Description

Ziff Davis is a serial acquirer and operator of digital assets: the company is what remains of the old J2 Global after the legacy efax business was spun off (now listed as Consensus). The remaining company is a digital media and internet company with a portfolio of assets in tech, entertainment, shopping, health, cybersecurity and marketing technology (martech). ZD generates revenues through advertising and subscriptions. In the last five years, the business was able to grow its revenues at a 20% CAGR and EBITDA at a similar rate, and while it’s true that ZD doesn’t have a track record as a standalone company, I believe that the market is still anchored to the legacy Consensus fax assets, which had issues about organic growth and poor disclosure. Today, with ZD one gets a fully digital business, with recurring revenues, and a platform to grow via a proven M&A strategy, at less than 9x 2022 EBITA with a runway for further consolidation and growth in the mid term. 

Brief business History

ZD was originally founded in 1927 by Bill Ziff and Bernard Davis. When Bill Ziff died in 1953, his son William B. Ziff Jr, took his share and bought Davis’ share too in 1958, keeping the Ziff Davis name. Bill Ziff was already an advertiser and published magazines before ZD was founded: however “Ziff’s Magazine” (an early “men’s magazine” with photographs, short stories, humor, art) was circulated only for a few years. Then when ZD was formed, they started with a publication called Popular Aviation which reached a circulation of 100k in 1929. ZD then expanded into comic books, fiction, hobbyist and bridal magazines, including publications on electronics, cars and photography, that were providing a self-selected audience to advertisers. Fast forward to the 70s and 80s, ZD increased its success in consumer and specialist magazines, with titles such as PC Magazine, Modern Bride, Popular Electronics and Computer Shopper. In 1979, the company also expanded into broadcasting, a business which was then sold in the 80s. In the early 90s ZD started to develop some websites and in 1994 the publishing business was sold to a PE fund for $1.4bn (then sold a year later to Softbank). In the 2000s the business went through a restructuring and discontinued the print copies of PC Magazine. In 2010, Green Brick Partners (a PE fund), together with Vivek Shah (who’s the current CEO) bought the remaining ZD assets, which by then were mainly websites including PCMag.com and Techsaver.com. 

In 2012 the business was acquired by J2 Global. J2 was an online provider of eFax and ancillary services and ZD became the digital media division. The division then grew mostly via M&A, the acquisition included (but are not limited to) IGN (a gaming website) in 2013, Ookla (speedtest.net) in 2014, Mashable.com (bought in 2017) and RetailMeNot (2020). 

Current assets

ZD’s current assets are organized by three different verticals: 

• Tech, Shopping, Entertainment (TSE), which owns Pcmag.com, Mashable, IGN, RetailMeNot among others, 

• Health & Wellness (which includes Everyday Health and babycenter),

• Martech-cybersecurity (which owns Moz, Virpe, IPVanish and others). 

ZD offers content that informs decisions (which laptop to buy on PCMag.com or which diapers to buy on babycenter.com) which caters to a selected high-intent audience and the content itself shapes the purchase intent. In addition, ZD businesses offer tools to measure and improve broadband, cybersecurity tools and marketing technology tools. 

In digital media, ZD operates in high value verticals, markets that have been witnessing mid-teens to low-20s CAGRs in ‘17-’21. And the cybersecurity and martech end markets showed low to mid teens CAGRs in the same period.

At FY2021 the company reported revenues of $1.38bn vs $1.08bn in 2020 and adjusted EBITDA of $484.6m in 2021 vs $377m in 2020. ZD categorized revenues by source in the annual report with revenues from Digital Media at $1068.5m in 2021 vs $811m in 2020 and revenues of $314.7m from Cybersecurity and Martech vs $279m in 2020. 

In addition to revenues by vertical, the company gives us the breakdown of revenues from Advertising and Subscription. Advertising revenues in 2021 were $837m (vs $627m in 2020) and Subscription revenues were $512m in 2021 vs $445m in 2020. (There’s also a small “other” source they disclose, which includes an indie gaming production). The advertising vs subscription breakdown is generally how management thinks about the portfolio of different verticals under ZD. 

