UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ACT OF 1934
For the quarterly period ended June 30, 2024
OR
ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-25965
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction | (I.R.S. Employer | ||||
| of incorporation or organization) | Identification No.) | ||||
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (212 ) 503-3500
Former name, former address and former fiscal year, if changed since last report: Not Applicable
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ý | Accelerated filer | o | Non-Accelerated filer | o | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ý
There were 44,740,746 shares outstanding of the Registrant’s common stock as of August 2, 2024.
ZIFF DAVIS, INC. AND SUBSIDIARIES
QUARTERLY REPORT
QUARTER ENDED JUNE 30, 2024
INDEX
| PAGE | |||||||||||
-2-
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
ZIFF DAVIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except share and per share data)
| June 30, 2024 | December 31, 2023 | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
Accounts receivable, net of allowances of $ | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Long-term investments | |||||||||||
Property and equipment, net of accumulated depreciation of $ | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued employee related costs | |||||||||||
| Other accrued liabilities | |||||||||||
| Income taxes payable, current | |||||||||||
| Deferred revenue, current | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred income taxes | |||||||||||
| Income taxes payable, noncurrent | |||||||||||
| Deferred revenue, noncurrent | |||||||||||
| Other long-term liabilities | |||||||||||
| TOTAL LIABILITIES | |||||||||||
Commitments and contingencies (Note 8) | |||||||||||
Preferred stock, $ | |||||||||||
Preferred stock - Series A, $ | |||||||||||
Preferred stock - Series B, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| TOTAL STOCKHOLDERS’ EQUITY | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited)
-3-
ZIFF DAVIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except share and per share data)
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||
| Direct costs | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Research, development, and engineering | |||||||||||||||||||||||
| General, administrative, and other related costs | |||||||||||||||||||||||
| Total operating costs and expenses | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Loss on sale of businesses | ( | ||||||||||||||||||||||
Unrealized loss on short-term investments held at the reporting date, net | ( | ( | ( | ||||||||||||||||||||
Gain on investments | |||||||||||||||||||||||
Other income (loss), net | ( | ( | |||||||||||||||||||||
Income before income tax expense and income (loss) from equity method investment | |||||||||||||||||||||||
Income tax expense | ( | ( | ( | ( | |||||||||||||||||||
Income (loss) from equity method investment, net of income taxes | ( | ( | |||||||||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||||||||||
Net income per common share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited)
-4-
ZIFF DAVIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||||||||||
Other comprehensive (loss) income, net of tax: | |||||||||||||||||||||||
| Foreign currency translation adjustment | ( | ( | |||||||||||||||||||||
Change in fair value on available-for-sale investments, net of tax expense of $ | ( | ( | |||||||||||||||||||||
Other comprehensive (loss) income, net of tax | ( | ( | |||||||||||||||||||||
Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited)
-5-
ZIFF DAVIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| Six months ended June 30, | |||||||||||
| Cash flows from operating activities: | 2024 | 2023 | |||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Non-cash operating lease costs | |||||||||||
| Share-based compensation | |||||||||||
| Provision for credit losses on accounts receivable | |||||||||||
| Deferred income taxes, net | ( | ( | |||||||||
Loss on sale of businesses | |||||||||||
(Gain) loss from equity method investments | ( | ||||||||||
| Unrealized loss on short-term investments held at the reporting date, net | |||||||||||
Gain on investments | ( | ( | |||||||||
| Other | |||||||||||
| Decrease (increase) in: | |||||||||||
Accounts receivable | |||||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Other assets | ( | ( | |||||||||
| Increase (decrease) in: | |||||||||||
| Accounts payable | ( | ( | |||||||||
| Deferred revenue | ( | ||||||||||
| Accrued liabilities and other current liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Acquisition of businesses, net of cash received | ( | ( | |||||||||
| Proceeds from sale of equity investments | |||||||||||
| Proceeds from sale of businesses, net of cash divested | |||||||||||
| Other | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repurchase of common stock | ( | ( | |||||||||
| Issuance of common stock under employee stock purchase plan | |||||||||||
| Deferred payments for acquisitions | ( | ( | |||||||||
| Other | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Net change in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited)
-6-
ZIFF DAVIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands, except share amounts)
| Three months ended June 30, 2024 | ||||||||||||||||||||
| Common stock | Additional paid-in | Retained | Accumulated other | Total Stockholders’ | ||||||||||||||||
| Shares | Amount | capital | earnings | comprehensive loss | Equity | |||||||||||||||
| Balance, April 1, 2024 | $ | $ | $ | $ | ( | $ | ||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||
Other comprehensive loss, net of tax expense of $ | — | — | — | — | ( | ( | ||||||||||||||
| Issuance of restricted stock, net | — | ( | — | |||||||||||||||||
| Issuance of shares under employee stock purchase plan | — | — | ||||||||||||||||||
| Repurchase and retirement of common stock | ( | ( | ( | ( | — | ( | ||||||||||||||
| Share-based compensation | — | — | — | — | ||||||||||||||||
| Other, net | — | — | ( | — | ( | |||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | $ | ( | $ | ||||||||||||||
| Three months ended June 30, 2023 | ||||||||||||||||||||
| Common stock | Additional paid-in | Retained | Accumulated other | Total Stockholders’ | ||||||||||||||||
| Shares | Amount | capital | earnings | comprehensive loss | Equity | |||||||||||||||
| Balance, April 1, 2023 | $ | $ | $ | $ | ( | $ | ||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||
Other comprehensive income, inclusive of tax benefit of $ | — | — | — | — | ||||||||||||||||
| Issuance of restricted stock, net | — | ( | — | ( | ||||||||||||||||
| Issuance of shares under employee stock purchase plan | — | — | ||||||||||||||||||
| Repurchase and retirement of common stock | ( | ( | ( | ( | — | ( | ||||||||||||||
| Share-based compensation | — | — | — | — | ||||||||||||||||
| Other, net | — | — | ( | ( | — | ( | ||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | $ | ||||||||||||||
-7-
ZIFF DAVIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands, except share amounts)
| Six months ended June 30, 2024 | ||||||||||||||||||||
| Common stock | Additional paid-in | Retained | Accumulated other | Total Stockholders’ | ||||||||||||||||
| Shares | Amount | capital | earnings | comprehensive loss | Equity | |||||||||||||||
| Balance, January 1, 2024 | $ | $ | $ | $ | ( | $ | ||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||
Other comprehensive loss, net of tax expense of $ | — | — | — | — | ( | ( | ||||||||||||||
| Issuance of restricted stock, net | — | ( | — | ( | ||||||||||||||||
| Issuance of shares under employee stock purchase plan | — | — | ||||||||||||||||||
| Repurchase and retirement of common stock | ( | ( | ( | ( | — | ( | ||||||||||||||
| Share-based compensation | — | — | — | — | ||||||||||||||||
| Other, net | — | — | ( | — | ( | |||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | $ | ( | $ | ||||||||||||||
| Six months ended June 30, 2023 | ||||||||||||||||||||
| Common stock | Additional paid-in | Retained | Accumulated other | Total Stockholders’ | ||||||||||||||||
| Shares | Amount | capital | earnings | comprehensive loss | Equity | |||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | $ | ( | $ | ||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||
Other comprehensive income, inclusive of tax benefit of $ | — | — | — | — | ||||||||||||||||
| Issuance of restricted stock, net | — | ( | — | ( | ||||||||||||||||
| Issuance of shares under employee stock purchase plan | — | — | ||||||||||||||||||
| Repurchase and retirement of common stock | ( | ( | ( | ( | — | ( | ||||||||||||||
| Share-based compensation | — | — | — | — | ||||||||||||||||
| Other, net | — | — | — | — | ||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | ( | $ | ||||||||||||||
See Notes to Condensed Consolidated Financial Statements (Unaudited)
-8-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.Basis of Presentation and Overview
The accompanying Condensed Consolidated Financial Statements of Ziff Davis, Inc. and its direct and indirect wholly-owned subsidiaries (“Ziff Davis”, the “Company”, “our”, “us”, or “we”), were prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), and all adjustments considered necessary for a fair presentation have been included. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying interim Condensed Consolidated Financial Statements have been prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). The preparation of these Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Condensed Consolidated Financial Statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. All normal recurring adjustments necessary for a fair presentation of these interim Condensed Consolidated Financial Statements were made.
This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 26, 2024 and other filings with the SEC.
The results of operations for this interim period are not necessarily indicative of the operating results for the full year or for any future period.
Description of Business
Ziff Davis, Inc. is a vertically focused digital media and internet company whose portfolio includes brands in technology, shopping, gaming and entertainment, connectivity, health and wellness, cybersecurity, and martech. Our Digital Media business specializes in the technology, shopping, gaming and entertainment, connectivity, and healthcare markets, offering content, tools, and services to consumers and businesses. Our Cybersecurity and Martech business provides cloud-based subscription and license services to consumers and businesses including cybersecurity, privacy, and marketing technology.
Significant Accounting Policies
The accounting policies followed by the Company are set forth in Note 1 to the Company's consolidated financial statements included in its Form 10-K for the fiscal year ended December 31, 2023.
Direct costs - Direct costs represent the Company’s costs of revenue and primarily include costs associated with compensation for personnel directly involved in revenue generation, content fees, production costs, royalty fees, hosting and licensing costs, processing fees, and depreciation and amortization expense.
For the three and six months ended June 30, 2024, there have been no new or material changes to the significant accounting policies discussed in the Company’s Form 10-K for the fiscal year ended December 31, 2023.
Recent Accounting Pronouncements
Recently issued applicable accounting pronouncements not yet adopted
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides for optional financial reporting alternatives to reduce costs and complexities associated with accounting for contracts, hedging relationships, and other transactions affected by reference rate reform. This update applies only to contracts, hedging relationships, and other transactions that reference London Interbank Offer Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The accommodations were available for all entities through December 31, 2022, with early adoption permitted. This update was later amended by ASU 2022-06.
In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This update defers the expiration date of Accounting Standards Codification (“ASC”) Topic 848 from December 31, 2022 to December 31, 2024. We are currently evaluating the effect the adoption of this update will have on our consolidated financial statements and related disclosures.
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. The amendments in this update modify the disclosure or presentation requirements of a variety of Topics in the Codification. Certain of the amendments represent clarifications to or technical corrections of the current requirements. For entities subject to the SEC's existing disclosure requirements and entities
-9-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
required to file/furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for which each amendment will be the date on the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. For all other entities, amendments will be effective two years later. We are currently evaluating the impact the adoption of this update will have on our consolidated financial statements and related disclosures.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which provides for enhanced disclosures about significant segment expenses. This update enhances interim disclosure requirements, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, provides new segment disclosure requirements for entities with a single reportable segment, and contains other disclosure requirements. The purpose of this update is to enable investors to better understand an entity’s overall performance and assess potential future cash flows. The update is required to be applied retrospectively to prior periods presented, based on the significant segment expense categories identified and disclosed in the period of adoption. The amendments in this update are required to be adopted for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. This update will likely result in us including the additional required disclosures when adopted. We are currently evaluating the impact of adoption of this update will have on our consolidated financial statements and related disclosures and expect to adopt them for the year ended December 31, 2024.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in the update require public business entities on an annual basis to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. This update also requires that entities disclose on an annual basis information about the amount of income taxes paid disaggregated by federal, state, and foreign taxes and the amount of income taxes paid disaggregated by individual jurisdictions in which income taxes paid is equal to or greater than a quantitative threshold. The amendments in this update are required to be adopted for fiscal years beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the effect the adoption of this update will have on our consolidated financial statements and related disclosures.
2.Revenues
Digital Media
Digital Media revenues are earned primarily from the delivery of advertising and performance marketing services, licensing, and subscriptions to services and information.
Advertising and Performance Marketing
Revenue from the delivery of advertising services is earned on websites that are owned and operated by us and on those websites that are part of Digital Media’s advertising network. Depending on the individual contracts with the customer, revenue for these services is recognized over the contract period when any of the following performance obligations are satisfied: (i) when an advertisement is placed for viewing, (ii) when a qualified sales lead is delivered, (iii) when a visitor “clicks through” on an advertisement, or (iv) when commissions are earned upon the sale of an advertised product.
The Digital Media business also generates revenues from marketing, performance marketing, production services, and the management of client gift card programs. Such revenues are generally recognized over the period in which the products or services are delivered.
Subscription and Licensing
Revenues from subscriptions is earned through the granting of access to, or delivery of, data products or services to customers. Subscriptions cover video games and related content, health information, data, and other copyrighted material. Revenues are also earned from listing fees, subscriptions to online publications, and from other sources. Subscription revenues are primarily recognized over the contract term. Revenues related to the provision of access to historical data for certain services are recorded at the time of delivery.
The Digital Media business also generates revenues through the license of certain assets to clients. Assets are licensed for clients’ use in their own promotional materials or otherwise and may include logos, editorial reviews, or other copyrighted material that represent symbolic intellectual property, as defined in ASC 606, Revenue from Contracts with Customers. Revenues under such license agreements are generally recognized over the contract term. In instances when technology assets in the form of functional intellectual property are licensed to our clients, revenues from the license of these assets are recognized at a point in time.
-10-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Digital Media subscription and licensing revenues include revenues from transactions involving the sale of perpetual software licenses, related software support, and maintenance. Revenue is recognized for software transactions with multiple performance obligations after (i) the contract has been approved and we are committed to perform the respective obligations and (ii) we can identify and quantify each obligation and its respective selling price. Once the respective performance obligations have been identified and quantified, revenue will be recognized when the obligations are met, either over time or at a point in time, depending on the nature of the obligation.
Revenues from software license performance obligations are generally recognized upfront at the point in time that the software is made available to the customer for download and use. Revenues from related software support and maintenance are generally recognized ratably over the contractual period, because technical support, unspecified software product upgrades, maintenance releases, and patches are provided to customers on an as needed basis and they are available during the term of the support period. We are obligated to make the support services available continuously throughout the contract period.
Other
Other revenues primarily include those from the sale of hardware used in conjunction with software described above, online course revenue, and game publishing revenue. Hardware product and related software performance obligations, such as an operating system or firmware, are highly interdependent and interrelated and are accounted for as a bundled performance obligation. The revenues for this bundled performance obligation are generally recognized at the point in time that the hardware and software products are delivered and ownership is transferred to the customer.
Cybersecurity and Martech
The Company’s Cybersecurity and Martech revenues consist of subscription and licensing revenues which primarily include subscription and usage-based fees, a significant portion of which are paid in advance. The Company defers the portions of monthly, quarterly, semi-annual, and annual fees collected in advance of the satisfaction of performance obligations and recognizes them in the period earned.
