second.
Can you update us on.
On the sales to be up in the new go to market strategy and how that's evolving and if it's starting to improve the trends in results there.
Yeah, no listen in the beta deep part of the cyber security business and I, just want to remind everyone that at the BDC part, which is largely IP vanish and the VPN businesses, where we're having our <unk>.
Significant struggles, but in the <unk> security business, the new sales or starting to hit its stride really in Q4, a lot of nice logo wins for our E Mail security offering we've got a product called <unk> that has signed a bunch of multi year deals with some significant.
Enterprise customers actually we're happy with that we've got some new partners and distributors, both in the United States and in Europe our.
<unk> E mail.
Just overall, the email security business E mail as the leading attack vector and its the primary delivery mechanism for fishing and ransomware and other malware attack and I would say that of our cyber security offerings.
I think our E mail security offerings are the strongest so good progress in B to B.
<unk> decline and think through BDC.
And I think we'll get there I think we will once we find.
A formula that works on the BDC side, I think some interesting things will start to develop.
Cyber scared.
Great. Thanks, so much.
Okay.
Thank you.
Thank you. The next question is coming from Rishi <unk> from RBC Rishi Your line is live.
Oh wonderful.
Alright. Thanks, so much for taking my question I'll keep it to one question.
Which is just drilling a little bit more into the cyber security and Martech business.
Would love to hear a little bit more about kind of what you've seen so far from a macro perspective first simply simplicity sake, we can keep it at the <unk> level.
And kind of strip out the IP vanished business, but what are you seeing so far in terms of churn and maybe even businesses that are just kind of disappearing and maybe more importantly, as we think modeling 2023, what sort of assumptions are you, making from a macro perspective on those businesses. Thanks.
Yes, all good questions I would say that with respect to churn in <unk> cyber security, we don't see much of it is very sticky right once the company installed.
Any of our solutions, they generally stay installed for a while but switching costs and the difficulty.
Can be significant so we don't we don't see it there within Mar Tech because we have a more of an SMB.
Audience. There are some churn dynamics, we're just business failure.
Lead to not needing to do.
Any more email marketing, but what I will say that.
We're excited about from a model point of view is that we.
We're building technology to help our customers build their E mail lists at cash signals to there to there.
E mail initiatives, and so that they're better targeted and getting better ROI integrating demographic data across the larger demographic data management platform of the Davis is basically going to be plugged into our.
Our eye contact and campaigner units, so that they can be more insight.
Into the various customer databases that we have with our customers. So there's a lot of different things I think going on in both cyber security and Martech I think with respect to maybe I'll, let Brent talk a little bit about just subscription revenue in general.
And sort of how we're thinking about guidance and where we think subscription revenue may fall for 2023.
Yes, I mean, we gave some color on that as part of our prepared remarks, I mean, we're looking at subscription revenue as well.
A.
Contributor in 2023 and <unk> <unk>.
Projected growth in the low single digits and I think it's important to kind of almost widen the lens because we've been talking about our b to B go to market approach for several quarters now and it's our it's the timeline sort of on track I could go back to the end of 2021, we should have revision of go to market strategy somewhere around.
The end of the first quarter beginning of the second quarter, we bring in leadership Q2, Q3, we're rebuilding the go to market teams and the actual sort of feet on the street. If you will to reach out to customers simultaneously with upgrading elements of our product said Vivek. Just noted some of those products, we're bringing to market and then as we get into the fourth quarter, we start to see some.
Some of the fruits of that labor.
Beginning to grow and we enter into 2023 with the beginnings of momentum. So we believe if you look across our subscription revenue there are theres a drag with regards to our consumer privacy business, but then we've talked about how excited we are about connectivity.
<unk>, we've talked about some of the momentum that we're seeing.
And b to B within cyber Mar Tech, we're excited about our lucid acquisition, both from a subscription standpoint, but also the ability to expand the revenue base, thereby by adding advertising, we haven't had that business.
Under our leadership for a full year yet.
Contributions from the gaming market there is excitement in our subscription businesses and being a business that is levered to the digital advertising market in the digital advertising market being so sensitive to macro activity. We think it's a very strong positive that a significant portion of our revenue has some.
Subscription characteristics.
Alright, great really helpful. Thank you so much guys.
Thank you.
Thank you and the next question is coming from John Todd One thing from CJS Securities. John Your line is live.
Hey, guys. Thanks for squeezing me in one for you you mentioned getting closer to more and bigger deals in the M&A pipeline and most interesting.
But perhaps an eighth vertical what kind of scale in returns that you need to see to take on additional risk and bandwidth requirement of <unk>.
Another business.
Right now and if it would need to be synergistic with <unk>.
You used.
To get there just help us understand what you are looking at and then kind of the kinds of opportunities that are out there.
Yes look I think if we were to dominate platform it would likely be aligned with just our overall theme of decision media.
We like being in a position, we're providing content and tools to inform high value decisions purchase decision that's why.
It's a lot of what we do whether it's in healthcare, it's in technology or gaming or different shopping wed like to be at the transaction.
We'd like to be between buyer and seller Thats, where we can extract the best value and rank and so obviously there are a lot of categories in which we don't do that and so I think that's how we would think about in a platform. I think you have to be something that that we do believe that we have technology and we have knowhow and we have business models to create.
Sort of an unfair advantage to it can't just be a good business that we're adding to the portfolio there needs to be value creation that is just in excess of that has to be the first thing, but we need to have a path to creating value that is unique to us and is a function of knowhow a function of scale a function of technology platform a functional leadership that we may have here.
That we can deploy into the business.
Okay, great. Thanks, a lot.
Thank you.
Thank you there are 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 everybody joining us today for our Q4 and our fiscal year 2022 earnings call and results.
Our upcoming conference participation as detailed on our Investor Relations website, we recently put out.
Release on that and the details are there we hope to see some of you in the coming weeks and continue our dialogue. Thank you all and have a great day.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you for your part Goodbye.