Business model 

ZD business model is to buy, own and operate web “properties” with an engaged audience that is already showing a buying intention and “rent” ad space to large ad buyers. And repeat the same with adjacencies. Ads are relevant to the area, hence “rent” is higher (vs a generic site) and the company operates in large and valuable areas. 

Steve Horowitz, president of the Tech, Entertainment and Shopping vertical, at the Analyst Day in 2021 said “I aspire to be the Ralph Furley of the internet”. For the ones like me who don’t know who the hell this guy is, I found out it’s a fictional character from the sitcom Three's Company, where he is the landlord of a Santa Monica apartment building. Anyway … 

ZD makes money two ways: advertising and subscriptions. In ads, they’ve included performance marketing solutions, which taps into unlimited ad budgets (they get paid as long as a lead turns into a sale, with CAC limits but no spend limit) which have scaled up since their introduction. While there’s a structural tailwind helping the different verticals ZD is exposed to, content quality and brands are important to engage audiences and generate traffic. ZD owns decent brands: Mashable and Pcmag in TSE are recognizable brands, What to Expect and Baby Center are the number one and number two pregnancy apps in the US and 75% of pregnant moms are registered on one or both. In TSE ca. ¾ of the business comes from ads (rest is subscriptions). High intent content attracts large advertisers: as opposed to, say, Meta, which has millions of businesses customers, which on average spend a bit more than $10k, ZD ad buyers were ca. 2200 and spent on average $120k in Q4 2021. These declined to 1950 and average spend of $87k in Q1 ‘22 (-4% YoY, in line with the current macro). Ad revenues grew at a 25% CAGR in the last eight years prior to 2022. ZD boosts high customer retention: 100%+ (as in, customers usually spend more every year) and growth on top of that comes from new customers or M&A. Also the company delivers their performance on owned and operated properties, so they don’t have (or have low) traffic acquisition costs, which boosts profitability. TSE and Health and Wellness revenues have grown at a ca.17% CAGR from 17-21 to $966m with EBITDA margins averaging 37%. 

In subscriptions, ZD actively seeks opportunities to extend their area or relevance into subscription adjacencies for both consumer and enterprise customers. One example is the acquisition of Humble Bundle by IGN (owned by ZD): IGN is a gaming website with news and reviews of games. Humble Bundle was a storefront for video games where one could buy bundles of indie games at a price determined by the purchaser with a part of the price paid going to charities. Now, Humble Bundle offers subscriptions, offers single games and bundles and ZD bought it thanks to the insights they learned at IGN. Horowitz at the analyst day: 

“On the IGN side, the IGN audience demonstrated the insatiable appetite for gaming and entertainment content discovery. As we owned IGN, it became apparent though that as a subsection of Gaming, Indie Gaming - a $14 billion market in itself, a pretty nice subsection -  suffered from content discovery issues by even a larger degree, given the sheer volume of Indie Games published a year. There are about 10,000 or over 10,000 games published on Steam each year, and if you don’t know what Steam is, think iTunes for PC gaming.

Through this lens we found Humble and we're able to blend the content discovery with a subscription business model and it's been a great success for us”.

Another example is the acquisition of Ookla (speedtest), after ZD experienced Ookla through PCmag for their “Fastest Mobile Network” report. ZD was able to buy Ookla, and turn it into a 100% subscription business from an ad based business (customers are telecom operators that want feedback on network speed).  

Martech and Cybersecurity are mostly subscription models for services like SEO optimization (Moz) and cybersecurity (Vipre Security) and VPN services (IPVanish). The end markets for cybersecurity and martech are growing in the low teens and the business benefits from predictable recurring subscription-based revenues. Revenues in the Martech and Cybersecurity division grew to $290m at a 22% CAGR (including M&A) from 2017 with 35%+ EBITDA margins. 

Overall, if we step back and look at the overall business, the overall pro forma numbers for 2021 are:

Management is then guiding (guidance confirmed at the Q1 update) for high single digit growth in advertising, low teens growth in subscriptions (and 50% growth in the small other vertical): which turns into total revenue growth of ca. 10% in 2022. In addition ZD is guiding for a 36% EBITDA margin, 23.5%-25% tax rate, SBC between $24-$28m and share count between 47.5m and 48.5m. If we plug these numbers in, we get to a 14x PE and 10x EV/EBITA. Longer term, management has said they aim to double the size of the business every 5 to 6 years.

