Q1 2023 Ziff Davis Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the Ziff Davis first quarter 2023 earnings call.
My name is Paul and I will be the operator, assisting you today.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
On this call will be Vivek Shah CEO of Ziff Davis, and Bret Richter, Chief Financial Officer of Ziff Davis I will now turn the call over to Bret Richter, Chief Financial Officer of Ziff Davis.
You may begin.
Morning, everyone and welcome to the Ziff Davis Investor Conference call for Q1 2023.
As the operator mentioned I am Bret Richter, Chief Financial Officer of Ziff Davis, and I am joined by our Chief Executive Officer Vivek Shah of.
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 <unk> <unk>.
<unk> Ziff Davis stock comp in.
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 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, we have disclosed in our S. E T.
<unk> 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 the webcast. We refer you to discussions in those documents regarding safe Harbor language as well as forward looking statements.
Now, let me turn the call over to Vivek for his remarks, Thank you Bret and good morning, everyone.
The operating environment, particularly the advertising market remains challenging we're pleased to see incremental improvements in our business and have reasons to be cautiously optimistic about a stronger second half.
While we're seeing scattered headwinds in different pockets of our portfolio along with some exciting tailwind.
It is our tech vertical that is having an outsized impact on revenue growth.
Of our seven verticals tech has been by far the most negatively affected by the current environment.
In fact, excluding Tac total Ziff Davis revenues in the first quarter would have grown over 1% year over year.
As a result, the tech vertical has shrunk to representing only 8% of total revenues in the first quarter.
Most exciting for us in the quarter was the performance of our connectivity and health and wellness verticals.
Both businesses experienced double digit revenue growth.
As Youll recall, we recruited Stephen by to be the president of the connectivity Division.
And he's hit the ground running with the team.
Echo how an industry leader in Wi Fi planning and optimization achieved significant year over year growth.
And we continue to see strong demand within uccle for core data services across the industry as operators continue to deploy and optimize their five G networks.
In our last call I mentioned that we were seeing some green shoots in both our consumer and professional pharma AD businesses, where pharma digital AD spend appears to have returned to its more predictable pre pandemic cadence buttressed by a strong 2023 drug launch calendar.
And in March the everyday Health group was for the first time in our history number one and Comscore as health category with an underappreciated U S reach of 81.8 million unique visitors.
My hearty, congratulations to Dan stone and the team at everyday health.
The gaming vertical declined in the first quarter, but that was primarily due to the timing of humble game releases and a very tough game advertising comp given last year's Q1 release of AAA titles.
<unk> was down in the quarter, but retail me not grew for the third quarter in a row, which we view as very important while offers dot com continued to slide.
As I said on the last call we've reallocated resources to address what is largely a technical set of challenges. It offers and believe we can stabilize and return the asset to grow.
Cyber security and Martech were down high single digits year over year and revenue in the first quarter with growth in E mail being offset by declines in VPN.
This represents a slight improvement from Q4, and we believe each subsequent quarter. This year will represent an incremental improvement over the last.
Were encouraged by strong usage and a robust new business pipeline for campaigner and SMTP email solutions and quarter on quarter growth in customer adds for VPN solutions.
In addition, as we progressed throughout the year. We currently expect a more favorable year over year impact from FX, which was a drag in Q1.
On the M&A front, we continue to balance our active sourcing program with a commitment to pursuing only the highest confidence opportunities, where we are uniquely positioned to unlock value.
With nearly $900 million of cash and investments on our balance sheet.
We continue to have a great deal of capacity to deploy capital for acquisitions.
When the right opportunities arise we will have the ability to act decisively.
But we continue to be patient and selective in a market that is in the midst of a rotation that.
That we believe will result, an increasingly attractive opportunities over the balance of this year.
We are very aware that our recent pace of acquisition activity has been slower than we expected. However.
However, we believe our patients will ultimately be rewarded and we're grateful for our shareholders patients as well.
We're always examining our portfolio and making decisions about where to invest and where to monetize assets by divesting or seeking partners to enhance the growth potential of our businesses.