Along with its numerous proprietary Cybersecurity and Martech solutions, the Company also generates subscription revenues by reselling various third-party solutions, primarily through its email security line of business. These third-party solutions, along with the Company’s proprietary products, allow it to offer customers a variety of solutions to better meet the customer’s needs.
Principal vs. Agent
The Company determines whether revenue should be reported on a gross or net basis by assessing whether the Company is acting as the principal or an agent in the transaction, respectively. The Company records revenue on a gross basis with respect to revenue generated (i) by the Company serving online display and video advertising across its owned and operated web properties, on third-party sites, or on unaffiliated advertising networks; (ii) through the Company’s lead-generation business; and (iii) through the Company’s subscriptions, including the resale of various third-party solutions, primarily through its email security line of business. The Company records revenue on a gross basis with respect to reseller revenue because the Company has control of the specified good or service prior to transferring control to the customer. The Company records revenue on a net basis with respect to revenue paid to the Company by certain third-party advertising networks who serve online display and video advertising across the Company’s owned-and-operated web properties and certain third-party platforms, primarily related to the transfer of functional intellectual property. The Company records revenue on a net basis with respect to revenue earned from servicing the client gift card programs.
-11-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Disaggregated Revenues
Revenues from external customers classified by revenue source are as follows (in thousands):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Digital Media | |||||||||||||||||||||||
Advertising and performance marketing | $ | $ | $ | $ | |||||||||||||||||||
Subscription and licensing | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total Digital Media revenues | $ | $ | $ | $ | |||||||||||||||||||
| Cybersecurity and Martech | |||||||||||||||||||||||
Subscription and licensing | $ | $ | $ | $ | |||||||||||||||||||
| Total Cybersecurity and Martech revenues | $ | $ | $ | $ | |||||||||||||||||||
| Elimination of inter-segment revenues | ( | ( | ( | ( | |||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | |||||||||||||||||||
The Company recorded $58.3 million and $30.3 million of revenue for the three months ended June 30, 2024 and 2023, respectively, and $132.4 million and $95.4 million of revenue for the six months ended June 30, 2024 and 2023, respectively, which was previously included in the deferred revenue balance as of the beginning of each respective year.
Performance Obligations
The Company may be a party to multiple concurrent contracts with the same customers, or a party or parties related to those customers. Some of these situations may require judgment to determine if those arrangements should be accounted for as a single contract. Consideration of both the form and the substance of the arrangement is required. The Company’s contracts with customers may include multiple performance obligations, including contracts when advertising and licensing services are sold together.
The Company determines the transaction price based on the amount to which the Company expects to be entitled in exchange for services provided. The Company includes any fixed consideration within its contracts as part of the total transaction price. The Company’s contracts occasionally contain some component of variable consideration, such as commissions that are recognized in the period of the commissionable event. The Company does not include in the transaction price taxes assessed by a governmental authority that are (i) both imposed on and concurrent with a specific revenue-producing transaction and (ii) collected by us from the customer. Due to the nature of the services provided, there are no obligations for returns.
The Company satisfies its performance obligations upon delivery of services to its customers. Within the Digital Media business, the Company provides content to its advertising partners which the Company sells to its partners’ customer base and receives a revenue share based on the terms of the agreement.
Payment terms vary by type and location of our customers and the services offered. The time between invoicing and when payment is due is generally not significant.
Our Digital Media business consists primarily of performance obligations that are satisfied over time. This was determined based on a review of the contracts and the nature of the services offered, where the customer simultaneously receives and consumes the benefit of the services provided.
Revenue is recognized based on delivery of services over the contract period for advertising and on a straight-line basis or units of output basis over the contract period for subscriptions. The Company believes that the methods described are a faithful depiction of the transfer of goods and services.
The Digital Media business also has licensing arrangements that have standalone functionality. As a result, the performance obligations are satisfied at a point in time.
-12-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Our Cybersecurity and Martech business consists primarily of performance obligations that are satisfied over time. This has been determined based on the fact that the nature of services offered are subscription-based where the customer simultaneously receives and consumes the benefit of the services provided regardless of whether the customer uses the services. Depending on the individual contracts with the customer, revenue for these services is recognized over the contract period when any of the following materially distinct performance obligations are satisfied:
•Voice, email marketing, and search engine optimization as services are delivered.
•Consumer privacy services and data backup capabilities are provided.
•Security solutions, including email and endpoint are provided.
The Company has concluded the best measure of progress toward the complete satisfaction of the performance obligation is a time-based measure. The Company recognizes revenue on a straight-line basis throughout the subscription period, or as usage occurs, or when functional intellectual property is delivered for services outside of the subscription, and believes that the method used is a faithful depiction of the transfer of goods and services.
Transaction Price Allocation to Future Performance Obligations
As of June 30, 2024, the aggregate amount of transaction price that is allocated to future performance obligations was approximately $86.8 million and is expected to be recognized as follows: 39 % by December 31, 2024, 45 % by December 31, 2025, and 16 % thereafter. The amount disclosed does not include revenues related to performance obligations that are part of contracts with original expected durations of twelve months or less or portions of the contracts that remain subject to cancellations. Further, the disclosure does not include contracts for which the Company recognizes revenue in proportion to the amount it has the right to invoice for services performed.
3.Business Acquisitions
The Company uses acquisitions as a strategy to grow its customer base by increasing its presence in new and existing markets, expanding and diversifying its service offerings, enhancing its technology, and acquiring skilled personnel.
For the three and six months ended June 30, 2024, the Company recorded $12.3 million and $19.3 million of incremental revenue from the businesses acquired during the six months ended June 30, 2024 and 2023. Net income contributed by these acquisitions was not separately identifiable due to the Company’s integration activities and is impracticable to provide.
2024 Acquisitions
The Company completed the following acquisitions during the six months ended June 30, 2024, paying the purchase price in cash in each transaction: (a) a purchase of 100 % of the equity interest in TDS Gift Cards, acquired on February 5, 2024, a California-based digital gifting and branded payments platform, which is reported within our Digital Media segment; and (b) one other Digital Media acquisition.
The acquisition of TDS Gift Cards is expected to expand our ability to offer innovative shopping solutions to our merchant partners and broaden our capabilities to help facilitate commerce between consumers and some of the most highly visible brands. The other acquisition was completed in the second quarter of 2024 and is expected to provide access to new markets and expand the Company’s product lineup within the gaming and entertainment business. Total consideration for these transactions was $203.4 million, or $57.4 million, net of cash acquired.
-13-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
The following table summarizes the allocation of the preliminary purchase consideration for the acquisition of TDS Gift Cards as of June 30, 2024 (in thousands):
Assets and Liabilities | Valuation (1) | |||||||
Cash | $ | |||||||
Accounts receivable and other current assets (2) | ||||||||
Intangible assets | ||||||||
Goodwill (2) | ||||||||
Other assets | ||||||||
Accounts payable and other current liabilities | ( | |||||||
Deferred tax liability, noncurrent | ( | |||||||
Other noncurrent liabilities | ( | |||||||
Total | $ | |||||||
(1)During the three months ended June 30, 2024, we recorded a measurement period adjustment of $7.2 million primarily reducing goodwill and increasing customer relationships asset and other purchased intangibles.
The preliminary amounts assigned to intangible assets by type for the acquisitions during the six months ended June 30, 2024 are summarized in the table below (in thousands):
| Gross Carrying Value | Weighted Average Estimated Life | ||||||||||
| Customer relationships | $ | ||||||||||
| Trade names and trademarks | |||||||||||
| Other purchased intangibles | |||||||||||
| Total gross carrying value | $ | ||||||||||
The initial accounting for the 2024 acquisitions is incomplete due to the timing of available information and is subject to change. The Company has recorded provisional amounts for certain intangible assets as of June 30, 2024.
The Condensed Consolidated Statements of Operations since the date of each acquisition reflect the results of operations of the 2024 acquisitions since the date of the acquisition.
2023 Acquisitions
The Company completed two immaterial Digital Media acquisitions during the six months ended June 30, 2023, paying the purchase price in cash in each transaction.
The Condensed Consolidated Statements of Operations since the date of each acquisition reflect the results of operations of the 2023 acquisitions.
Goodwill recognized associated with these acquisitions during the six months ended June 30, 2023 was $6.6 million, all of which is expected to be deductible for income tax purposes. Approximately $7.2 million of definite-lived intangibles were recorded in connection with these acquisitions during the six months ended June 30, 2023.
-14-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
4.Investments
Investments consist of equity and debt securities.
Investment in equity securities
On October 7, 2021, we completed the separation of our cloud fax business (the “Separation”) into an independent publicly traded company. Following the Separation, the Company retained shares of publicly traded common stock of Consensus Cloud Solutions, Inc. (“Consensus”). During the three and six months ended June 30, 2023, the Company sold zero and 52,393 shares, respectively, of common stock of Consensus in the open market. As of December 31, 2023, the Company held approximately 1.0 million shares of the common stock of Consensus with the carrying value of $27.1 million, which was included in ‘Short-term investments’ in the Condensed Consolidated Balance Sheets. The Company accounted for its investment in Consensus at fair value under the fair value option, and the related fair value gains and losses were recognized in earnings. For the three months ended June 30, 2024 and 2023, the unrealized losses of zero and $3.2 million, respectively, were recorded in the Condensed Consolidated Statement of Operations. For the six months ended June 30, 2024 and 2023, the unrealized losses of $10.7 million and $23.5 million, respectively, were recorded in the Condensed Consolidated Statement of Operations. During the three and six months ended June 30, 2024, the Company sold its remaining 1,034,295
On July 31, 2023, the Company entered into an agreement to purchase $25.0 million of equity in Xyla, Inc. (“Xyla”) for a minority ownership stake. This minority investment was made in the form of cash and shares of the Company’s common stock. The Company accounts for its investment in Xyla as an equity investment without a readily determinable fair value measured under the measurement alternative in accordance with ASC Topic 321, Investments — Equity Securities. As of each of June 30, 2024 and December 31, 2023, the carrying value of the investment in Xyla was $25.3
Investment in corporate debt security
On April 12, 2022, the Company entered into an agreement with an entity to acquire 4 % convertible notes with an aggregate value of $15.0 million. On May 19, 2023, the Company entered into the Note Amendment Agreement (the “Amendment”) with respect to the same entity. The Amendment increased the interest rate on the convertible notes to 6 %, extended the maturity date, and subordinated all existing and future obligations, liabilities, and indebtedness of the entity to the entity’s senior creditor, as defined in the Amendment. This investment is included in ‘Long-term investments’ in the Condensed Consolidated Balance Sheets and is classified as available-for-sale. The investment was initially measured at its transaction price and subsequently remeasured at fair value, with unrealized gains and losses reported as a component of other comprehensive income.
As of June 30, 2024, both the carrying value and the maximum exposure of the Company’s investment in corporate debt securities was approximately $16.1 one year but less than five years . As of December 31, 2023, both the carrying value and the maximum exposure of the Company’s investment in corporate debt securities was approximately $15.7 million, with a contractual maturity date that was more than one year but less than five years . Cumulative gross unrealized gains on investment in corporate debt securities as of June 30, 2024 and December 31, 2023 were approximately $1.1 million and $0.7 million, respectively.
There were no
During the three and six months ended June 30, 2024 and 2023, the Company did not
Equity method investment
On September 25, 2017, the Company entered into a commitment to invest in OCV Fund I, LP (the “OCV Fund”). The Company recognizes its equity in the net earnings or losses relating to the investment in the OCV Fund on a one-quarter lag due to the timing and availability of financial information from the OCV Fund. If the Company becomes aware of a significant decline in value that is other-than-temporary, the loss will be recorded in the period in which the Company identifies the decline.
During the three months ended June 30, 2024 and 2023, the Company recognized income (loss) from the equity method investment, net of income taxes of $8.8 million and $(0.6 ) million, net of tax (expense) benefit, respectively. During the six months ended June 30, 2024 and 2023, the Company recognized income (loss) from the equity method investment, net of income taxes of $8.2 million and $(9.8 ) million, net of tax (expense) benefit, respectively. The income (loss) in the periods presented were primarily the result of gains in the underlying investments.
-15-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
As of June 30, 2024, both the carrying value and the maximum exposure of the Company’s equity method investment was approximately $111.0 million. As of December 31, 2023, both the carrying value and the maximum exposure of the Company’s equity method investment was approximately $99.9 million. These equity securities are included in ‘Long-term investments’ in our Condensed Consolidated Balance Sheets.
As a limited partner, the Company’s maximum exposure to loss is limited to its proportional ownership in the partnership. In addition, the Company is not required to contribute any future capital. Finally, there are no call or put options, or other types of arrangements, which limit the Company’s ability to participate in losses and returns of the OCV Fund.
5.Fair Value Measurements
The Company complies with the provisions of ASC 820, which defines fair value, provides a framework for measuring fair value and expands the disclosures required for fair value measurements of financial and non-financial assets and liabilities. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value.
| § | Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. | |||||||
| § | Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |||||||
| § | Level 3 – Unobservable inputs which are supported by little or no market activity. | |||||||
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Recurring Fair Value Measurements
The Company’s money market funds are classified within Level 1. The Company values these Level 1 investments using quoted market prices.
On May 22, 2024, the Company sold its remaining investment in Consensus common stock. The investment in Consensus common stock was an investment in equity securities for which the Company elected the fair value option, and the fair value of the investment in Consensus common stock and subsequent fair value changes were included in our assets of and results from operations, respectively. As of December 31, 2023, our investment in Consensus common stock was remeasured at fair value based on Consensus’ closing stock price and had a balance of $27.1 million in the Condensed Consolidated Balance Sheets. The fair value of the investment in Consensus common stock was determined using quoted market prices, which is a Level 1 input. As of June 30, 2024, our investment in Consensus common stock was zero .
The Company has investment in a corporate debt security that does not have a readily determinable fair value because the acquired securities are privately held, not traded on any public exchanges and not an investment in a mutual fund or similar investment. The investment in corporate debt securities is classified as available-for-sale and is initially measured at its transaction price. The fair value of the corporate debt securities is determined primarily based on estimates and assumptions, including Level 3 inputs. As of June 30, 2024 and December 31, 2023, the fair value was determined based upon various probability-weighted scenarios which included discount rate assumptions between 13 14 three years
The Company classifies its contingent consideration liability in connection with acquisitions within Level 3 because factors used to develop the estimated fair value are unobservable inputs, such as volatility and market risks, and are not supported by market activity. The valuation approaches used to value Level 3 investments considers unobservable inputs in the market such as time to liquidity, volatility, dividend yield, and breakpoints. Significant increases or decreases in any of the inputs in isolation could result in a significantly lower or higher fair value measurement.