However, in addition to the current assets, ZD is “first and foremost a buyer and operator” of digital assets, a “capital allocation machine” according to CEO Vivek Shah. They’re serial acquirers. ZD strategy is to acquire profitable businesses “that can generate predictable growing free cash flow over long horizons. As that cash accumulates, we recycle it into future investments of the same-nature, businesses that can generate predictable and growing free cash flow over long horizons.” (Director of M&A at the analyst day). ZD looks at recurring free cash flow as the key factor they consider, where they see a business with a profitable core that they’re positioned to grow. That doesn’t necessarily mean they buy only profitable businesses, but they would need a profitable core business (which they'd keep and nurture while cutting the money losing branches). ZD is often perceived as a preferred buyer of choice as they’re often very quick to close (target is 4 to 6 weeks) as they already operate in the vertical and most often have been dealing with the target for years.

In 2021, the company evaluated more than 500 opportunities, with an approach they call “M&A toolkit” with different layers of management involved, starting from the operating managers of single verticals to top managers. The process requires an operating “sponsor” who understands the intricacies of the vertical and a “corporate development” sponsor who has a better view of capital allocation opportunities across the whole spectrum of opportunities ZD can pursue. Usually the company targets post-synergy multiples of 5x (after 24 months, so spot multiples can look higher).

Reaching synergies and nurturing acquired businesses most often doesn’t require a lot of capex, if any, with content improvements and investments going into opex rather than capex, and ZD actively cutting the unprofitable parts of acquired businesses to only focus on the most profitable ones. 

The company has cumulatively spent $2.7bn in M&A from 2013 to 2021, which generated sales of $1.4bn in 2021 and EBITDA of $485m. An EBITDA based average ROIC is in the mid to high teens. 

The company’s current leverage is relatively low, with gross debt at $1.1bn and net cash of $629m, in addition to short term investments of $238m (this is the stake in the spun off business, Consensus) and long term investments of $122m. So net debt (GD less cash and investments) is only $134m vs guidance implied 2022 EBITDA of ca. $550m. ZD target leverage is 3x gross debt /EBITDA: this implies ZD has about $1000m of firepower to buy stuff (considering cash conversion of ca. 55% for 2022). If we assume they are able to buy business at a 6x-7x multiple, this turns into additional EBITDA of $140m-$170m which lowers current ZD multiples to 8.5x-9x EBITA and ca.11x PE. Which seems cheap for an asset light business with predictable characteristics and a runway for consolidation. ZD is also buying back stocks: during the early part of the first quarter of 2022, ZD repurchased $54.6 million of their 4.65% senior notes and $58.7 million of common shares. In addition, with the Consensus separation, ZD received a cash distribution of ca. $261m. In order for this to be tax free, ZD has to use it within a year of the spin for a specific set of allowed disbursements (and these repurchases qualify). 

I believe the market still doesn’t recognize ZD’s value as it’s still anchored to J2 Global and their legacy efax assets, a business in structural decline that was trying to pivot to ancillary revenues. J2 Global, for this reason (and being a serial acquirer) was also targeted by short sellers (a couple of write ups here on VIC too) that mainly pointed at the lack of disclosure of organic growth numbers (vs inorganic) and instead highlighted organic declines. Now ZD discloses organic growth and some other KPIs and many of the short sellers points are no longer relevant today. Another issue highlighted in one of the short sellers reports was about non-GAAP exclusions of SBC and acquisition related costs. It’s not that uncommon to exclude these in adjusted numbers, but I agree and I’ve excluded SBC and acquisition related costs for my valuation. Another short seller highlighted CEO remuneration way above industry averages. However, the short seller only considered the year Vivek Shah was promoted to CEO: given the promotion, he had received a long-term award which the company was required to recognize in year 1 (even if the award vests in 8 years). In following years, remuneration fell to industry standards. All in all, even if some of the accounting points are valid (which I’ve considered) most of these issues were more specifically relevant for the old JCOM. 

Catalyst

Clean 10k (spinoff of Consensus was finalized in October 2021, so last 10k still included it)

further buybacks and growth via M&A