It's in this context that we've hired an advisor to explore strategic options for our B to B Tech business and we're pleased with the quality and nature of the discussions we're having.
This is not a first for us.
In recent years, we have run several successful processes that resulted in a sharper focus for us and an exciting new chapter so the divested enterprise.
Portfolio rationalization is an important discipline and healthy exercise for any company.
And to be clear, we intend to remain leaders in the B to C Tech publishing business with brands, such as PC Mag Mashable and our newest edition life Aker.
I wanted to pick up from some of the discussion we had on our last call about AI.
I understand investor interest in the topic is high and rightly so.
We're very excited by the potential that AI has to create compelling opportunities across our company.
But that's not new.
We've been utilizing AI technologies to enhance and streamline our business for over a decade.
Machine learning algorithms power, our proprietary customer data platform.
AI powers, many of our products, including Mas and our connectivity solutions at Uccle and a cow.
A I also supports our compliance and security processes.
What is new are the exciting advancements in generative AI and large language models L. L. EMS.
We've identified three key categories of opportunities.
The first is enhancing the value proposition of our proprietary data to deliver predictive analytics and insights.
The second is about creating new conversational experiences across our consumer facing brands.
And the third is about increasing our content velocity and gaining efficiencies in our content production process.
On the data front, we possess a significant quantum a proprietary valuable and permission data.
We are a global leader in connectivity insights with over 7 billion throughput tests from over 600 million App installs across more than 190 countries every year.
We are a category leader in shopping and ecommerce data with over 2 billion annual sessions and over 200 million unique visitors.
Our Mas brand is one of the most trusted authorities in online search with over 44 trillion index links 1.25 billion keyword suggestions and $670 million analyzed search engine results pages.
By harnessing our unique proprietary data weakened enable predictive insights that directly support our customers objectives and create more value for them.
For example, we can leverage our connectivity data to support providers with predictive insights on customers that are likely to churn.
We're also excited about leveraging generative AI to create new conversational experiences with our audiences.
Yes.
Until now audience engagement has primarily been one way.
We can soon have two way interactions through AI powered virtual assistance that can deepen our audience engagement.
For example in our lose it App, we can offer our audience of personalized virtual nutritionists that.
That instantly addresses their queries based on their app inputs.
This represents a unique opportunity for us to better support our audiences and objectives, resulting in greater engagement.
Lastly, the opportunities to improve efficiency and effectiveness across all of our businesses have increased rapidly.
For example, our various editorial teams are actively pursuing the integration of generative AI across multiple steps in the editorial workflow to produce more high quality content.
This has come about bottoms up from the editorial organization itself is our creators see an enormous opportunity to enhance productivity, while ensuring the continued creation of trusted editorial content.
Before I hand, the call back to Bret Let me provide you with an update on our ESG efforts.
In April we released Ziff Davis is 20 twenty-two ESG report and separately.
Ziff Davis is 20 twenty-two dei report both of which can be found on our website.
The ESG report includes findings from our most recent greenhouse gas inventory and I'm pleased to report that our 2022 scope, one two and three combined admissions.
Represent a 7% decrease from 2021.
This is solid year over year progress and illustrates that we are on the right path as we wait validation of our science based emission reduction targets from the S. E. T. I scheduled to happen later this month.
The report also details how we've leveraged our platforms to help implement change in our communities and discusses our extensive data privacy security and corporate governance practices.
The <unk> report provides an update on company demographics, and our ongoing efforts to increase representation across Ziff Davis.
Of note in 2022, Ziff Davis increased the percentage of women, we both hired and promoted and we increased the percentage of people of color, who were promoted and our managers as compared to the prior year.
The report also includes the latest programs policies and actions, we are taking to foster a workplace in which all can thrive.
Needless to say I'm incredibly proud of the work Ziff Davis has done and continues to do and.
And I Hope you will take some time to review the reports.
With that 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 Q1 2023.
We will focus our discussion today and my commentary will primarily relate to our Q1 2023, adjusted financial results and our comparisons to prior periods.
Now, let's review the summary of our quarterly financial results on slide four.