As of each of June 30, 2024 and December 31, 2023, the contingent consideration was determined using a 100% probability of payout at the maximum amount, without any other estimates applied.
-16-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
The following tables present the fair values of the Company’s financial assets or liabilities that are measured at fair value on a recurring basis (in thousands):
| June 30, 2024 | Level 1 | Level 2 | Level 3 | Fair Value | Carrying Value | ||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||||||||
| Money market and other funds | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Long-term investments: | |||||||||||||||||||||||||||||
| Investment in corporate debt securities | |||||||||||||||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Total liabilities measured at fair value | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| December 31, 2023 | Level 1 | Level 2 | Level 3 | Fair Value | Carrying Value | ||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||||||||
| Money market and other funds | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||||||||
| Consensus common stock | |||||||||||||||||||||||||||||
| Long-term investments: | |||||||||||||||||||||||||||||
| Investment in corporate debt securities | |||||||||||||||||||||||||||||
| Total assets measured at fair value | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Total liabilities measured at fair value | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
At the end of each reporting period, management reviews the inputs to the fair value measurements of financial and non-financial assets and liabilities to determine when transfers between levels are deemed to have occurred. For the three and six months ended June 30, 2024 and 2023, there were no transfers that occurred between levels.
The following table presents a reconciliation of the Company’s Level 3 financial assets related to our contingent consideration arrangements and investment in corporate debt securities that are measured at fair value on a recurring basis (in thousands):
| Six months ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Contingent Consideration Arrangements | Corporate Debt Securities | Contingent Consideration Arrangements | Corporate Debt Securities | ||||||||||||||||||||
| Balance as of January 1 | $ | $ | $ | $ | |||||||||||||||||||
| Fair value at date of acquisition | |||||||||||||||||||||||
Fair value adjustments (1) | ( | ||||||||||||||||||||||
| Balance as of June 30 | $ | $ | $ | $ | |||||||||||||||||||
-17-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Nonrecurring Fair Value Measurements
The Company’s non-financial assets, such as goodwill, intangible assets, right-of-use assets, and property, plant and equipment, are adjusted to fair value only when an impairment is recognized. The Company’s financial assets, comprised of equity securities without readily determinable fair value, are adjusted to fair value when observable price changes are identified or due to impairment. Such fair value measurements are based predominately on Level 3 inputs.
Other Fair Value Disclosures
The fair value of the Company’s 4.625 % Senior Notes and 1.75 % Convertible Notes (as defined in Note 7 — Debt) was determined using quoted market prices or dealer quotes for instruments with similar maturities and other terms and credit ratings, which are Level 1 inputs. If such information is not available for the 1.75 % Convertible Notes, the fair value is determined using cash flow models of the scheduled payments discounted at market interest rates for comparable debt without the conversion feature.
The following table presents the carrying value and the fair value of financial instruments measured at fair value only for disclosure purposes:
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
6.Goodwill and Intangible Assets
Goodwill
The changes in carrying amounts of goodwill for the six months ended June 30, 2024 are as follows (in thousands):
| Digital Media | Cybersecurity and Martech | Consolidated | |||||||||||||||
Balance as of January 1, 2024 | $ | $ | $ | ||||||||||||||
Goodwill acquired (1) | |||||||||||||||||
Goodwill removed due to sale of businesses (2) | ( | ( | |||||||||||||||
| Foreign exchange translation | ( | ( | ( | ||||||||||||||
| Balance as of June 30, 2024 | $ | $ | $ | ||||||||||||||
(1)Goodwill recognized in connection with the acquisitions during the six months ended June 30, 2024 (see Note 3 — Business Acquisitions), which is not expected to be deductible for income tax purposes.
(2)During the six months ended June 30, 2024, in a cash transaction, the Company sold an international business at Digital Media within its shopping vertical, which resulted in $4.0 million of goodwill being removed in connection with this sale.
Goodwill as of each of June 30, 2024 and December 31, 2023 reflects accumulated impairment losses of $84.2 79.2 million. Further, as of June 30, 2024, there was one other reporting unit within the Digital Media reportable segment that had goodwill of approximately $98.1 million that may be at risk of impairment. Changes in market conditions, and key assumptions made in future quantitative assessments, including expected cash flows, competitive factors and discount rates, could negatively impact the results of future impairment testing and could result in the recognition of an impairment charge. As of June 30, 2024, there were no other reporting units that have material goodwill at risk of impairment as of the most recent test date.
-18-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Intangible Assets Subject to Amortization
As of June 30, 2024, intangible assets subject to amortization relate primarily to the following (in thousands):
| Historical Cost | Accumulated Amortization | Net | |||||||||||||||
| Trade names and trademarks | $ | $ | $ | ||||||||||||||
Customer relationships | |||||||||||||||||
| Other purchased intangibles | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
As of December 31, 2023, intangible assets subject to amortization relate primarily to the following (in thousands):
| Historical Cost | Accumulated Amortization | Net | |||||||||||||||
| Trade names and trademarks | $ | $ | $ | ||||||||||||||
Customer relationships | |||||||||||||||||
| Other purchased intangibles | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
Amortization expense, included in ‘General, administrative, and other related costs’ in our Condensed Consolidated Statements of Operations, was approximately $27.8 million and $35.3 million for the three months ended June 30, 2024 and 2023, respectively, and $54.1 million and $68.6 million for the six months ended June 30, 2024 and 2023, respectively.
7.Debt
Long-term debt consists of the following (in thousands):
| June 30, 2024 | December 31, 2023 | ||||||||||
| $ | $ | ||||||||||
| Total Notes | |||||||||||
| Credit Agreement | |||||||||||
| Less: Unamortized discount | ( | ( | |||||||||
Deferred issuance costs (1) | ( | ( | |||||||||
| Total long-term debt | $ | $ | |||||||||
(1)Includes $4.5 million and $5.5 million of carrying amount of deferred issuance costs on the 1.75 % Convertible Notes as of June 30, 2024 and December 31, 2023, respectively, and $0.7 million and $0.8 million of carrying amount of deferred issuance costs on the 4.625 % Senior Notes as of June 30, 2024 and December 31, 2023, respectively.
As of June 30, 2024, $550.0 million of principal of 1.75 % Convertible Notes will mature in 2026 and $460.0 million of principal of 4.625 % Senior Notes will mature in 2030.
On October 7, 2020, the Company completed the issuance and sale of $750.0 million aggregate principal amount of its 4.625 % senior notes due 2030 (the “4.625 % Senior Notes”) in a private placement offering exempt from the registration requirements of the Securities Act of 1933, as amended. The Company received proceeds of $742.7 million after deducting the initial purchasers’ discounts, commissions and offering expenses. The net proceeds were used to redeem all of its then outstanding 6.0 % Senior Notes due in 2025 and, the remaining net proceeds were available for general corporate purposes which may include acquisitions and the repurchase or redemption of other outstanding indebtedness.
These senior notes bear interest at a rate of 4.625 % per annum, payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2021. The 4.625 % Senior Notes mature on October 15, 2030, and are senior unsecured obligations of the Company which are guaranteed, jointly and severally, on an unsecured basis by certain of the Company’s existing and future domestic direct and indirect wholly-owned subsidiaries (collectively, the “Guarantors”). If the Company or any of its restricted subsidiaries acquires or creates a domestic restricted subsidiary, other than an Insignificant
-19-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Subsidiary (as defined in the indenture pursuant to which the 4.625 % Senior Notes were issued (the “Indenture”)), after the issue date, or any Insignificant Subsidiary ceases to fit within the definition of Insignificant Subsidiary, such restricted subsidiary is required to unconditionally guarantee, jointly and severally, on an unsecured basis, the Company’s obligations under the 4.625 % Senior Notes.
The Company may redeem some or all of the 4.625 % Senior Notes at any time on or after October 15, 2025 at specified redemption prices plus accrued and unpaid interest, if any, up to, but excluding the redemption date. In addition, at any time prior to October 15, 2025, the Company may redeem some or all of the 4.625 % Senior Notes at a price equal to 100 % of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, plus an applicable “make-whole” premium. The discount and deferred issuance costs are being amortized, at an effective interest rate of 4.7 %, to interest expense through the maturity date.
The Indenture contains covenants that restrict the Company’s ability to (i) pay dividends or make distributions on the Company’s common stock or repurchase the Company’s capital stock; (ii) make certain restricted payments; (iii) create liens or enter into sale and leaseback transactions; (iv) enter into transactions with affiliates; (v) merge or consolidate with another company; and (vi) transfer and sell assets. These covenants contain certain exceptions. Restricted payments are applicable only if the Company and subsidiaries designated as restricted subsidiaries have a net leverage ratio of greater than 3.5 to 1.0. In addition, if such net leverage ratio is in excess of 3.5 to 1.0, the restriction on restricted payments is subject to various exceptions, including the total aggregate amount not exceeding the greater of (A) $250 million and (B) 50.0 % of EBITDA for the most recently ended four fiscal quarter period ended immediately prior to such date for which internal financial statements are available. The Company is in compliance with its debt covenants for the 4.625 % Senior Notes as of June 30, 2024.
Cumulatively as of June 30, 2024, the Company has repurchased approximately $290 million in aggregate principal of its 4.625 % Senior Notes. There were no repurchases of 4.625 % Senior Notes during the three and six months ended June 30, 2024 and June 30, 2023.
On November 15, 2019, the Company issued $550.0 million aggregate principal amount of 1.75 % convertible senior notes due November 1, 2026 (the “1.75 % Convertible Notes”). The Company received proceeds of $537.1 million in cash, net of purchasers’ discounts and commissions and other debt issuance costs. A portion of the net proceeds were used to pay off all amounts outstanding under the then-existing credit facility. The 1.75 % Convertible Notes bear interest at a rate of 1.75 % per annum, payable semiannually in arrears on May 1 and November 1 of each year, beginning on May 1, 2020. The 1.75 % Convertible Notes will mature on November 1, 2026, unless earlier converted or repurchased.
Under certain conditions set forth in the indenture, the 1.75 % Convertible Notes bear additional interest of 0.50 % per annum payable semiannually in arrears on May 1 and November 1 of each year, beginning on May 1, 2021. During the three and six months ended June 30, 2023, the Company recorded $7.4 1.75 % Convertible Notes for such additional interest. The Company paid $7.0 million of this interest obligation to the trustee under the indenture for the 1.75 % Convertible Notes in August 2023. The Company recorded additional interest of $0.3 million in the third quarter of 2023 and paid the remaining $0.7 million in November 2023. As of August 1, 2023, the Company has complied with the conditions set forth in the indenture. As such , the cumulative $7.7 million interest expense was non-recurring.
Holders may surrender their 1.75 % Convertible Notes for conversion at any time prior to the close of business on the business day immediately preceding July 1, 2026 only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on March 31, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding the calendar quarter is greater than 130 % of the applicable conversion price of the 1.75 % Convertible Notes on each such applicable trading day; (ii) during the five business day period following any 10 consecutive trading day period in which the trading price per $1,000 principal amount of 1.75 % Convertible Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after July 1, 2026, and prior to the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their notes at any time, regardless of the foregoing circumstances. The Company will settle conversions of the 1.75 % Convertible Notes by paying or delivering, as the case may be, cash, shares of the Company’s common stock or a combination thereof at the Company’s election. The Company currently intends to satisfy its conversion obligation by paying and delivering a combination of cash and shares of the Company’s common stock. Holders of the notes will have the right to require the Company to repurchase for cash all or any portion of their notes upon the occurrence of certain corporate events, subject to certain conditions. As of June 30, 2024 and December 31, 2023, the market trigger conditions did not meet the conversion requirements of the 1.75 %
-20-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Convertible Notes and, accordingly, the 1.75 % Convertible Notes are classified as long-term debt on our Condensed Consolidated Balance Sheets.
As of June 30, 2024, the conversion rate is 9.3783 shares of the Company’s common stock for each $1,000 principal amount of 1.75 % Convertible Notes (or 5,158,071 shares), which represents a conversion price of approximately $106.63 per share of the Company’s common stock. The conversion rate is subject to adjustment for certain events as set forth in the indenture governing the 1.75 % Convertible Notes, but will not be adjusted for accrued interest. In addition, upon the occurrence of a “Make-Whole Fundamental Change” (as defined in the 1.75 % Convertible Note Indenture), the Company will increase the conversion rate for a holder that elects to convert its 1.75 % Convertible Notes in connection with such a corporate event in certain circumstances.
The Company may not redeem the 1.75 % Convertible Notes prior to November 1, 2026, and no sinking fund is provided for the 1.75 % Convertible Notes.
The 1.75 % Convertible Notes are the Company’s general senior unsecured obligations and rank: (i) senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the 1.75 % Convertible Notes; (ii) equal in right of payment to the Company’s existing and future indebtedness that is not so subordinated; (iii) effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and (iv) structurally junior to all existing and future indebtedness and other liabilities incurred by the Company’s subsidiaries.
The following table provides the components of interest expense related to the 1.75 % Convertible Notes (in thousands):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Contractual interest expense | $ | $ | $ | $ | |||||||||||||||||||
Amortization of deferred issuance costs | |||||||||||||||||||||||
Total interest expense related to | $ | $ | $ | $ | |||||||||||||||||||
Accounting for the 1.75 % Convertible Notes
In connection with the issuance of the 1.75 % Convertible Notes, the Company incurred $12.9 million in deferred issuance costs, which primarily consisted of the underwriters’ discount, legal and other professional service fees. Of the total deferred issuance costs incurred, $10.1 million was attributable to the liability component and is being amortized at an effective interest rate of 5.5 %, to interest expense through the maturity date. The remaining $2.8 million of the deferred issuance costs was netted with the equity component in additional paid-in capital at the issuance date. Upon adoption of ASU 2020-06 using the modified retrospective approach, the Company reclassified the $2.8 million from additional paid-in-capital to long-term liability and recorded a cumulative adjustment to retained earnings for amortization from the issuance date through January 1, 2022.
Credit Agreement
On April 7, 2021, the Company entered into a $100.0 million credit agreement (as amended, the “Credit Agreement”). On June 18, 2024, the Company entered into a New Lender Joinder Agreement and Eighth Amendment (the “Joinder and Amendment”) to the Credit Agreement. The Joinder and Amendment provides for, among other things, (i) an increase in the Aggregate Revolving Loan Commitment by an aggregate principal amount of $250.0 million for a total of $350.0 million, (ii) an extension of the scheduled maturity date from April 7, 2026 to the earlier of (x) June 18, 2027 or (y) under certain limited circumstances, August 2, 2026, (iii) a “credit spread adjustment” for SOFR-based borrowings of 0.10 % across all interest periods, (iv) the inclusion of limited conditionality borrowing mechanics with respect to certain borrowings and (v) certain other related amendments.
