ZD earnings call transcript, November 5, 2026

Good day, ladies and gentlemen, and welcome to the Zip Davis third quarter 2020. 26 earnings conference call. My name is Mike, and I will be the operator assisting you today. At this time, all participants are in a listen only mode. A question and answer. Session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. This call will be Vivek Shah, CEO of ZIF Davis, and Brett Richter, Chief Financial Officer of ZIF Davis. I will now turn the call over to Brett Richter, Chief Financial Officer.

Of ZIF Davis. Thank you. You may begin. Thank you.

Thank you, Brett, and good morning, everyone. We delivered third quarter... ...results that were broadly in line with the expectations we set during our second quarter call. Revenues in adjusted EBITDA grew sequentially, and our adjusted EBITDA margin improved by 160 basis points. ...as compared to the last quarter. So, while the headwinds facing our businesses persist, we're encouraged by our sequential growth as we continue to focus on ways to create value for our shareholders. Year-to-date, we have deployed more than a quarter billion dollars. to repurchase our stock at attractive valuations and have reduced our shares outstanding by nearly 14%. We continue to maintain a strong balance sheet, exiting the third quarter with one and a half billion dollars. of cash and investments and a net cash position in excess of half a billion dollars. We continue to be careful and opportunistic capital allocators while also considering monetization opportunities. to unlock value for our shareholders. As I've said before, we see our portfolio as dynamic and every decision we take is measured against its impact on value per share. Now I'd like to share some observations about our four operating segments. Tech and shopping revenues declined less than 4% year-over-year, consistent with our goal for revenue trends to improve each quarter through year-end. This is the third straight quarter the rate of decline narrowed from 18% in Q4 2025.

Thank you, Vivek.

Let's discuss our financial results. Our earnings release reflects both our gap and adjusted financial results for Q3 2026. My commentary will primarily. We relate to our Q3 2026 adjusted financial results for continuing operations and their comparisons to the relevant prior period. Our results from continuing operations in prior periods exclude the results of the. Activity division, the sale of which was completed in Q2 2026. Please see slide four for the summary of our Q3 2026 financial results. 2026 revenues were $289.3 million as compared with revenues of $306.5 million for Q3 2025. Q3 2026 adjusted EBITDA was $82.2 million as compared with $97.8 million for the prior year period. Our adjusted EBITDA margin for the quarter was 28.4% compared with an adjusted EBITDA margin of 31.9% in Q3 2025. As Vivek noted, these results are broadly in line with the Q3 2026. Expectations we provided on our earnings call last quarter. Q3 2026 adjusted diluted EPS was $1.39 compared to $1.40 in the prior year period. Reflecting in part our active share repurchase activity. Slide five reflects performance summaries for our two primary sources of revenue, advertising and performance marketing and subscription and licensing. Three, 2026 advertising and performance marketing revenues declined 7.7% compared to the prior year period while subscription and licensing revenues were lowered by 2.7%. Other revenues were up.

was 30% increasing by $1 million year over year in Q3, 2026, due in part to the contribution of semantic labs in our MarTech group. Slide six through nine reflect the Q3 financial results of each of our. Slide four reportable segments. Tech and shopping adjusted EBITDA margins declined year over year due in part to a revenue mix shift related to the shift of traffic from organic web towards social media. However, Q3, 2026 margins were slightly improved as compared with Q2. Gaming and entertainment adjusted EBITDA margins were lower year over year due to several factors including revenue mix and an increase in custom event and activation programs which generally have lower margins than traditional display and video. health and wellness adjusted EBITDA margins were lower primarily reflecting lower revenues due in particular to the drop in pharma advertising at our professional businesses that Vivek noted earlier. And in our cyber security and MarTech segment adjusted EBITDA margins were down only slightly from the prior year period. Please refer to slide 10 as we review our balance sheet. As of the end of Q3 2026, we had $1.4 billion of cash and cash equivalents and approximately $100 million of long term investments. As of September 30th, 2026, gross leverage was 2.5 times trailing 12 months adjusted EBITDA. And our cash and cash equivalents exceeded our outstanding debt balances by $535 million.

In the third quarter, we paid approximately $55 million of the approximately $200 million in tax.

And we expect the vast majority of the remaining payments to be settled by the end of the first quarter of 2027. As we noted last quarter, we are exploring ways to positively impact. Or aggregate tax obligations, including through the use of investment tax credits. Earlier this month, we satisfied the maturity of our 1.75% coupon convertible notes, paying approximately $150 million, including accrued. Interest. Our next significant outstanding debt maturity is in March, 2028. Slide 11 shows the historic change in our share counts since the end of 2022. During the third quarter of 2026, we continue to deploy capital through share buybacks, repurchasing 1.7 million shares under a 10B51 plan. We deployed $92 million related to share repurchases in the quarter. Since the start of 2026, we have repurchased 5.5 million shares, reducing the share account year to date by nearly 14%. The total amount currently available for repurchase under our board's current buyback authorization is approximately 6 million shares. We spent $7 million related to prior period acquisitions during the third quarter of 2026. And year to date, we have deployed a total of $16.2 million to support our M&A activities. We have ample cash at present to deploy in support of our capital allocation priorities, but we remain disciplined about valuation. As Vivek noted, we continue to seek opportunities to add businesses.