We reported revenue of $307 $1 million for the first quarter of 2023 as compared with revenue of $315 $1 million for the prior year period, reflecting a decline of 2.5%.
FX negatively impacted the Q1 year over year growth rate and if the comparable 2022 currency values were applied to our 2023 Q1 results revenue would have declined by approximately 1.5%.
Adjusted EBITDA was $94.3 million for Q1, 2023, as compared with $100.8 million for the prior year period, reflecting a decline of six 4% our adjusted EBITDA margin for the quarter was 37%.
We reported fourth quarter adjusted diluted EPS of $1 10 sense.
While Q1 2023 was overall consistent with our expectations. We saw widespread in performance between some of our businesses as Vivek noted our technology business performance and in particular, our <unk> business continues to reflect market pressures and therefore had a disproportionately negative impact.
On a year over year results.
While certain of our other businesses also declined year over year as Vivek noted earlier several exhibited year over year growth, primarily our connectivity and health and wellness businesses. Excluding Tech Ziff Davis Q1, 2023 revenue grew more than 1% year over year.
On slides five and six we have provided performance summaries for our two primary sources of revenue advertising and subscription.
Slide five presents the company's advertising revenue performance Q1, 2023 advertising revenue declined by 8% as compared with the prior year period, consistent with Q4 2022.
This performance was also heavily impacted by the challenges within tech, excluding our technology vertical year over year advertising decline would have been.
2%.
Trailing 12 month advertising revenue declined by 7%. This was also impacted by the reduction in foreign currency rates as compared with the prior year period.
Our net advertising revenue retention and annual trailing 12 month's statistics that we update quarterly was approximately 91% for Q1 2023, largely consistent with the decline in advertising revenue as.
As defined in the slide in the first quarter Ziff Davis had more than 1700 advertisers with the average quarterly revenue per advertiser of nearly $90000. This reflects fewer customers at a higher average revenue per customer as compared with the prior year period.
Slide six depicts our subscription revenue performance Q1, 2023 subscription revenue grew 4.5% as compared with the prior year period and was again negatively impacted by FX subscription revenues grew 6% during the last 12 months, excluding the contribution from certain businesses that were.
Divested in 2021.
The table on the bottom of slide six includes subscription metrics for the last nine quarters sequentially total subscription customers were essentially flat, primarily reflecting growth in lucid subscriptions offset by slight declines in gaming and privacy.
Sequentially, our average quarterly revenue per subscriber grew by one 7% to $47.14.
As noted on our prior calls since Q3 2022. These metrics reflect 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 average revenue than the average of our other subscription businesses overall the acquisition of lucid has.
<unk> raised our number of subscribers and lowered our average quarterly revenue per subscriber as compared with the prior year period.
Our overall churn rate improved 53 basis points from Q4 2022 two.
3.28%.
This decline reflects a number of factors, including improvements in connectivity humble bundle and Martech churn.
Additionally, the company's Q1 2023, other revenues declined 2% year over year.
Slide seven provides quarterly organic and total revenue growth rates for the last nine quarters.
Revenues from businesses owned for at least a full 12 months are included in organic revenue while acquired revenue relates to businesses, we've owned for less than 12 months.
First quarter 2023, organic revenue declined 6%, a small improvement as compared with Q4 2022.
This decline was minus 5% adjusted for FX and primarily reflects the business unit performance trends discussed earlier.
Turning to our balance sheet, please refer to slide eight.
Our balance sheet continues to be strong.
As of the end of Q1, 2023, we had $722 million of cash and cash equivalents and $155 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 the first quarter gross leverage was two times trailing 12 months adjusted EBITDA and our net leverage was <unk> six times and only 0.3 times. If you include the value of our financial investments.
During Q1 2023, we continued to monetize our stake in consensus selling approximately 52400 CSI shares for gross proceeds of $3 $2 million.
As of March 31, 2023, we held approximately 1 million Ccs I shares and we will continue to be opportunistic with regards to our monetization efforts. As a reminder, we havent to October 2026 to complete the disposition of our C CSI stake.