At the Company’s option, amounts borrowed under the Credit Agreement will bear interest at either (i) a base rate equal to the greater of (x) the Federal Funds Effective Rate (as defined in the Credit Agreement) in effect on such day plus 0.5 % per annum, (y) the rate of interest per annum most recently announced by the Agent (as defined in the Credit Agreement) as its U.S. Dollar “Reference Rate”, and (z) one month Term SOFR (as defined in the Credit Agreement) plus a credit spread adjustment plus 1.00 % or (ii) a rate per annum equal to Term SOFR plus a credit spread adjustment, in each case, plus an applicable margin. The applicable margin relating to any base rate loan will range from 0.50 % to 1.25 % and the applicable margin relating to any Term SOFR loan will range from 1.50 % to 2.25 %, in each case, depending on the total leverage ratio of the Company, plus a credit spread adjustment equal to 0.10 %. The Company is permitted to make voluntary prepayments of the
-21-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Credit Facility at any time without payment of a premium or penalty. The Credit Agreement is secured by an associated collateral agreement that provides for a lien on the majority of the Company’s assets and the assets of the guarantors, in each case, subject to customary exceptions.
As of June 30, 2024, there were no amounts outstanding under the Credit Agreement.
The Credit Agreement contains financial maintenance covenants, including (i) a maximum total leverage ratio as of the last date of any fiscal quarter not to exceed 4.00 :1.00 for the Company and its restricted subsidiaries and (ii) a minimum interest coverage ratio as of the last date of any fiscal quarter not less than 3.00 :1.00 for the Company and its restricted subsidiaries. The Credit Agreement also contains restrictive covenants that limit, among other things, the Company’s and its restricted subsidiaries’ ability to incur additional indebtedness, create, incur or assume liens, consolidate, merge, liquidate or dissolve, pay dividends or make other distributions or other restricted payments, make or hold certain investments, enter into certain transactions with affiliates, sell assets other than on terms specified by the Credit Agreement, amend the terms of certain other indebtedness and organizational documents, and change their lines of business and fiscal years, in each case, subject to customary exceptions. The Credit Agreement also sets forth customary events of default, including, among other things, the failure to make timely payments under the credit facility, the failure to satisfy certain covenants, cross-default and cross-acceleration to other material debt for borrowed money, the occurrence of a change of control, and specified events of bankruptcy and insolvency. The Company is in compliance with its debt covenants for the Credit Agreement as of June 30, 2024.
8.Commitments and Contingencies
Commitments
In the ordinary course of business, the Company enters into commitments including those related to cloud computing, information technology, security, and information and document management. The Company also has revenue sharing arrangements with annual minimum guarantees based upon third-party website advertising metrics and other contractual provisions.
Litigation
From time to time, the Company and its affiliates are involved in litigation and other legal disputes or regulatory inquiries that arise in the ordinary course of business. Any claims or regulatory actions against the Company and its affiliates, whether meritorious or not, could be time consuming and costly, and could divert significant operational resources. The outcomes of such matters are subject to inherent uncertainties, carrying the potential for unfavorable rulings that could include monetary damages and injunctive relief. The Company does not believe, based on current knowledge, that any such legal proceedings or claims, including those set forth below, after giving effect to existing accrued liabilities, are likely to have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could have a material effect on the Company’s consolidated financial position, results of operations, or cash flows in a particular period.
Although the Company cannot predict the outcome of legal or other proceedings with certainty, where there is at least a reasonable possibility that a loss may have been incurred, GAAP requires us to disclose an estimate of the reasonably possible loss or range of loss or make a statement that such an estimate cannot be made. The Company follows a thorough process in which it seeks to estimate the reasonably possible loss or range of loss, and only if it is unable to make such an estimate does it conclude and disclose that an estimate cannot be made. Accordingly, unless otherwise indicated below in our discussion of litigation, a reasonably possible loss or range of loss associated with any individual legal proceeding cannot be estimated.
On July 8, 2020, Jeffrey Garcia filed a putative class action lawsuit against the Company in the Central District of California (20-cv-06096), alleging violations of federal securities laws. The court appointed a lead plaintiff. The Company moved to dismiss the consolidated class action complaint. The court granted the motion to dismiss and the plaintiff filed an amended complaint. The Company moved to dismiss the amended complaint. On August 8, 2022, the court granted the Company’s motion to dismiss the amended complaint without leave to amend. The lead plaintiff appealed the dismissal. On April 19, 2024, the Ninth Circuit Court of Appeals affirmed the dismissal.
On December 11, 2020, Danning Huang filed a lawsuit in the District of Delaware (20-cv-01687-LPS) asserting derivative claims against directors of the Company and other third parties. The lawsuit alleges violations of Section 14(a), Section 10(b), Section 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934, as well as breach of fiduciary duty, unjust enrichment and abuse of control.
-22-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
On March 24, 2021, Fritz Ringling filed a lawsuit in the District of Delaware (21-cv-00421-UNA) asserting substantially similar derivative claims, and on April 8, 2021, the district court consolidated the two actions under the caption In re J2 Global Stockholder Derivative Litigation. No.: 20-cv-01687-LPS. On June 4, 2024, the plaintiffs in the consolidated case dismissed their claims without prejudice.
The Company has not accrued for any material loss contingencies relating to these legal proceedings because materially unfavorable outcomes are not considered probable by management. It is the Company’s policy to expense as incurred legal fees related to various litigations.
Non-Income Related Taxes
The Company does not collect and remit sales and use, telecommunication, or similar taxes and fees in certain jurisdictions where the Company believes such taxes are not applicable or legally required. Several states and other taxing jurisdictions have presented or threatened the Company with assessments, alleging that the Company is required to collect and remit such taxes there. The Company is currently under audit or is subject to audit for indirect taxes in various states, municipalities, and foreign jurisdictions. The Company recognizes a liability for these matters when it is probable that an obligation exists and the amount can be reasonably estimated based on all relevant information that is available at each reporting period.
The Company established reserves for these matters of $28.1
9.Income Taxes
The Company’s tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate adjusted for discrete interim period tax impacts. Each quarter the Company updates its estimated annual effective tax rate and, if the estimate changes, makes a cumulative adjustment. The Company’s effective tax rate was 19.9 % and 27.2 % for the three months ended June 30, 2024 and 2023, respectively, and 27.9 % and 23.7 % for the six months ended June 30, 2024 and 2023, respectively.
The Company’s effective tax rate for the three and six months ended June 30, 2024 was impacted disproportionately by the recognition and subsequent changes to a valuation allowance against a portion of its U. S. capital loss carryforwards. During the three months ended June 30, 2024, the Company reversed a portion of its valuation allowance, which resulted in a discrete tax benefit of $0.8 million. During the six months ended June 30, 2024, the Company recognized a net valuation allowance against a portion of its U. S. capital loss carryforwards, which resulted in a discrete tax charge of $2.5 million.
The Company’s effective tax rate for the three and six months ended June 30, 2023 was impacted due to the unrealized loss on the Company’s investment in Consensus, which resulted in a discrete tax benefit of approximately $0.8 million and $5.8 million during the three and six months ended June 30, 2023, respectively.
As of June 30, 2024 and December 31, 2023, the Company had $37.1 million and $36.1 million, respectively, in liabilities for uncertain income tax positions included in ‘Other long-term liabilities’ on the Condensed Consolidated Balance Sheets. Accrued interest and penalties related to unrecognized tax benefits are recognized in income tax expense in our Condensed Consolidated Statements of Operations.
Certain taxes are prepaid during the year and, where appropriate, included in ‘Prepaid expenses and other current assets’ in our Condensed Consolidated Balance Sheets. As of June 30, 2024 and December 31, 2023, the Company’s prepaid taxes were $2.0 million and $4.7 million, respectively.
-23-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
10.Stockholders’ Equity
On August 6, 2020, the Company’s Board of Directors (the “Board”) approved a program authorizing the repurchase of up to ten million shares of the Company’s common stock through August 6, 2025 (the “2020 Program”). The Company entered into certain Rule 10b5-1 trading plans to execute repurchases under the 2020 Program. During the three and six months ended June 30, 2024, the Company repurchased 1,500,000 84.9 980,418 63.9 6,758,692 shares were repurchased under the 2020 Program, at an aggregate cost of $486.7 million, including excise tax. As a result of the repurchases, the number of shares of the Company’s common stock available for purchase as of June 30, 2024 was 3,241,308 shares.
Periodically, participants in the Company’s stock plans surrender to the Company shares of stock to pay the exercise price or to satisfy tax withholding obligations arising upon the exercise of stock options or the vesting of restricted stock and restricted stock units. During the three months ended June 30, 2024 and 2023, the Company purchased and retired 1,353 and 5,223 shares at an aggregate cost of approximately $0.1 million and $0.4 million, respectively, from plan participants for this purpose. During the six months ended June 30, 2024 and 2023, the Company purchased and retired 59,590 and 41,875 shares at an aggregate cost of approximately $4.0 million and $3.2 million, respectively, from plan participants for this purpose.
11.Share-Based Compensation
The Company’s share-based compensation plans include the Ziff Davis, Inc. 2024 Equity Incentive Plan (the “2024 Plan”), the 2015 Stock Option Plan (the “2015 Plan”), and 2001 Employee Stock Purchase Plan (the “Purchase Plan”). Each plan is described below.
On May 7, 2024, the 2024 Plan was approved by the stockholders of the Company and replaced the 2015 Stock Option Plan. The 2024 Plan permits the Company to issue shares of common stock to or for the benefit of employees, consultants, and non-employee directors of the Company and its subsidiaries as part of their compensation. The 2024 Plan provides for the grant of stock options, restricted stock, stock appreciation rights, restricted stock units, performance-based awards, and other incentive awards. Shares authorized but unissued under the 2015 Plan that were not subject to outstanding awards under the 2015 Plan as of May 7, 2024 were canceled. The total number of shares of the Company’s common stock that may be issued under the 2024 Plan shall not exceed 3,500,000 shares, plus any Returned Shares, as defined in the 2024 Plan, under the 2015 Plan and any shares under the 2024 Plan that are subsequently forfeited, canceled, reacquired by the Company, satisfied or are otherwise terminated (other than by exercise) or used to pay tax withholding obligations with respect to outstanding awards issued under the 2024 Plan. The 2024 Plan will expire on March 21, 2034, unless earlier terminated by the Board. Awards outstanding under the 2015 Plan were not impacted by the approval of the 2024 Plan. Collectively, the equity incentive plans are referred to herein as “Plans.”
As of June 30, 2024, 435,135 shares underlying options and 743,310 shares of restricted stock units were outstanding under the Plans. As of June 30, 2024, there were 3,488,228 additional shares underlying options, shares of restricted stock and other share-based awards available for grant under the 2024 Plan.
-24-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Share-Based Compensation Expense
The following table presents share-based compensation expense in the Condensed Consolidated Statements of Operations during the periods presented (in thousands):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
Direct costs | $ | $ | $ | $ | |||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Research, development, and engineering | |||||||||||||||||||||||
General, administrative, and other related costs | |||||||||||||||||||||||
| Total share-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
Restricted Stock and Restricted Stock Units
The Company has awarded restricted stock and restricted stock units to its Board and senior staff pursuant to certain share-based compensation plans. Compensation expense resulting from restricted stock and restricted unit grants is measured at fair value on the date of grant and is recognized as share-based compensation expense over the applicable vesting period. Vesting periods are approximately one year for awards to members of the Company’s Board, generally to four years for senior staff (excluding market-based awards discussed below) and to eight years for the Chief Executive Officer. The Company granted 390,284 and 291,159 shares of restricted stock units (excluding awards with market conditions below) (“RSUs”) during the six months ended June 30, 2024 and 2023, respectively.
The Company has awarded certain key employees market-based restricted stock (“PSAs”) and market-based restricted stock units (“PSUs”) pursuant to the Plans. Market-based awards granted prior to 2024 have vesting conditions that are based on specified stock price targets of the Company’s common stock. Market conditions were factored into the grant date fair value using a Monte Carlo valuation model, which utilized multiple input variables to determine the probability of the Company achieving the specified stock price targets with a 20 -day and 30 -day look back (trading days). During the six months ended June 30, 2023, the Company awarded 167,606 PSUs at stock price targets ranging from $83.61 to $103.76 per share.
During the six months ended June 30, 2024, the Company awarded 308,970 equity classified PSUs that vest in shares of the Company’s stock ranging from 0 % to 200 % of the award based on the Company’s attainment of a relative Total Shareholder Return (“TSR”) target compared to the TSR of all listed companies in a market index over the respective one, two, and three-year performance periods. Market conditions were factored into the grant date fair value using a Monte Carlo valuation model, which utilized multiple input variables to determine the probability of the Company and all listed companies in a market index achieving the relative TSR targets.
Share-based compensation expense related to an award with a market condition is recognized over the requisite service period using the graded-vesting method regardless of whether the market condition is satisfied, provided that the requisite service period has been completed.
The per share weighted average grant-date fair value for the PSUs granted during the six months ended June 30, 2024 and 2023 were $87.17 and $70.07 , respectively.
The assumptions used in determining the weighted-average fair values of PSUs granted during the periods presented are as follows:
| Six months ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Underlying stock price at valuation date | $ | $ | |||||||||
| Expected volatility | % | % | |||||||||
| Risk-free interest rate | % | % | |||||||||
-25-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Restricted stock award activity for the six months ended June 30, 2024 is set forth below:
RSAs | PSAs | |||||||||||||||||||||||||
Number of Shares | Weighted Average Grant Date Fair Value | Number of Shares | Weighted Average Grant Date Fair Value | |||||||||||||||||||||||
| Nonvested at January 1, 2024 | $ | $ | ||||||||||||||||||||||||
| Vested | ( | |||||||||||||||||||||||||
Forfeited | ( | |||||||||||||||||||||||||
Nonvested at June 30, 2024 | $ | $ | ||||||||||||||||||||||||
Restricted stock unit activity for the six months ended June 30, 2024 is set forth below:
RSUs | PSUs | ||||||||||||||||||||||
| Number of Shares | Weighted Average Grant Date Fair Value | Number of Shares (1) | Weighted Average Grant Date Fair Value | ||||||||||||||||||||
| Outstanding at January 1, 2024 | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Vested | ( | ||||||||||||||||||||||
Forfeited | ( | ( | |||||||||||||||||||||
| Outstanding at June 30, 2024 | $ | $ | |||||||||||||||||||||
(1)Represents the number of shares at 100% achievement.