Active prices, which we believe offer the potential for strong risk weighted cash on cash returns. Now we'd like to offer some insight related to our current financial performance expectations for the fourth quarter of 2026. Revenues in Q4. are expected to increase sequentially by a double digit percentage and decline low to mid single digits year over year. This should reflect the year over year rate of decline that is similar to, if not better than, the decline we experienced in Q3, 2026. Our adjusted EBITDA margin percentage is expected. To increase sequentially, but is expected to decline as compared with the prior year period to the low to mid thirties. We expect adjusted diluted EPS to be up slightly year over year, reflecting the benefit of the year over year reduction in shares outstanding due to our active buyback program. Turning now to our supplemental information, slide 14 provides a summary of our adjusted results from continuing operations for each quarter and the full year 2025, as well as the first three quarters of 2026. Slides 15 through 18 show reconciliation state. statements for the various non gap measures to the nearest gap equivalents. Slide 19 includes a reconciliation of free cash flow from continuing and discontinued operations. Free cash flow in the third quarter of 2026 was. Negative $100.1 million down from positive $108.2 million in Q3 2025. Note that the prior period figure includes the connectivity business. As we noted.

Last quarter, our conversion rate of adjusted EBITDA free cash flow in the second half of 2026 is being negatively impacted by estimated tax payments, professional fees, and certain other items associated with the sale of the connectivity. Business. During the third quarter of 2026, these items reduced our free cash flow by approximately $90 million and by approximately $100 million on a year-to-date basis. Excluding these items, trailing 12 months transaction adjusted free cash flow, a supplement. Measure, which we reconcile in our earnings release and presentation, was $208.5 million. Excluding these and similar discrete items, going forward, we expect continuing strong LTM free cash flow conversion. Of our adjusted EBITDA. As we manage through the continued transition of the digital media landscape and the impacts of AI, protecting our profitability is a priority for us. As Vivek discussed earlier, we believe that we can achieve this in part through our use of AI across the organization. However, we are also employing discipline cost management throughout our businesses, including targeted spending cuts and increased operating efficiencies. This is in part why our margins improve sequentially this quarter, and we plan to maintain this discipline approach going forward. As we look ahead to the end of the year and into 2027, our primary financial objectives. Remain unchanged, maintaining strong profitability, generating robust free cash flow, targeting investments to improve our growth trajectory, and working to highlight and realize the intrinsic value of our portfolio.

And with that, I will now ask the operator to rejoin us to instruct you on how to queue for questions.

We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question key. You may press star. too, if you would like to remove yourself from the key. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we begin.

Hey, good morning, Vivek and Brett.

Thanks for taking my questions.

I have a couple. The first one, Vivek. Could you talk a little bit more as to why drops in your traffic aren't resulting in correspondingly large drops in revenue? And I have a follow-up. Yeah, no. So it's a great question. So as we said, organic Google traffic was down 37% in the quarter, but then company revenues were down a little under 6%, which is a reminder that not all of the businesses in our portfolio rely on Google traffic. We have subscription businesses, we have app businesses, we have newsletter businesses. And so the portfolio continues to be fairly diversified, even with the disposition of connectivity. That's something to remind folks, which is, you know, connectivity was a large. And growing business within our portfolio that had very little exposure to Google search. But even with its disposition, we still maintain a pretty diversified portfolio. And what I'd also say is that. Even where Google traffic has been most important and where it's been most impacted in tech and shopping would be at the top of that list. We have narrowed the decline three quarters in a row from from minus six. 15% to under 4%. And then obviously, as we go forward, we start to lap some of those earlier quarters. And so I think that's evidence that the offsets that we've talked about in the past are working social commerce, video licensing, the retail may not app, which it talked about in the prepared remarks, direct audiences. And so look, I think our position is, we're not planning on a search recovery. And in fact, are operating with the view that referrals are going to continue to come down.

But I think we're managing that, that as well as you can. Thank you. That's very helpful. And you also mentioned something very interesting on the call. You said that, I believe you said something like, your content is mentioned almost 3 billion times in AI overviews and AI mode, which obviously points to the tremendous value of your content. Just wondering, how do you plan to or how do you think you guys can extract more monetary value from that over time?

Look, so so that statistic is new. It comes from Google's Google Search Console. So this comes from Google and it's a really useful statistic for the reasons you just. Said, which is the citation number and the AI impressions number does demonstrate how relevant our content is to AI answers, both to Google in terms of, you know, locating and using sources and then obviously. The user being on the other end of the query or the search and and as we know, Google is seeing a significant growth in their query volume. I believe it's this is the their print or their. In their last call, I think query volume is at a five year high. So the user is on the other side of that. Our content is an incredibly important input. You know, monetizing that relevance is the priority. And so, you know, simply we remain open to signing licensing deals, which would be a method in which we can extract value out of the use of our content within these systems. I do think our litigation. Um, with, with open AI will bring clarity around this, you know, this area and subject and that hopefully can move things along at the same time. Look, I think that, you know, it's the fact that we are. So well cited shows our trust and marketers are increasingly factoring AI visibility into kind of the media partners they pick. So that's sort of a more near term and kind of direct connection between the relevance, but look, we need to get value for our contributions. Um, and so I think.