Our strong balance sheet is the foundation of our capital allocation strategy. We believe that we are well positioned to continue to pursue M&A investments and other capital allocation alternatives. We closed one acquisition for our media business in the first quarter and we continue to pursue multiple M&A opportunities. We acknowledged at closing transactions in the current environment is.
It's been more challenging than anticipated. However, we continue to believe that we are well positioned both operationally and financially to execute upon our aggressive M&A strategy.
With regard to stock repurchases, we began repurchasing shares in the second quarter and we intend to continue to do so at an even above the stock's current market price.
Turning to slide 10.
We are reaffirming the fiscal year 2023 guidance range that we presented in February 2023.
As a reminder, the high end of our guidance for 2023 revenue adjusted EBITDA and adjusted diluted EPS reflects growth rates of approximately 1%, 1% and negative 2% as compared with our 2022 adjusted financial results. The low end reflects declines of approximately 3%, 6% and 9% rich.
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As we discussed on our year end 2022 earnings call. The operating environment remains challenging global macroeconomic pressures continue to weigh on the purchasing decisions of our largest advertising clients and in particular, our enterprise technology clients and consumers continue to navigate the pressures of high inflation and rising interest rates our Q1 two.
And 23 adjusted results reflect the impact of these and other factors as well as the change in certain FX rates.
As we noted on our February call. Our 2023 guidance reflects the carryforward impact of our 2022 results and an expectation that the macro economy will stabilize during the second half of 2023.
As a whole our performance during the first few months of 2023 was largely consistent with our expectations as to the balance of 2023, we continue to expect a stronger second half assuming we realize this expectation second half 2023 revenues would reflect approximately 55% of total 2023.
Revenues this revenue phasing implies a year over year Q2 revenue decline with revenue growth expected in the second half of 2023.
Notwithstanding the difficult environment.
We are permitted investments and initiatives that we believe holds strong promise and therefore have continued hiring into two into Q2 consistent with our plan and we expect our Q2 adjusted EBITDA margins to be newer slightly above our Q1 levels, we would anticipate margins to be stronger in the second half, resulting in the overall 2012.
Three adjusted EBITDA margins implied by our guidance in the event, we were to consummate a transaction involving our <unk> business, we would anticipate adjusting our guidance.
Following our business outlook slides of our supplemental materials, including reconciliation statements for the various non-GAAP measures to the nearest GAAP equivalent.
This section includes a reconciliation on slide 14 that reflects free cash flow.
Q1, 2023 reflects strong free cash flow conversion.
Q1, 2023 free cash flow was $85 $3 million, a similar amount to the prior year quarter, Despite a lower level of EBITDA.
Note that our semi annual cash interest payments on our outstanding debt occur in Q2, and Q4, which will impact Q2 free cash flow. In addition, we plan to make significantly higher cash tax payments in Q2, 2023 as compared with the prior year period.
Overall, we believe our Q1 2023 results position us to continue to pursue our 2023 plan, while selectively pursuing strategic alternatives for certain of our businesses and pursuing capital allocation alternatives that we believe will enhance shareholder value.
With that I would now ask the operator rejoin us.
To instruct you on how to queue for questions.
Thank you we will now be conducting a question and answer session in the interest of time, we ask that you. Please limit yourself to one question.
I would like to ask a question. Please press star one on your telephone keypad, 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 today is coming from Ross Sandler from Barclays.
Ross Your line is live.
Hi, everyone. This is joey on for Ross. Thanks for taking the question. So any additional color you can provide on the linearity that you saw in <unk> for the advertising business and then so far in <unk> any meaningful callouts. There I appreciate the commentary vivek on the different verticals this quarter. Thanks.
Yes, no listen it's a great question and I think when we think about the advertising business and trends it is worth unpacking.
By category. So you start with our largest AD category, which is health and wellness. So a strong quarter in Q1.
As I said, I think given where the drug pipeline is and the cadence that we're seeing in the marketplace as well as the Upfronts, which I talked about I think in the last call. We're optimistic about pharma health and wellness in general and remember this category represents.