-26-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
12.Earnings Per Share
The components of basic and diluted earnings (loss) per share are as follows (in thousands, except share and per share data):
| Three months ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Basic | Diluted | Basic | Diluted | ||||||||||||||||||||
Numerator for basic and diluted net income per common share: | |||||||||||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||||||||||
Less: Net income available to participating securities (1) | ( | ( | |||||||||||||||||||||
Plus: | — | — | |||||||||||||||||||||
Net income available to the Company’s common shareholders | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic weighted-average outstanding shares of common stock | |||||||||||||||||||||||
Dilutive effect of: | |||||||||||||||||||||||
Equity incentive plans | — | — | |||||||||||||||||||||
| Convertible debt | — | — | |||||||||||||||||||||
| Diluted weighted-average outstanding shares of common stock | |||||||||||||||||||||||
Net income per share: | $ | $ | $ | $ | |||||||||||||||||||
(1)Represents unvested share-based payment awards that contain certain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid).
| Six months ended June 30, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Basic | Diluted | Basic | Diluted | ||||||||||||||||||||
Numerator for basic and diluted net income per common share: | |||||||||||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||||||||||
Less: Net income available to participating securities (1) | ( | ( | |||||||||||||||||||||
Plus: | — | — | |||||||||||||||||||||
Net income available to the Company’s common shareholders | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Basic weighted-average outstanding shares of common stock | |||||||||||||||||||||||
Dilutive effect of: | |||||||||||||||||||||||
Equity incentive plans | — | — | |||||||||||||||||||||
| Convertible debt | — | — | |||||||||||||||||||||
| Diluted weighted-average outstanding shares of common stock | |||||||||||||||||||||||
Net income per share: | $ | $ | $ | $ | |||||||||||||||||||
(1)Represents unvested share-based payment awards that contain certain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid).
-27-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
For the three months ended June 30, 2024 and 2023, there were 1,322,295 and 1,548,331 shares, respectively, of stock options and restricted stock excluded from the calculation of diluted shares as they were anti-dilutive primarily due to the average stock price during the 2024 and 2023 periods. For the six months ended June 30, 2024 and 2023, there were 1,136,167 and 1,548,331 shares, respectively, of stock options and restricted stock excluded from the calculation of diluted shares as they were anti-dilutive primarily due to the average stock price during the 2024 and 2023 periods. During each of the three and six months ended June 30, 2024, zero 5,158,071
13.Segment Information
The Company’s businesses are based on the organizational structure used by the chief operating decision maker (“CODM”). The Company aggregates its operating segments into two reportable segments: Digital Media and Cybersecurity and Martech.
The accounting policies of the businesses are the same as those described in the Company’s Annual Report on Form 10-K filed with the SEC on February 26, 2024. The Company evaluates performance based on revenue and profit or loss from operations.
Information on reportable segments and reconciliation to income from operations is as follows (in thousands):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenue by reportable segment: | |||||||||||||||||||||||
| Digital Media | $ | $ | $ | $ | |||||||||||||||||||
| Cybersecurity and Martech | |||||||||||||||||||||||
Elimination of inter-segment revenues (1) | ( | ( | ( | ( | |||||||||||||||||||
| Total segment revenues | |||||||||||||||||||||||
Corporate | |||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||||||||
Operating costs and expenses by reportable segment (2): | |||||||||||||||||||||||
| Digital Media | |||||||||||||||||||||||
| Cybersecurity and Martech | |||||||||||||||||||||||
| Elimination of inter-segment operating expenses | ( | ( | ( | ( | |||||||||||||||||||
| Total segment operating expenses | |||||||||||||||||||||||
Corporate (3) | |||||||||||||||||||||||
| Total operating costs and expenses | |||||||||||||||||||||||
Operating income by reportable segment: | |||||||||||||||||||||||
Digital Media operating income | |||||||||||||||||||||||
| Cybersecurity and Martech operating income | |||||||||||||||||||||||
Total segment operating income | |||||||||||||||||||||||
Corporate (3) | ( | ( | ( | ( | |||||||||||||||||||
Income from operations | $ | $ | $ | $ | |||||||||||||||||||
(1)Inter-segment revenues relate to the Digital Media reportable segment.
(2)Operating expenses for each segment include direct costs and other operating expenses that are directly attributable to the segment, such as employee compensation expense, sales and marketing expenses, engineering and network operations expense, depreciation and amortization, and other administrative expenses.
-28-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
14.Supplemental Cash Flow Information
Non-cash investing and financing activities were as follows (in thousands):
| Six months ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Non-cash investing activity: | |||||||||||
| Property and equipment, accrued but unpaid | $ | $ | |||||||||
| Right-of-use assets acquired in exchange for operating lease obligations | $ | $ | |||||||||
Supplemental data (in thousands):
| Six months ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Interest paid | $ | $ | |||||||||
| Income taxes paid, net of refunds | $ | $ | |||||||||
15.Accumulated Other Comprehensive (Loss) Income
The following table summarizes the changes in accumulated balances of other comprehensive loss (income), net of tax, for the three months ended June 30, 2024 (in thousands):
Unrealized Gains on Investments | Foreign Currency Translation | Total | |||||||||||||||
| Balance as of April 1, 2024 | $ | $ | ( | $ | ( | ||||||||||||
Other comprehensive income (loss), net of tax | ( | ( | |||||||||||||||
Balance as of June 30, 2024 | $ | $ | ( | $ | ( | ||||||||||||
The following table summarizes the changes in accumulated balances of other comprehensive loss (income), net of tax, for the six months ended June 30, 2024 (in thousands):
Unrealized Gains on Investments | Foreign Currency Translation | Total | |||||||||||||||
Balance as of January 1, 2024 | $ | $ | ( | $ | ( | ||||||||||||
Other comprehensive income (loss), net of tax | ( | ( | |||||||||||||||
Balance as of June 30, 2024 | $ | $ | ( | $ | ( | ||||||||||||
There were no
-29-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
16. Subsequent Events
On July 16, 2024, the Company issued $263.1 million in aggregate principal amount of new 3.625 % Convertible Notes due 2028 (the “3.625 % Convertible Notes”) and paid an aggregate of approximately $135.0 million in cash in exchange for approximately $400.9 million in aggregate principal amount of the Company’s 1.75 % Convertible Notes (collectively, the “Exchange Transaction”) pursuant to separate, privately negotiated exchange agreements with certain holders of the 1.75 % Convertible Notes. The Company also paid outstanding and accrued interest on the exchanged 1.75 % Convertible Notes. The Exchange Transaction is expected to be accounted for as a debt modification.
The 3.625 % Convertible Notes bear interest at a rate of 3.625 % per annum on the principal amount thereof, payable semi-annually in arrears on September 1 and March 1 of each year, beginning on March 1, 2025, to the noteholders of record of the 3.625 % Convertible Notes as of the close of business on the immediately preceding August 15 and February 15, respectively. The 3.625 % Convertible Notes will mature on March 1, 2028, unless earlier converted or repurchased. The 3.625 % Convertible Notes can be settled in cash, the Company’s common stock, or a combination of cash and the Company’s common stock, at $0.01 par value per share, at the Company’s election.
Holders may surrender their 3.625 % Convertible Notes for conversion at any time prior to the close of business on the business day immediately preceding December 1, 2027 only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on September 30, 2024 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding the calendar quarter is greater than or equal to 130 % of the applicable conversion price of the 3.625 % Convertible Notes on each such applicable trading day; (ii) during the five business day period following any 10 consecutive trading day period in which the trading price per $1,000 principal amount of 3.625 % Convertible Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events. On or after December 1, 2027, and prior to the close of business on the business day immediately preceding the maturity date, holders may convert all or any portion of their notes at any time, regardless of the foregoing circumstances, at an initial conversion rate of 10 shares of the Company’s common stock per $1,000 principal amount of 3.625 % Convertible Notes. The Company will settle conversions of the 3.625 % Convertible Notes by paying or delivering, as the case may be, cash, shares of the Company’s common stock or a combination thereof at the Company’s election. Holders of the notes will have the right to require the Company to repurchase for cash all or any portion of their notes upon the occurrence of certain corporate events, subject to certain conditions.
The initial conversion rate of the 3.625 % Convertible Notes is 10 shares per $1,000 principal amount of the 3.625 % Convertible Notes, which represents an initial conversion price of $100 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events as set forth in the indenture governing the 3.625 % Convertible Notes, but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a “Make-Whole Fundamental Change”, as defined in the 3.625 % Convertible Note Indenture, the Company will in certain circumstances increase the conversion rate for a holder that elects to convert its 3.625 % Convertible Notes in connection with such a corporate event.
The Company may not redeem the 3.625 % Convertible Notes prior to the maturity date, and no sinking fund is provided for the 3.625 % Convertible Notes.
The 3.625 % Convertible Notes are the Company’s general senior unsecured obligations and rank: (i) senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the 3.625 % Convertible Notes; (ii) equal in right of payment to the Company’s existing and future indebtedness that is not so subordinated; (iii) effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and (iv) structurally junior to all existing and future indebtedness and other liabilities incurred by the Company’s subsidiaries
Share Repurchases
On August 2, 2024, the Board of the Company authorized (i) an increase in its 2020 Program pursuant to which the Company may purchase up to an additional 5 million shares of the Company’s common stock (the “Additional Authorization”) and (ii) an extension of the expiration date of the share repurchase program from August 6, 2025 to August 2, 2029. As a result of the Additional Authorization, the aggregate number of shares of the Company’s common stock under the 2020 Program increased from up to 10 million shares to up to 15 million shares of the Company’s common stock, with 8,241,308 shares remaining under the 2020 Program as of August 2, 2024.
-30-
ZIFF DAVIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
Business Acquisition
On August 5, 2024, the Company and CNET Media, Inc. and certain CNET related companies (together, “CNET”) entered into an agreement for the Company’s acquisition of 100 % of the equity interests of CNET for an aggregate price of approximately $150 million, subject to satisfaction of certain closing conditions. CNET is a digital media publication platform that is expected to be part of our technology business within our Digital Media segment.
-31-
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
In addition to historical information, certain statements included in this Quarterly Report on Form 10-Q may be forward-looking statements, including statements regarding the intent, belief or current expectations of the Company. These statements may include those concerning our possible or assumed future results of operations, business, strategy and current and future acquisitions, as well as the assumptions on which such statements are based. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements generally are identified by use of the words “anticipates,” “believes,” “estimates,” “hopes,” “may,” “will,” “seeks,” “protects,” “potential,” “predicts,” “expects,” “plans,” “intends,” “would,” “could,” “should,” or similar expressions, although not all forward-looking statements contain these identifying words. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed below, the risk factors discussed in Part II, Item 1A - “Risk Factors” of this Quarterly Report on Form 10-Q (if any) and in Part I, Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (together, the “Risk Factors”), the factors discussed in Part I, Item 3 in this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures About Market Risk”, and any risks and uncertainties identified in our other filings with the SEC, as such risks, uncertainties and other important factors may be updated from time to time in our subsequent reports. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions and speak only as of the date they are made. We undertake no obligation to revise, update or publicly release the results of any revision to these forward-looking statements to reflect changed assumptions, new information or the occurrence of unanticipated events, unless required by law.
Some factors that could cause actual results to differ materially from those anticipated in these forward-looking statements include, but are not limited to, our ability and intention to:
◦Sustain growth or profitability, particularly in light of an uncertain U.S. or worldwide economy, including the possibility of an economic downturn or recession, continuing inflation, supply chain disruptions, and other factors and their related impacts on customer acquisition and retention rates, customer usage levels, and credit and debit card payment declines;
◦Maintain and increase our customer base and average revenue per user;
◦Generate sufficient cash flow to make interest and debt payments, reinvest in our business, and pursue desired activities and businesses plans while satisfying restrictive covenants relating to debt obligations;
◦Acquire businesses on acceptable terms, execute on our investment strategies, successfully manage our growth, and integrate and realize anticipated synergies from such acquisitions;
◦Continue to expand our businesses and operations internationally in the wake of numerous risks, including adverse currency fluctuations, difficulty in staffing and managing international operations, higher operating costs as a percentage of revenues, or the implementation of adverse regulations;
◦Maintain our financial position, operating results and cash flows in the event that we incur new or unanticipated costs or tax liabilities, including those relating to federal and state income tax and indirect taxes, such as sales, value-added, and telecommunication taxes;
◦Manage certain risks related to the unauthorized use of our content and the infringement of our intellectual property rights by developers and users of generative artificial intelligence (“AI”);
◦Prevent system failures, security breaches, and other technological issues;
◦Accurately estimate the assumptions underlying our effective worldwide tax rate;
◦Maintain favorable relationships with critical third-party vendors that are financially stable;
◦Create compelling digital media content facilitating increased traffic and advertising levels and additional advertisers or an increase in advertising spend, and effectively target digital media advertisements to desired audiences;
◦Manage certain risks inherent to our business, such as costs associated with fraudulent activity, system failure, or security breach; effectively maintaining and managing our billing systems; the time and resources required to
-32-
manage our legal proceedings; liability for legal and other claims; or adhering to our internal controls and procedures;
◦Compete with other similar providers with regard to price, service, and functionality;
◦Achieve business and financial objectives in light of burdensome domestic and international telecommunications, internet, or other regulations, including regulations related to data privacy, access, security, retention, and sharing;
◦Successfully adapt to technological changes and diversify services and related revenues at acceptable levels of financial return;
◦Successfully develop and protect our intellectual property, both domestically and internationally, including our brands, content, copyrights, patents, trademarks, and domain names from infringement by third parties, and avoid infringing upon the proprietary rights of others;
◦Manage certain risks associated with environmental, social, and governmental matters, including related reporting obligations, that could adversely affect our reputation and performance;
◦Recruit and retain key personnel and maintain the beneficial aspects of our corporate culture globally;
◦Meet our publicly announced guidance or other expectations about our business and future operating results; and
◦Avoid disruptions to our operations, financial position, and reputation as a result of the collapse of certain banks and potentially other financial institutions.
In addition, other factors that could cause actual results to differ materially from those anticipated in these forward-looking statements or materially impact our financial results include the risks associated with new accounting pronouncements, as well as those associated with natural disasters, public health crises, pandemics, and other catastrophic events outside of our control.
Overview
Ziff Davis, Inc. was incorporated in 2014 as a Delaware corporation through the creation of a holding company structure. Ziff Davis, Inc., together with its subsidiaries (“Ziff Davis”, “the Company”, “our”, “us” or “we”), is a vertically focused digital media and internet company whose portfolio includes brands in technology, shopping, gaming and entertainment, connectivity, health and wellness, cybersecurity, and martech. Our Digital Media business specializes in the technology, shopping, gaming and entertainment, connectivity, and healthcare markets, offering content, tools, and services to consumers and businesses. Our Cybersecurity and Martech business provides cloud-based subscription and license services to consumers and businesses including cybersecurity, privacy, and marketing technology.
Our consolidated revenues are currently generated primarily from two basic business models, each with different financial profiles and variability. Our Digital Media business is driven primarily by advertising revenues, has relatively higher sales and marketing expenses, and has seasonal strength in the fourth quarter. Our Cybersecurity and Martech business is driven primarily by subscription revenues with relatively stable and predictable margins from quarter to quarter. In addition to growing our business organically, on a regular basis we acquire businesses to grow our customer bases, expand and diversify our service offerings, enhance our technologies, acquire skilled personnel, and enter into new markets. We continue to pursue additional acquisitions, which may include companies operating under business models that differ from those we operate under today. Such acquisitions could impact our consolidated profit margins and the variability of our revenues.
-33-
Revenue Overview
Revenues from customers classified by revenue source are as follows (in thousands):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Digital Media | |||||||||||||||||||||||
| Advertising and performance marketing | $ | 170,341 | $ | 175,083 | $ | 326,437 | $ | 331,165 | |||||||||||||||
Subscription and licensing | 72,764 | 68,161 | 146,231 | 137,309 | |||||||||||||||||||
| Other | 8,712 | 9,626 | 18,201 | 18,607 | |||||||||||||||||||
| Total Digital Media revenues | $ | 251,817 | $ | 252,870 | $ | 490,869 | $ | 487,081 | |||||||||||||||
| Cybersecurity and Martech | |||||||||||||||||||||||
| Subscription and licensing | $ | 68,984 | $ | 73,196 | $ | 144,436 | $ | 146,212 | |||||||||||||||
| Total Cybersecurity and Martech revenues | $ | 68,984 | $ | 73,196 | $ | 144,436 | $ | 146,212 | |||||||||||||||
| Elimination of inter-segment revenues | (1) | (50) | (20) | (135) | |||||||||||||||||||
| Total Revenues | $ | 320,800 | $ | 326,016 | $ | 635,285 | $ | 633,158 | |||||||||||||||
Performance Metrics
We use certain metrics to generally assess the operational and financial performance of our businesses. For our advertising and performance marketing businesses, net advertising and performance marketing revenue retention is an indicator of our ability to retain the spend of our existing customers year over year, which we view as a reflection of the effectiveness of our advertising and performance marketing platform. Similarly, we monitor the number of our customers and the revenue per customer, as defined below, as these metrics provide further details related to our reported revenue and contribute to certain of our business planning decisions.
The following table sets forth certain key operating metrics for our Digital Media advertising and performance marketing business for the three months ended June 30, 2024 and 2023:
| Three months ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
Net advertising and performance marketing revenue retention (1) | 90.5% | 89.8% | |||||||||
Customers (2) | 1,682 | 1,924 | |||||||||
Quarterly revenue per customer (3) | $101,273 | $91,000 | |||||||||
(1) Net advertising and performance marketing revenue retention equals (i) the trailing twelve months revenue recognized related to prior year customers in the current year period (excluding revenue from acquisitions during the stub period) divided by (ii) the trailing twelve months revenue recognized related to prior year customers in the prior year period (excluding revenue from acquisitions during the stub period). This excludes customers that generated less than $10,000 of revenue in the measurement period.
(2) Excludes customers that spent less than $2,500 in the quarter.
(3) Represents total gross quarterly advertising and performance marketing revenues divided by customers as defined in footnote (2).
For our subscription and licensing businesses, the number of customers that we serve is an indicator of our customer retention and growth. The average quarterly revenue per customer and the churn rate also contribute to insights that contribute to certain of our business planning decisions.
-34-
The following table sets forth certain key operating metrics for our Digital Media and Cybersecurity and Martech subscription and licensing businesses for the three months ended June 30, 2024 and 2023:
| Three months ended June 30, | |||||||||||
| 2024 | 2023 (7) | ||||||||||
| Digital Media | |||||||||||
Customers (in thousands) (1)(6) | 2,148 | 1,808 | |||||||||
Average quarterly revenue per customer (3)(6) | $33.86 | $37.74 | |||||||||
Churn rate (4)(5)(6) | 3.19% | 3.69% | |||||||||
Cybersecurity and Martech | |||||||||||
Customers (in thousands) (1)(2) | 1,272 | 1,423 | |||||||||
Average quarterly revenue per customer (3) | $54.25 | $51.43 | |||||||||
Churn rate (4) | 4.03% | 3.38% | |||||||||
Consolidated Total | |||||||||||
Customers (in thousands) (1)(2)(6) | 3,420 | 3,231 | |||||||||
Average quarterly revenue per customer (3)(6) | $41.74 | $43.75 | |||||||||
Churn rate (4)(5)(6) | 3.61% | 3.52% | |||||||||
(1) Represents the quarterly average of the end of month customer counts.
(2) Resellers within Cybersecurity and Martech segment are counted as one customer when there is not visibility into the number of underlying customers served by the reseller.
(3) Represents quarterly gross subscription and licensing revenues divided by customers as defined in footnote (1).
(4) Churn rate is calculated as (i) the average revenue per customer in the prior month multiplied by the number of cancellations in the current month, calculated at each business and aggregated; divided by (ii) subscription and licensing revenue in the current month, calculated at each business and aggregated.
(5) Within the Digital Media segment, the churn rate calculation for Ookla includes the sum of the monthly revenue from the specific cancelled agreements in the numerator.
(6) The metric includes the sale of perpetual software licenses, revenue for which is recorded at a point-in time rather than over-time.
(7) Certain prior period key performance metrics in the consolidated table above have been adjusted for our Cybersecurity and Martech segment as a result of gaining greater transparency into a reseller relationship enabling us to identify the underlying customers and for our Digital Media segment to remove certain subscribers who have paused their subscription for more than one month and to include certain subscribers that are within the estimated active usage period of a lifetime subscription. The following table summarizes the adjustments made to previously reported amounts.
| Three months ended June 30, 2023 | |||||
| Customers (in thousands) | 56 | ||||
| Average quarterly revenue per customer | $ | (0.76) | |||
| Churn rate | 0.01 | % | |||
Critical Accounting Policies and Estimates
In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements. Actual results could differ significantly from those estimates under different assumptions and conditions. Our critical accounting policies are described in our 2023 Annual Report on Form 10-K filed with the SEC on February 26, 2024. During the six months ended June 30, 2024, there were no significant changes in our critical accounting policies and estimates. See Note 1 — Basis of Presentation and Overview in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional description of significant accounting policies of the Company.
-35-
Following an impairment in 2023 to a reporting unit within the Digital Media reportable segment, there was no excess of reporting unit fair value over the carrying amount. As such, since this last impairment test, any further decrease in estimated fair value would result in an additional impairment charge to goodwill. Changes in market conditions, and key assumptions made in future quantitative assessments, including expected cash flows, competitive factors and discount rates, could negatively impact the results of future impairment testing and could result in the recognition of an impairment charge. As of June 30, 2024, this reporting unit had goodwill of approximately $79.2 million. Further, as of June 30, 2024, there was one other reporting unit within the Digital Media reportable segment that had goodwill of approximately $98.1 million that may be at risk of impairment. Changes in market conditions, and key assumptions made in future quantitative assessments, including expected cash flows, competitive factors and discount rates, could negatively impact the results of future impairment testing and could result in the recognition of an impairment charge. As of June 30, 2024, there were no other reporting units that have material goodwill at risk of impairment as of the most recent test date.
Results of Operations for the Three and Six Months Ended June 30, 2024
Digital Media
We expect our Digital Media business to improve as we integrate our recent acquisitions and over the longer term as advertising transactions continue to shift from offline to online, and we continue to expand our advertising platforms. The main focus of our platform monetization programs is to provide relevant and useful advertising to visitors to our websites, provide meaningful content that informs and shapes purchase intent, and leverage our brand, data, content, and editorial assets into subscription platforms. As a result, we expect to continue to take steps to improve the relevance of the ads displayed on our websites and those included within our advertising networks, and improve the effectiveness of our content in driving purchase decisions and subscriptions.
The operating margin we realize on revenues generated from ads placed on our websites is significantly higher than the operating margin we realize from revenues generated from those placed on third-party websites. Growth in advertising revenues from our websites has generally exceeded that from third-party websites. This trend has generally had a positive impact on our operating margins.
We expect acquisitions to remain an important component of our strategy and use of capital in this business; however, for a number of reasons, including macroeconomic conditions, in a given period, we may close greater or fewer acquisitions than in prior periods or acquisitions of greater or lesser significance than in prior periods. Moreover, future acquisitions of businesses with different business models, may impact Digital Media’s overall operating profit margins.
Cybersecurity and Martech
The main focus of our Cybersecurity and Martech service offerings is to reduce or eliminate costs, increase sales and enhance productivity, mobility, business continuity, and security of our customers as the technologies and devices they use evolve over time. As a result, we expect to continue to take steps to enhance our existing offerings and offer new services to continue to satisfy the evolving needs of our customers.
We expect acquisitions to remain an important component of our strategy and use of capital in this business; however, for a number of reasons, including macroeconomic conditions, in a given period, we may close greater or fewer acquisitions than in prior periods or acquisitions of greater or lesser significance than in prior periods. Moreover, future acquisitions of businesses with different business models, may impact Cybersecurity and Martech’s overall operating profit margins.
Revenues
| (in thousands, except percentages) | Three months ended June 30, | Percentage Change | Six months ended June 30, | Percentage Change | |||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||||
| Revenues | $ | 320,800 | $ | 326,016 | (1.6)% | $ | 635,285 | $ | 633,158 | 0.3% | |||||||||||||||||||||||||
Our revenues consist of revenues from our Digital Media business and our Cybersecurity and Martech business. Digital Media revenues primarily consist of advertising and performance marketing revenues and subscription and licensing revenues earned through the granting of access to, or delivery of, certain data products or services to customers, fees paid for generating business leads, and licensing and sale of editorial content and trademarks. Cybersecurity and Martech revenues primarily consist of revenues from “fixed” customer subscription and licensing revenues and “variable” revenues generated from actual usage of our services.
Our revenues decreased during the three months ended June 30, 2024 compared to the prior period primarily due to a $4.7 million decrease in advertising and performance marketing revenue in our Digital Media business and a $4.1 million decrease in subscription and licensing revenue in our Cybersecurity and Martech business, partially offset by a $4.6 million increase in subscription and licensing revenue in our Digital Media business.
-36-
Our revenues increased during the six months ended June 30, 2024 compared to the prior period primarily due to a $8.9 million increase in subscription and licensing revenue in our Digital Media business, partially offset by a $4.6 million decrease in advertising and performance marketing revenue in our Digital Media business and a $1.6 million decrease in subscription and licensing revenue in our Cybersecurity and Martech business.
Included in revenue during the three and six months ended June 30, 2024 was $1.5 million and $20.0 million of incremental revenue contributed by businesses acquired in 2023 and 2024.
Direct costs
| (in thousands, except percentages) | Three months ended June 30, | Percentage Change | Six months ended June 30, | Percentage Change | |||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||||
Direct costs | $ | 52,590 | $ | 47,421 | 10.9% | $ | 99,657 | $ | 93,151 | 7.0% | |||||||||||||||||||||||||
As a percent of revenues | 16.4 | % | 14.5 | % | 15.7 | % | 14.7 | % | |||||||||||||||||||||||||||
Direct costs represent the Company’s costs of revenue and primarily include costs associated with compensation for personnel directly involved in revenue generation, content fees, production costs, royalty fees, hosting and licensing costs, processing fees, and depreciation and amortization expense. The increase in direct costs for the three months ended June 30, 2024 compared to the prior period was primarily due to a $2.4 million increase in web and database hosting fees and a $1.7 million increase in processing fees. The increase in direct costs for the six months ended June 30, 2024 compared to the prior period was primarily due to a $5.0 million increase in web and database hosting fees, a $2.8 million increase in processing fees, and a $1.2 million increase in campaign fulfillment fees, partially offset by $1.8 million decrease in depreciation and amortization expense.
Sales and Marketing
| (in thousands, except percentages) | Three months ended June 30, | Percentage Change | Six months ended June 30, | Percentage Change | |||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||||
Sales and marketing | $ | 124,766 | $ | 119,934 | 4.0% | $ | 241,766 | $ | 235,854 | 2.5% | |||||||||||||||||||||||||
As a percent of revenues | 38.9 | % | 36.8 | % | 38.1 | % | 37.3 | % | |||||||||||||||||||||||||||
Sales and marketing costs consist primarily of internet-based advertising, sales and marketing, personnel costs, and other business development-related expenses. Our internet-based advertising relationships consist primarily of fixed cost and performance-based (cost-per-impression, cost-per-click, and cost-per-acquisition) advertising relationships with an array of online service providers. The increase in sales and marketing expenses during the three months ended June 30, 2024, compared to the prior period was primarily due to a $2.7 million increase in personnel-related expenses and a $1.5 million increase in expenses for software purchases. The increase in sales and marketing expenses during the six months ended June 30, 2024 compared to the prior period was primarily due to a $4.9 million increase in personnel-related expenses and a $2.9 million increase in expenses for software purchases, partially offset by a $2.1 million decrease in advertising and marketing expenses.
Research, Development, and Engineering
| (in thousands, except percentages) | Three months ended June 30, | Percentage Change | Six months ended June 30, | Percentage Change | |||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||||
Research, development, and engineering | $ | 16,795 | $ | 17,817 | (5.7)% | $ | 34,569 | $ | 35,731 | (3.3)% | |||||||||||||||||||||||||
As a percent of revenues | 5.2 | % | 5.5 | % | 5.4 | % | 5.6 | % | |||||||||||||||||||||||||||
Research, development, and engineering costs consist primarily of personnel-related expenses. The decrease in research, development, and engineering costs for the three months ended June 30, 2024, compared to the prior period was primarily due to a $1.1 million decrease in personnel-related costs as a result of an increase in capitalized costs related to the nature of the projects during the second quarter of 2024 compared to 2023. The decrease in research, development, and engineering costs for the six months ended June 30, 2024 compared to the prior period was primarily due to a $0.8 million decrease in personnel-related expenses.