Roughly 40% to 45% of our advertising business. So that's a it's an important one to focus on the next largest category shopping and.
It should not be lost that retail me not with three consecutive quarters.
The year over year growth, that's important for us to see I think it reflects both.
Both the execution at retail being up but also generally the ecommerce marketplace. So we feel good about what's happening in retail.
Gaming is choppy and that is driven by the calendar and so.
I think by the end of the year, we feel like we'll be in a good place with the Q1 comps were tough just given that last year's Q1 saw a significant slate of AAA games, and then text in the issue.
<unk> as a category, both <unk> and <unk> have been challenging and we are in a cycle and it's a top cycle, we've seen it before I've seen it in my career in other places Tech comes back and when it comes back I think we'll be in a very good position, particularly on the BDC side. So I think look when we talk about the AD market at <unk>.
Markets within the market and I think the markets. We're in we feel generally optimistic about what what they represent for the balance of the year.
Great that's helpful. Thanks.
Thank you.
The next question is coming from Egalet Iranian from Citigroup.
Your line is live.
Hey, good morning, guys you'd Max more on freight got Ryan.
Thanks for taking the question.
I guess could you guys just talk about here think about capital allocation you talked about stepping up buybacks.
Yes, M&A opportunities, but can you just maybe give some more color on the current M&A environment.
How private markets are trending and kind of.
How we should think about that for the rest of the year and then also maybe just on the <unk> business can you just made.
Maybe give us this kind of a.
Rough scope of how impactful that is and kind of what.
Like what inning, we are in that process.
Yeah sure, let me start with M&A and then.
Maybe I'll ask Brent to talk about.
Share buybacks in the <unk> business to look.
2023 is currently on pace to be.
The lowest M&A year since 2009, and this is generally this isn't just a statement about what were seeing I think into the marketplace. The lower middle market, which is where we really focus and specialized is particularly Clyde. So.
That is that that is the backdrop, but our commitment to our acquisition program is unwavering we have.
Kevin Great platform on which to acquire we have the capacity to add and new vertical to that so we are very much focused on on a pretty robust pipeline, but at the same time there is a fundamental gap.
Between buyers and sellers in this marketplace and so we do believe we're witnessing a rotation, but it is taking longer than any of us would like.
Patient and discipline have always been hallmarks of our approach. So we don't look at these things and in short periods of time and I might remind everyone that M&A has always been lumpy. So if you go back to 2019 and 2020 in those two years, we deployed <unk>.
$900 million against our acquisition program.
Then in 2021 and 2022, we deployed about $300 million.
I think the pendulum slowly swinging back. So if you look at this over I think a longer window of time, I think youll start to see that that historically, we've seen this before and so look I also think as a buyer we are in a privileged position <unk> got tightening credit and that just tightened everyday.
Hey.
I think for a lot of buyers using stock and deals as unappealing given market performance. So as a buyer with a significant amount of cash sitting on our balance sheet. I think we do have an advantage over other buyers as this rotation plays itself out Brett.
Sure so with regards to capital allocation.
As we've talked about this is a constant dynamic process within the business that starts with a healthy balance sheet, which we're very fortunate to have we then of course, they look at the cash flow generation of the business over time, our expectations. The environments. We're in the markets, we're operating in and make decisions with regards to the comments we made.
A de stock buybacks are always an important component of our capital allocation strategy, but when the stock is trading at a level that we believe creates an opportunity for us to capture meaningful shareholder value by acquiring shares that moves up in the pecking order and we're currently allocating capital to a stock buyback.
We believe our stock is meaningful upside potential.
At current trading represents sort of a discount to our intrinsic value and what we can do over time, but importantly, we believe that we can repurchase shares fund our M&A program and maintain a healthy balance sheet. Given these dynamics of course going back to my first statement. This is a constant and dynamic equation that we manage there is always a.
Healthy competition for uses of our capital.
But we're very comfortable and confident with the decisions, we're making at this time similarly looking at our businesses strategically how they fit in our portfolio is also part of our capital allocation strategy and we're constantly evaluating each asset and how it fits in a hole.
The valuations like this involves numerous factors internal factors external factors general market conditions condition specific to the business at a point in time over points in time and in the case of Spice works or enterprise Tech business, given certain facts and circumstances, we've determined to explore strategic alternatives.
It's early no specific outcomes.
We're encouraged by sort of the initial stages of our exploration.
This approach as Vivek mentioned is entirely consistent with past practice as we look at portfolio review and portfolio development, but we will see what happens over time.
Despite a meaningful business in terms of scale, both in its own right and relative to Ziff Davis I think whats interesting about this opportunity is it's both large enough to potentially be attractive as its own business, but also small enough to potentially fit in with similar businesses in the marketplace.
Either which is a path that we might go down the business can produce 70, 80, 80 plus million dollars revenue depending on market dynamics at the time, obviously, we've spoken about and I think we've seen by other participants in the marketplace. What that market is currently exhibiting but how the next handful of weeks handful of months quarters.
Play out will determine our path for that business.
Okay. Thanks very helpful guys.
Thank you. The next question is coming from <unk> <unk> from Evercore ISI shall.
<unk> your line of life.
Thank you for taking my questions Vivek.
<unk>.
Nicely laid out how you are leveraging it to.
For the benefit of the company and how you plan to do that for the long term I guess one of the pushback we get is on.
Content creation and access to content so.
What would you say do so.
Someone who thinks that.
Content access to content as it's been made so much easier with chat GPT, thereby engagement on certain platforms.
Go down.
Whether it is a cooking website or a health and wellness website. So how do you think of how should how should we think about that and then.
I'm, sorry, but could you please.
We repeat that the cadence for the second quarter and the balance of the year for revenue and EBITDA just wanted to make sure we got that right. Thanks a lot.
Alright, Thanks, <unk>, so look you're right there's certainly.
<unk>.
Hi, Epocrates that I've heard around the threat being that <unk>.
<unk> AI.
Lowers the barrier to entry.
Content to which I say the barrier was long removed with the explosion of user generated content and I remember the same sort of thesis sort of starting to develop and I think forgetting.
How the contents produced and even in even as producing it I think truck duration distribution monetization and brand matter and I think are the points of differentiation around the kind of content that ultimately has value in the kind of content.
So I don't think that theres going to be any meaningful real change and the fact that there's a lot of content in the world today and I also do think that Marion human and artificial intelligence only makes sense stronger I think that fundamentally I look at it quite the opposite that our ability.
To produce more the velocity by which we can produce content is incredibly exciting I understand that with any new technology.
It's that old law right, we overestimate the impact of the technology in the short term and underestimate the effect in the long term. We believe that this technology is as meaningful as when I first saw the mosaic browser and the ninth early 19, 90% right you recognize with its can do but for the reasons I laid out and probably.
For other reasons that we haven't even thought through and use cases I think this is great for our business and I really do believe that we have been systematic and if you think about things. We said in the past we've talked about data and data exhaust a lot and part of that is by systematically acquiring businesses.
That have proprietary dataset data that is unique data that can create a competitive advantage actually put that I think that puts us in a very different category than maybe a lot of other quote unquote content companies. So I'm bullish we're obviously mindful of all of the dynamics. It is early days.
Dave.
But theres a lot of energy and excitement inside of this company in a number of different initiatives and experiments around ad.
Excellent. Thanks for the question with regards to the cadence of expectations over the course of the balance of the year happy to repeat them and maybe unpack just a little bit more but I think it's important and asking the question.
So in answering your question I should say is that we're not running the company in 90 day scripts.
We set expectations for a 12 month period, we did that in February we further comments on it today and we're running the business not only over the long term, but with that overall plan for 2023 in mind.
The dynamics that we've discussed in this call and the fact is highlighted as such that so many of our businesses have their unique characteristics over the course of a 12 month period that are dependent on their specific market factors. The calendar game releases seasonality, but it's also worth mentioning businesses like our.