-37-
General, Administrative, and Other Related Costs
| (in thousands, except percentages) | Three months ended June 30, | Percentage Change | Six months ended June 30, | Percentage Change | |||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||||
General, administrative, and other related costs | $ | 98,080 | $ | 101,949 | (3.8)% | $ | 194,863 | $ | 203,212 | (4.1)% | |||||||||||||||||||||||||
As a percent of revenues | 30.6 | % | 31.3 | % | 30.7 | % | 32.1 | % | |||||||||||||||||||||||||||
Our general, administrative, and other related costs consist primarily of personnel-related expenses, depreciation and amortization, changes in the fair value associated with contingent consideration, share-based compensation expense, bad debt expense, professional fees, severance, and insurance costs. The decrease in general, administrative, and other related costs for the three months ended June 30, 2024 compared to the prior period was primarily due to a $6.1 million decrease in expense from changes in estimated amounts of deferred acquisition payments related to previously acquired businesses, and a $4.5 million decrease in depreciation and amortization expense, partially offset by a $3.8 million increase in personnel-related expenses. The decrease in general, administrative, and other related costs for the six months ended June 30, 2024 compared to the prior period was primarily due to a $9.0 million decrease in depreciation and amortization expense.
Share-Based Compensation Expense
The following table presents share-based compensation expense in the Condensed Consolidated Statements of Operations during the periods presented (in thousands):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Direct costs | $ | 62 | $ | 94 | $ | 123 | $ | 170 | |||||||||||||||
| Sales and marketing | 1,093 | 1,038 | 1,851 | 1,962 | |||||||||||||||||||
| Research, development, and engineering | 1,071 | 958 | 2,161 | 1,741 | |||||||||||||||||||
General, administrative, and other related costs | 9,374 | 7,127 | 16,337 | 13,746 | |||||||||||||||||||
| Total share-based compensation expense | $ | 11,600 | $ | 9,217 | $ | 20,472 | $ | 17,619 | |||||||||||||||
Non-Operating Income and Expenses
The following table represents the components of non-operating income and expenses for the three and six months ended June 30, 2024 and 2023 (in thousands):
| Three months ended June 30, | Percentage Change | Six months ended June 30, | Percentage Change | ||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||||||||
| Interest expense, net | $ | (1,804) | $ | (10,483) | 82.8 | % | $ | (3,573) | $ | (14,963) | 76.1 | % | |||||||||||||||||||||||
| Loss on sale of businesses | — | — | 0.0% | (3,780) | — | (100%) | |||||||||||||||||||||||||||||
| Unrealized loss on short-term investments held at the reporting date, net | — | (3,196) | 100.0 | % | (10,705) | (23,541) | 54.5 | % | |||||||||||||||||||||||||||
Gain on investments | 3,051 | — | 100.0 | % | 3,051 | 357 | 754.6 | % | |||||||||||||||||||||||||||
| Other income (loss), net | 5,267 | (1,503) | NM | 5,163 | (2,411) | NM | |||||||||||||||||||||||||||||
Total non-operating income (expense) | $ | 6,514 | $ | (15,182) | NM | $ | (9,844) | $ | (40,558) | 75.7 | % | ||||||||||||||||||||||||
Interest expense, net. Interest expense is generated primarily from interest due on outstanding debt, partially offset by interest income generated from interest earned on cash, cash equivalents, and investments. Interest expense, net was $1.8 million and $10.5 million for the three months ended June 30, 2024 and 2023, respectively, and $3.6 million and $15.0 million for the six months ended June 30, 2024 and 2023, respectively. Interest expense, net decreased during the three and six months ended June 30, 2024, compared to the prior periods primarily due to 1) the absence from 2024 results of an additional non-recurring $7.4 million of interest expense on the 1.75% Convertible Notes at a rate of 0.50% per annum, that accumulated through June 30, 2023, and 2) higher interest income as a result of higher interest rates.
Loss on sale of business. Loss on sale of business during the six months ended June 30, 2024 represents the loss on disposal of an international business at Digital Media within the shopping vertical.
-38-
Unrealized loss on short-term investments held at the reporting date, net. During the three months ended June 30, 2024, the Company sold its remaining investment in Consensus common stock. Unrealized loss on short-term investment held at the reporting date, net was zero and $3.2 million during the three months ended June 30, 2024 and 2023, respectively. Unrealized loss on short-term investment held at the reporting date, net was $10.7 million and $23.5 million during the six months ended June 30, 2024 and 2023, respectively. The unrealized loss recorded during the periods presented represented the change in fair value of our investment in Consensus common stock.
Gain on investments. Gain on investments is generated from gains from investments in equity and debt securities. Gain on investments was $3.1 million and zero during the three months ended June 30, 2024 and 2023, respectively. Gain on investments was $3.1 million and $0.4 million during the six months ended June 30, 2024 and 2023, respectively. Gain on investments recorded during the periods presented related to the disposition of Consensus common stock.
Other income (loss), net. Other income (loss), net is generated primarily from miscellaneous items and gains or losses on foreign currency. Other income (loss), net was $5.3 million and $(1.5) million during the three months ended June 30, 2024 and 2023, respectively, and $5.2 million and $(2.4) million for the six months ended June 30, 2024 and 2023, respectively. The change was primarily attributable to a reversal of a reserve established on a receivable from a buyer of a previously disposed business and to changes in gains or losses on foreign currency.
Income Taxes
Our effective tax rate is based on pre-tax income, statutory tax rates, tax regulations (including those related to transfer pricing), and different tax rates in the various jurisdictions in which we operate. The tax bases of our assets and liabilities reflect our best estimate of the tax benefits and costs we expect to realize. When necessary, we establish valuation allowances to reduce our deferred tax assets to an amount that will more likely than not be realized.
Provision for income taxes amounted to income tax expense of $7.0 million and $6.5 million for the three months ended June 30, 2024 and 2023, respectively, and $15.2 million and $5.8 million for the six months ended June 30, 2024 and 2023, respectively. Our effective tax rate was 19.9% and 27.2% for the three months ended June 30, 2024 and 2023, respectively, and 27.9% and 23.7% for the six months ended June 30, 2024 and 2023, respectively.
The decrease in our effective income tax rate for the three months ended June 30, 2024 compared to the prior period was primarily attributable to the following:
1.a partial release of the valuation allowance against a portion of our U. S. capital loss carryforwards as a result of the sale of our investment in the Consensus common stock, which resulted in a discrete tax benefit of approximately $0.8 million; and
2.a recognition of foreign exchange tax losses on dividends received from the Company’s foreign subsidiaries, which resulted in a discrete tax benefit of $0.4 million.
The increase in our effective income tax rate for the six months ended June 30, 2024 compared to the prior period was primarily attributable to the following:
1.a recognition of a valuation allowance against a portion of our U.S. capital loss carryforwards, which resulted in a discrete tax charge of $2.5 million;
2.a decrease in the amount of unrealized losses recognized on our investment in Consensus common stock, which resulted in a lower tax benefit during the six months ended June 30, 2024; and
3.a $1.0 million tax benefit recognized in 2023 related to the release of reserves for uncertain tax positions with no similar event during the six months ended June 30, 2024.
Judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business. Certain of these tax positions have in the past been, and are currently being, challenged, and this may have a significant impact on our effective tax rate if our tax reserves are insufficient.
-39-
Equity Method Investment
Income (loss) from equity method investment, net. Income or loss from equity method investment is primarily generated from our investment in the OCV Fund I, LP (the “OCV Fund”) for which we receive annual audited financial statements. The investment in the OCV Fund is presented net of tax and on a one-quarter lag due to the timing and availability of financial information from OCV. If the Company becomes aware of a significant decline in value that is other-than-temporary, the loss will be recorded in the period in which the Company identifies the decline.
Income from equity method investment was $8.8 million, net of income tax, for the three months ended June 30, 2024 compared to loss from equity method investment of $0.6 million, net of income taxes, for the three months ended June 30, 2023. Income from equity method investment was $8.2 million, net of income taxes, for the six months ended June 30, 2024 compared to loss from equity method investments of $9.8 million, net of income taxes, for the six months ended June 30, 2023, respectively. The increase in loss from equity method investment, net during the three months ended June 30, 2024 compared to the prior period was primarily due to a greater decline in the value of the underlying investments. The decrease in loss from equity method investment, net during the six months ended June 30, 2024 compared to the prior period was primarily due to a smaller decline in the value of the underlying investments.
Digital Media and Cybersecurity and Martech Results
Our businesses are based on the organization structure used by management for making operating and investment decisions and for assessing performance and have been aggregated into two reportable segments: (i) Digital Media and (ii) Cybersecurity and Martech.
We evaluate the performance of our segments based on revenues, including both external and inter-business net sales, and operating income. We account for inter-business sales and transfers based primarily on standard costs with reasonable mark-ups established between the businesses. Identifiable assets by business are those assets used in the respective business’ operations. Corporate assets consist of cash and cash equivalents, deferred income taxes, and certain other assets. All significant inter-business amounts are eliminated to arrive at our consolidated financial results.
Digital Media
The financial results are presented as follows (in thousands):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
Revenues | $ | 251,816 | $ | 252,820 | $ | 490,849 | $ | 486,946 | |||||||||||||||
Inter-business revenues | 1 | 50 | 20 | 135 | |||||||||||||||||||
Total | 251,817 | 252,870 | 490,869 | 487,081 | |||||||||||||||||||
| Operating costs and expenses | 216,798 | 216,154 | 424,245 | 421,896 | |||||||||||||||||||
Operating income | $ | 35,019 | $ | 36,716 | $ | 66,624 | $ | 65,185 | |||||||||||||||
Digital Media’s revenues of $251.8 million for the three months ended June 30, 2024 decreased $1.0 million, or 0.4%, compared to the prior period primarily due to a $4.7 million decline in advertising and performance marketing revenue and a $0.9 million decline in other revenue, partially offset by a $4.6 million increase in subscription and licensing revenue. The decrease in advertising and performance marketing revenue was due primarily to lower revenue of $6.5 million within the Company’s health and wellness and technology businesses, partially offset by an increase in revenue in the gaming and entertainment business. The increase in subscription and licensing revenue was due primarily to higher revenue of $4.2 million within the Company’s health and wellness and connectivity businesses.
Digital Media’s revenues of $490.8 million for the six months ended June 30, 2024 increased $3.9 million, or 0.8%, compared to the prior period primarily due to a $8.9 million increase in subscription and licensing revenue, partially offset by a $4.6 million decline in advertising and performance marketing revenue. The increase in subscription and licensing revenue was due primarily to higher revenue of $8.1 million within the Company’s health and wellness and connectivity businesses. The decrease in advertising and performance marketing revenue was due primarily to lower revenue of $5.2 million within the Company’s health and wellness businesses.
Digital Media’s operating costs and expenses of $216.8 million for the three months ended June 30, 2024 increased $0.6 million, or 0.3%, compared to the prior period primarily due to higher direct costs and sales and marketing expenses, partially offset by lower general, administrative, and related costs. Digital Media’s operating costs and expenses of $424.2 million for the six months ended June 30, 2024 increased $2.3 million, or 0.6%, compared to the prior period primarily due to higher general, administrative, and related costs, offset by lower direct costs and sales and marketing expenses.
-40-
As a result of these factors, Digital Media’s operating income of $35.0 million for the three months ended June 30, 2024 decreased $1.7 million, or 4.6%, compared to the prior period. Digital Media’s operating income of $66.6 million for the six months ended June 30, 2024 increased $1.4 million, or 2.2%, compared to the prior period.
Cybersecurity and Martech
The financial results are presented as follows (in thousands):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
Revenues | $ | 68,984 | $ | 73,196 | $ | 144,436 | $ | 146,212 | |||||||||||||||
Inter-business revenues | — | — | — | — | |||||||||||||||||||
Total | 68,984 | 73,196 | 144,436 | 146,212 | |||||||||||||||||||
| Operating costs and expenses | 57,437 | 59,679 | 113,480 | 121,092 | |||||||||||||||||||
| Operating income | $ | 11,547 | $ | 13,517 | $ | 30,956 | $ | 25,120 | |||||||||||||||
Cybersecurity and Martech’s revenues of $69.0 million for the three months ended June 30, 2024 decreased $4.2 million, or 5.8%, compared to the prior period. The decrease of $4.2 million was driven by lower revenue of approximately $3.7 million within the Company’s cybersecurity business due primarily to lower revenue from the Company’s consumer privacy services during the three months ended June 30, 2024, as compared to the prior period.
Cybersecurity and Martech’s revenues of $144.4 million for the six months ended June 30, 2024 decreased $1.8 million, or 1.2%, compared to the prior period. The decrease of $1.8 million was driven by lower revenue of approximately $1.1 million within the Company’s cybersecurity business and $0.7 million within the Company’s martech business during the six months ended June 30, 2024, as compared to the prior period.
Cybersecurity and Martech’s operating costs and expenses of $57.4 million for the three months ended June 30, 2024 decreased $2.2 million, or 3.8% compared to the prior period primarily due to lower general, administrative, and related costs, partially offset by higher sales and marketing expenses. Cybersecurity and Martech’s operating costs and expenses of $113.5 million for the six months ended June 30, 2024 decreased $7.6 million, or 6.3%, compared to the prior period primarily due to lower general, administrative, and related costs and direct costs.
As a result of these factors, Cybersecurity and Martech’s operating income of $11.5 million for the three months ended June 30, 2024 decreased $2.0 million, or 14.6%. Cybersecurity and Martech’s operating income of $31.0 million for the six months ended June 30, 2024 increased $5.8 million, or 23.2%.
-41-
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash flows from operations and debt financing. We continue to invest in the development and expansion of our operations using available cash flows from operations. Ongoing investments include, but are not limited to, improvements in our offerings, investments in new products and services, acquisitions, and continued investments in sales and marketing. We also use cash flows from operations to service our debt obligations and for the repurchase of our shares.
Cash, Cash Equivalents, and Investments
Cash, cash equivalents, and investments consisted of (in thousands):
| June 30, 2024 | December 31, 2023 | ||||||||||
| Cash and cash equivalents | $ | 687,234 | $ | 737,612 | |||||||
| Short-term investments | — | 27,109 | |||||||||
| Long-term investments | 152,421 | 140,906 | |||||||||
| Cash, cash equivalents and investments | $ | 839,655 | $ | 905,627 | |||||||
Cash, cash equivalents, and investments held within domestic and foreign jurisdictions were as follows (in thousands):
| June 30, 2024 | December 31, 2023 | ||||||||||
| Cash, cash equivalents and investments held in domestic jurisdiction | $ | 703,867 | $ | 742,010 | |||||||
| Cash, cash equivalents and investments held in foreign jurisdiction | 135,788 | 163,617 | |||||||||
| Cash, cash equivalents and investments | $ | 839,655 | $ | 905,627 | |||||||
For information on short-term and long-term investments of the Company, refer to Note 4 — Investments in Part I Item 1 of this Quarterly Report on Form 10-Q for further details.
Financings
On June 18, 2024, the Company entered into a New Lender Joinder Agreement and Eighth Amendment (the “Joinder and Amendment”) to the Credit Agreement. The Joinder and Amendment provides for, among other things, (i) an increase in the Aggregate Revolving Loan Commitment by an aggregate principal amount of $250.0 million for a total of $350.0 million credit agreement, (ii) an extension of the scheduled maturity date from April 7, 2026 to the earlier of (x) June 18, 2027 and (y) under certain limited circumstances, August 2, 2026, (iii) a “credit spread adjustment” for SOFR-based borrowings of 0.10% across all interest period tenors, (iv) the inclusion of limited conditionality borrowing mechanics with respect to certain borrowings and (v) certain other related amendments.
As of June 30, 2024 and December 31, 2023, there were no amounts drawn under the Credit Agreement.
On July 16, 2024, the Company issued $263.1 million in aggregate principal amount of new 3.625% Convertible Notes due 2028 (the “3.625% Convertible Notes”) and paid an aggregate of approximately $135.0 million in cash in exchange for approximately $400.9 million in aggregate principal amount of the Company’s 1.75% Convertible Notes (collectively, the “Exchange Transaction”) pursuant to separate, privately negotiated exchange agreements with certain holders of the 1.75% Convertible Notes. The Company also paid outstanding and accrued interest on the exchanged 1.75% Convertible Notes. The 3.625% Convertible Notes bear interest at a rate of 3.625% per annum on the principal amount thereof, payable semi-annually in arrears on September 1 and March 1 of each year, beginning on March 1, 2025, to the noteholders of record of the 3.625% Convertible Notes as of the close of business on the immediately preceding August 15 and February 15, respectively. The 3.625% Convertible Notes will mature on March 1, 2028, unless earlier converted or repurchased. The 3.625% Convertible Notes can be settled in cash, the Company’s common stock, or a combination of cash and the Company’s common stock, at $0.01 par value per share, at the Company’s election. See Note 16 – Subsequent Events in Part I Item 1 of this Quarterly Report on Form 10-Q.
Material Cash Requirements
Ziff Davis’ long-term contractual obligations generally include its long-term debt as described in Note 7 – Debt in Part I Item 1 of this Quarterly Report on Form 10-Q, interest on long-term debt, lease payments on its property and equipment, and
-42-
holdback amounts in connection with certain business acquisitions. These long-term contractual obligations extend through 2031.
As of June 30, 2024, we and our subsidiaries had outstanding $1.0 billion in aggregate principal amount of indebtedness. As of June 30, 2024, our total future minimum lease payments are $25.8 million of which approximately $12.0 million future minimum lease payments are due in the succeeding twelve months.
As of June 30, 2024, our liability for uncertain tax positions was $37.1 million. In the ordinary course of business, the Company enters into commitments including those related to cloud computing, information technology, security, and information and document management. The Company also has revenue sharing arrangements with annual minimum guarantees based upon third-party website advertising metrics and other contractual provisions.
We currently anticipate that our existing cash and cash equivalents, cash generated from operations, and availability under our revolving credit facility, will be sufficient to meet our anticipated needs for working capital, capital expenditures, and share repurchases, if any, for at least the next 12 months.
Cash Flows
The following table provides a summary of cash flows from operating, investing, and financing activities (in thousands):
| Six months ended June 30, | Change | ||||||||||||||||
| 2024 | 2023 | ||||||||||||||||
| Net cash provided by operating activities | $ | 126,122 | $ | 155,035 | $ | (28,913) | |||||||||||
| Net cash used in investing activities | $ | (83,140) | $ | (65,321) | $ | (17,819) | |||||||||||
| Net cash used in financing activities | $ | (91,760) | $ | (64,612) | $ | (27,148) | |||||||||||
Operating Activities
Our net cash provided by operating activities resulted primarily from cash received from our customers offset by cash payments we made to third parties for their services, employee compensation, interest payments associated with our debt, and taxes. The $28.9 million decrease in net cash provided by operating activities during the six months ended June 30, 2024 compared to the prior period was primarily related to the timing of collections from our customers and increased payments to our vendors during the current period, partially offset by a reduction in prepaid expenses during the current period. The decrease in net cash provided by operating activities includes the activities of TDS Gift Cards (“TDS”) from the date of the acquisition. TDS negatively impacted the Company’s net cash provided by operating activities by $40.5 million.
Investing Activities
The $17.8 million increase in net cash used in investing activities during the six months ended June 30, 2024 compared to the prior period was primarily related to higher cash used on business acquisitions during the six months ended June 30, 2024 compared to the 2023 period, partially offset by proceeds received on the sale of our investment in Consensus common stock and proceeds received related to the sale of disposed businesses.
Financing Activities
The $27.1 million increase in net cash used in financing activities during the six months ended June 30, 2024 compared to the prior period was primarily related to increased share repurchases.
-43-
Stock Repurchase Program
On August 6, 2020, our Board of Directors (the “Board”) approved a program authorizing the repurchase of up to ten million shares of our common stock through August 6, 2025 (the “2020 Program”). In connection with the authorization, the Company entered into certain Rule 10b5-1 trading plans with a broker-dealer to facilitate the repurchase program.
A summary of share repurchases under the 2020 Program during the six months ended June 30, 2024 is as follows (in thousands, except share amounts):
| Total number of shares repurchased | Aggregate purchase price (1) | Shares remaining under repurchase authorization as of June 30, 2024 | ||||||||||||
| 1,500,000 | $84,910 | 3,241,308 | ||||||||||||
(1)Includes the impact of excise taxes.
Cumulatively as of June 30, 2024, 6,758,692 shares have been repurchased under the 2020 Program, at an aggregate cost of $486.7 million (including excise tax). These shares were subsequently retired. Refer to Note 10 – Stockholders’ Equity in Item 1 of Part I of this Quarterly Report on Form 10-Q for further details.
On August 2, 2024, the Board authorized an increase in the 2020 Program for an additional 5 million shares of the Company’s common stock and an extension of the expiration date of the 2020 Program from August 6, 2025 to August 2, 2029. As a result, the aggregate number of shares of the Company’s common stock under the 2020 Program increased from up to 10 million shares to up to 15 million shares of the Company’s common stock, with 8,241,308 shares remaining under the 2020 Program as of August 2, 2024.
-44-
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and potential borrowings under our credit facility that would bear variable market interest rates. The primary objectives of our investment activities are to preserve our principal while at the same time maximizing yields without significantly increasing risk. To achieve these objectives, we maintain our portfolio of cash equivalents and investments in a mix of instruments that meet high credit quality standards, as specified in our investment policy or otherwise approved by the Board. Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of June 30, 2024, the carrying value of our cash and cash equivalents approximated fair value. Our return on these investments is subject to interest rate fluctuations.
As of June 30, 2024 and December 31, 2023, we had $687.2 million and $737.6 million, respectively, of cash and cash equivalent investments primarily in funds that invest in U.S. treasuries, money market funds as well as demand deposit accounts with maturities within three months or less. Currently, we do not have interest rate risk on our outstanding long-term debt as these arrangements have fixed interest rates. As of June 30, 2024, the carrying value and the fair value of our fixed rate debt was $1.0 billion and $0.9 billion, respectively. Following the Exchange Transaction described in Note 16 - Subsequent Events to the Notes in Item 1 of Part 1 of this Quarterly Report on Form 10-Q, our fixed rate debt matures as follows: $149.1 million in 2026, $263.1 million in 2028, and $460.0 million in 2030. Interest rates have risen since certain of these sources of financing were obtained, thus, we may not be able to refinance this fixed rate debt at similar or favorable rates when it matures. Further, our revolving credit agreement bears interest at variable rates. However, during the six months ended June 30, 2024, we did not need to draw on this revolving credit agreement. If we need to draw on the revolving credit facility in the future, we will be exposed to interest rate changes. Refer to Note 5 — Fair Value Measurements and Note 7 — Debt to the Notes in Item 1 of Part I of this Quarterly Report on Form 10-Q for further details.
We cannot ensure that future interest rate movements will not have a material adverse effect on our future business, prospects, financial condition, operating results, and cash flows. To date, we have not entered into interest rate hedging transactions to control or minimize certain of these risks.
Market Risk
During the three months ended June 30, 2024, we sold our remaining investment in Consensus common stock and recognized a gain of $3.1 million, which is included in ‘Gain on investments’ in our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2024. Our investment in Consensus common stock was based upon the quoted market price of Consensus common stock. Prior to the sale of our investment in Consensus common stock, our results of operations and financial condition were materially impacted by increases or decreases in the price of Consensus common stock, which is traded on the Nasdaq Global Select Market.
Foreign Currency Risk
We conduct business in certain foreign markets, primarily in Canada, the United Kingdom, Australia, the European Union, Japan, Denmark, Sweden, and Norway. Our principal exposure to foreign currency risk relates to investment and intercompany debt in foreign subsidiaries that transact business in functional currencies other than the U.S. Dollar, primarily the Canadian Dollar, the British Pound Sterling, the Australian Dollar, the Euro, the Japanese Yen, the Danish Krone, the Swedish Krona, and the Norwegian Krone. If we are unable to settle our intercompany debts in a timely manner, we will remain exposed to foreign currency fluctuations.
As we expand our international presence, we become further exposed to foreign currency risk by entering new markets with additional foreign currencies. The economic impact of currency exchange rate movements is often linked to variability in real growth, inflation, interest rates, governmental actions, and other factors. These changes, if material, could cause us to adjust our financing and operating strategies.
As currency exchange rates change, translation of the income statements of the international businesses into U.S. Dollars affects year-over-year comparability of operating results.
Historically, we have not hedged translation risks because cash flows from international operations were generally reinvested locally; however, we may do so in the future. Our objective in managing foreign exchange risk is to minimize the potential exposure to changes that exchange rates might have on earnings, cash flows, and financial position.
During the three months ended June 30, 2024 and 2023, foreign exchange losses amounted to $0.4 million and $1.0 million, respectively. During the six months ended June 30, 2024 and 2023, foreign exchange losses amounted to $0.4 million and $1.9 million, respectively.
-45-
Cumulative translation adjustments, net of tax, included in Other comprehensive (loss) income, net for the three months ended June 30, 2024 and 2023 were $(0.5) million and $2.5 million, respectively; and for the six months ended June 30, 2024 and 2023 were $(7.0) million and $6.2 million, respectively.
We currently do not have derivative financial instruments for hedging, speculative, or trading purposes and, therefore, are not subject to such hedging risk. However, we may in the future engage in hedging transactions to manage our exposure to fluctuations in foreign currency exchange rates.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the principal executive officer and the principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As of June 30, 2024, under the supervision and with the participation of Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
Management’s Report on Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act), which occurred during the quarter ended June 30, 2024 covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
-46-
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
See discussion of legal proceedings in Note 8 — Commitments and Contingencies in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Item 1A. Risk Factors
There has not been a material change in our risk factors since the filing of our Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
On August 6, 2020, the Board approved a program authorizing the repurchase of up to ten million shares of our common stock through August 6, 2025 (the “2020 Program”). In connection with the authorization, the Company entered into certain Rule 10b5-1 trading plans with a broker-dealer to facilitate the repurchase program. During the three months ended June 30, 2024, 1,500,000 shares were repurchased under the 2020 Program. See Note 10 — Stockholders’ Equity in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Cumulatively, as of June 30, 2024, the Company repurchased 6,758,692 shares, under the 2020 Program, at an aggregate cost of $486.7 million (including excise tax), which were subsequently retired. See Note 10 — Stockholders’ Equity in Item 1 of Part I of this Quarterly Report on Form 10-Q.
As a result of the Company’s share repurchases, as of June 30, 2024, the number of shares of the Company’s common stock available for purchase under the 2020 Program was 3,241,308 shares.
The following table details the repurchases that were made under and outside the 2020 Program, on a trade date basis, during the three months ended June 30, 2024:
| Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share (2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Program | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Program (3) | ||||||||||||||||||||||
| April 1, 2024 - April 30, 2024 | 266 | $ | 66.77 | — | 4,741,308 | |||||||||||||||||||||
| May 1, 2024 - May 31, 2024 | 728,225 | $ | 56.21 | 727,138 | 4,014,170 | |||||||||||||||||||||
| June 1, 2024 - June 30, 2024 | 772,862 | $ | 55.89 | 772,862 | 3,241,308 | |||||||||||||||||||||
| Total | 1,501,353 | 1,500,000 | 3,241,308 | |||||||||||||||||||||||
(1)Includes shares surrendered to the Company to pay the exercise price and/or to satisfy tax withholding obligations in connection with employee stock options and/or the vesting of restricted stock issued to employees.
(2)Excludes the impact of excise taxes.
(3)As of the last day of the applicable month.
Item 3.Defaults Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
Not Applicable.
-47-
Item 5.Other Information
Insider Trading Arrangements and Policies
During the three months ended June 30, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,”
-48-
Item 6. Exhibits
| Exhibit No. | Description | |||||||
Amended and Restated Certificate of Incorporation of J2 Global, Inc., dated as of June 10, 2014 (incorporated by reference to Exhibit 3.1 to Ziff Davis’ Current Report on Form 8-K filed on June 10, 2014. (File No. 0-25965)) | ||||||||
10.1 (1) | ||||||||
10.2 (1) | ||||||||
10.3 (1) | ||||||||
31.1* | ||||||||
31.2* | ||||||||
32.1** | ||||||||
32.2** | ||||||||
101.INS* | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
* Filed herewith.
** Furnished herewith.
(1) Indicates a management contract or compensatory plan.
-49-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ZIFF DAVIS, INC. | ||||||||||||||
| (registrant) | ||||||||||||||
| Date: | August 8, 2024 | By: | /s/ VIVEK SHAH | |||||||||||
| Vivek Shah | ||||||||||||||
| Chief Executive Officer and a Director | ||||||||||||||
| (Principal Executive Officer) | ||||||||||||||
| Date: | August 8, 2024 | By: | /s/ BRET RICHTER | |||||||||||
| Bret Richter | ||||||||||||||
| Chief Financial Officer | ||||||||||||||
| (Principal Financial Officer) | ||||||||||||||
| Date: | August 8, 2024 | By: | /s/ LAYTH TAKI | |||||||||||
| Layth Taki | ||||||||||||||
| Chief Accounting Officer | ||||||||||||||
| (Principal Accounting Officer) | ||||||||||||||
-50-