Connectivity business that side very significant contracts can often have dollars flow in just before quarter end or just after quarter end and have very little impact over a 12 month period, but a meaningful impact on our quarter that said, having just completed the first quarter and confirming our guidance for the year, what we have.
Said was we think it'll be a balanced first half and second half second half approximately 55% of overall revenue annual revenue depending on what we achieve and how we perform but that's our expectation is embedded in our guidance.
We will see EBITA margins lower in the second quarter, partly as a result of the cadence of revenue the mix of revenue and the expectation of performance, but also because we are investing in initiatives that we believe will result in growth in the back half of the year and beyond so we're spending some money, particularly in hiring in certain of our businesses. So that will have.
The impact on margins that we said is second quarter margins will be near or slightly above first quarter margins and of course, we have to continue to run the businesses dynamically and move through the balance of the year.
Okay. Thank you Vivek. Thank you Brad.
Thanks Chuck.
Thank you. The next question is coming from Rishi <unk> from RBC Rishi.
Your line is live.
Oh wonderful.
Okay, great. Thanks for taking my question as you're thinking about the potential of divesting.
<unk> Tec business can you maybe help us.
Understand your thought process behind looking at certain businesses that have faced challenges.
Secular execution and what drives the decision point between investing more in bringing in new leadership, and maybe layer on more acquisitions and trying to turn around the business versus ultimately deciding that divesting the best use.
Of time.
The assets I know you did the <unk> backup divestment recently and that makes sense, but maybe just remind us of kind of that thought process and how you weigh those two decision points. Thanks.
Thank you for the question ratio.
Theyre almost too many factors to account.
It's a holistic review that is both specific to the business, but I think you alluded to is also based on an element of capital allocation that we don't necessarily talk about enough in a business like ours, but it's human capital allocation and not only where do we want to invest our dollars, but where we want to invest our energies.
And which businesses sort.
Sort of as we compete for those energies pull ahead, and others, which may be at points in time compete less effectively this is an exploration.
Operations are triggered by multiple factors, sometimes internal initiatives sometimes.
External triggers and essentially we look at all of our assets in our portfolio on a regular basis and just how do I fit annualized spirit opportunity analyzed competition for <unk>.
Financial resources annualized competition for human resources, and even against opportunities that haven't yet manifested in our business because we're constantly out there.
Looking to expand our businesses inorganically through M&A, So again, no promises to an outcome here.
Early in an exploration we're encouraged by the initial energies, but portfolio review is as important.
An element of our management.
Time allocation as anything else, we do and.
And I think one of the things that I would just underscore that Brett said easy to the internal competition for resources and capital is real and so often we have to look at an asset against the other assets inside of the company.
And their need for capital their pipeline, where they're looking to take their business is what the profile looks like in terms of growth for those businesses and are confident our capital management, alright that much we know and so I think against that backdrop is part of the assessment.
And then look we're always thinking about it in terms of what is the value we can.
Extract in a transaction that financial value focus and other positives in that against what would be the value. If we continue to run the business and we're in the evaluation stage right. So we're not going to predetermine the outcome per se, but we want to be transparent on the process.
That we're running and I think it is healthy and as you know we do this regularly and as I think you pointed out we do believe.
The b to B backup process that we ran a couple of years ago was the right thing for us to do.
Wonderful. Thank you so much guys.
Thank you.
Thank you. The next question is coming from Shyam Patil from Sig Xiaomi Your line is live.
Hey, guys business Jared on for Sean Thanks for taking the question.
I was hoping to maybe dig in a bit further on how youre thinking about bottom line pacing, particularly in the back half of the year anything that you'd call out in terms of waiting between the third and fourth quarters. There and then maybe digging in on the sales and marketing after seeing some increased efficiency in the back half of last year.
At the net margins were largely in line year over year are you thinking that we might see more of a similar dynamic there as the year progresses or could we see increased efficiency.
Sure.
Okay.
But attacking the business with line item detail in that businesses as dynamic as this is a little challenged again each of our businesses have.
A different mix of margins certain of our businesses have partners certain of our businesses have extra costs certain of our businesses have.
Internally generate covenant, which everything is internal.
I think the important message again is that.
We expect our performance to strengthen in the back half of the year, we expect to see that across.
Virtually all our businesses, we're seeing signs of it in several of our businesses and we've highlighted those.
The number of them today, particularly helping connectivity as we get to the bottom line.
Different dynamics are at play including.
So on a year over year comparisons that we have impact on our on our fourth quarter call with regards to our cadence of depreciation amortization, obviously, our balance sheet is changing and we're earning more on interest income. So our net interest expense has declined year over year, our tax rate has been fairly stable, although it ticked up in the early part of this year and part of that.
It relates to the mix of revenue and part of that relates to changes in foreign tax rates I think it's important to stay a little bit above and when I look at the business as a whole and looking at our overall guidance of expectations again over a 12 month period and over a mix of all our businesses rather than try to specifically unpack each and every line item.
Certainly makes sense.
Thank you.
The next question is coming from Cory Carpenter from J P. Morgan.
Corey your line of sight.
Hey, guys. This is Danny on for Cory Carpenter I just have two quick ones.
So I know that you've taken steps to get an advertising component until there is it can you maybe talk about any success there and then on generative implementation for the new conversational experiences are there any other brands in your portfolio. Besides those that you could see this being used in or that you have already experimented with thanks.
Yes, great question.
Lose it and its core subscription business continues to be a strong grower. So I just want to make that statement and then the advertising revenue that has just been incremental and it flows through at 100% it doesn't come into our organic growth calculation, yet because we haven't lapped one year of ownership that will show up.
A little bit later, some something to point out.
With respect to the conversational.
Concept and what we illustrated the nutrition coach.
<unk> within lose it you add a buying assistant within retail me not you had.
A chatbot within really ended the editorial brand gain helped and gave guidance, which are very important parts of IGN. So I would say parenting and pregnancy I would say that you can imagine in each of these how you can.
Right acute way dialog and a back and forth trained on our on our dataset and our proprietary content.
And creating an experience within our experiences so I think really there's something almost for every brand.
And so.
We're excited.
For all of that and look I think it drives engagement and engagement ultimately we can extract address.
Thanks.
Thank you and the next question is coming from John Todd One thing from CJS Securities. John Your line is live.
Yes, hi, good morning extremely helpful answered most of my questions sorry, It's Pete Lucas for Jon.
Been extremely helpful and answered most of my questions. Just wanted to know you gave us a lot of color on M&A and how the outlook is there just wondering on where the focus is for you guys in terms of what Youre looking at and kind of the approximate size of deals that youre seeing in the pipeline.
And now look at <unk>, we're looking across all of the verticals.
But <unk> more than anything else given the process, we're running on the <unk> side shopping connectivity gaming held cyber security Mark Tac I think every one of our operating units are looking for deals and then at the corporate level, we're looking at new.
<unk> that we think are complementary to the verticals, we're in where we see monetization and audience.
Books that are similar where we can apply our knowledge and platforms to them. So.
It's across the board I would say that from a size point of view as I think I said in.
Earlier kind of this lower middle market has always been our sweet spot right and so deals that generally are in the under $100 million of enterprise value, having said that we have flexed up the retailmenot deal.
A couple of years ago, the everyday health deal those were closer to $5 billion deal. So I think thats still the neighborhood in which we run we like the spread we like to spread our capital around there are a lot of mouths to feed and side.
The company so as the balance sheet build it doesn't change our view into our sweet spot. We don't I don't think get duped into all well. We've got all this capacity, let's go necessarily bigger we're not afraid of a bigger deal, but I think generally our inclination is defeat as many of our general manager.
<unk> and the various platforms in the company.
Very helpful. Thank you.
Hello.
Thank you there are no other questions in the queue. At this time I would now like to hand, the call back to Bret Richter for any closing remarks.
Thank you Paul and thank you everyone for joining us today for our Q1 2023 earnings call.
Coming conference participation schedules detailed on our website we have.
Some activity plan for the next handful of weeks and we hope to see some of you there.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time have a wonderful day. Thank you for your participation Goodbye.