The great news is that, you know, as you'd expect, brands like ours and content like ours do well within these systems. But yes, there is a gap between usage and monetization. Thank you.

Thank you, Brett.

Thank you.

Our next questioner is Ron Josie with Citi.

Our next question is Robert Kulbris with Evercore. Great.

Thanks very much.

I think, you know, others. It's in the category of established that, you know, non-session-based revenue could potentially get up to around half of total revenue, you know, sort of to get a similar business mix. So just wondering if you could... Talk to that, you know, where you are on that curve today in terms of efforts to diversify the revenue streams, maybe get away from, you know, session-based revenue, and where you think that could go. And then I have a couple follow-ups. Thank you. Well, yeah, Rob. So, I mean, it's sort of what I was talking about with Rishi, which is, you know, we've said in the past, like a third of the revenue depends on web traffic. We're a little bit different, I think, than other players in that we have a lot of non sort of media, non-traffic businesses. You know, I mentioned a bunch of those. So, look, I think that that's a little bit of a difference in what we're doing. I think what I think, you know, the majority of even our web businesses are today, not traffic dependent. So I think we've been diversified and, and, and we've been that way for a while. Again, I think it's the way I would look at it is it's social, so that's, you know, Instagram, Facebook, snap, tick tock. It's YouTube, which is an incredibly important platform. It's inbox. By that, I mean email. There may be notifications and messaging elements as well. There's app, so meaning mobile app. There's browser extension even, which we have within our shopping business. These are like when we sort of talk about non-web or what you were.

We refer to as non-sessions. I think those are the panoply of things in which all of our brands are at various levels of success and adoption. Got it. You have the mitigation playbook. It sounds like quite successfully. There are areas where that hasn't been fully deployed, where there could be an opportunity to do more, or areas where, frankly, because of demographics or other factors, you just haven't felt the need yet to deploy that. No, absolutely. I mean, I would tell you that if you go across the portfolio in each of the segments, I feel like each segment is strongest in one of those. And the real, real opportunity. Here is to make all segments strong and all of those. And so we have a lot of effort around. Knowledge sharing, playbook sharing and making sure and even moving people around to bring some of. To bring some velocity to where we see performance gaps and we do see performance gaps to be perfectly honest. But to me, that's the opportunity is to close those performance gaps so that. You know, the businesses that have figured out, for instance, how to leverage social platforms for commerce. That's really only happening in one business, you know, and then we have some businesses that are in one segment. We have some businesses that are doing. Some smart, interesting custom content work, but again, not happening in other places. So look, the good news is that that the opportunities exist. I'm not known for my patients. And so, you know, what we need to do is.

Move things along, and we are doing concrete things within the company to do that. And maybe I'll just add, I mean, the mitigation playbook goes beyond the advertising, the revenue diversification within advertising. I mean, we were a business prior. To the connectivity sale that was approaching 50% subscription and licensing revenue. We, you know, part of this and subscription licensing revenue is still material for the overall enterprise. We made the determination to. Execute on the connectivity transaction as a play in the mitigation playbook overall mitigation of the value of the company in the public markets and to recapture a gap between trading value and. Intrinsic value are our capital allocation strategy and investing our stock as part of the mitigation playbook, I think, you know, we have a lot of tools and of course for that, but the other aspect of the mitigation playbook is managing the bottom half of the income statement in our. expenses. So, I mean, I think we have a lot of actions that are underway. We're obviously fighting some of these broad pressures in the market for traditional web and traditional traffic, but. You know, we're running a lot of different places. One last one for you. Just wanted to ask on any impressions you have around iOS 26, some of the changes made there in the Safari browser. Do you view those? There's a potential opportunity. Do advertisers need to spend more time, money with endemic websites directly versus using programmatic audience extension, given some of the changes we're seeing in the market? Thank you.

Yeah, I mean, even without the iOS change, I think generally we're seeing more of an interest in... Aligning with trusted brands in contextual content. This is where I think a lot of marketers want the strong AI visibility players to align with, because there's a different issue, which is... How much AI slop is in the ecosystem that is getting essentially monetized with programmatic ads. So even when you get away from maybe some of the difficulties that the iOS change will... ...create around behavioral advertising and targeting, I also think there's just an environmental question that a lot of marketers have, which is, hey, where are my ads running and what is it against? And, you know, that's always existed, I guess, in digital advertising. But I think becomes more acute. So generally speaking, yes, I do think that aligning with trusted brands and creating programs that are well beyond spots and dots on web pages, which is a lot of what we do. Within CNET as the market leader in tech and IGN as a market leader in gaming and health and, well, you know, everyday health as a market leader in health and in pharma. I mean, that's what we attempt to do. And I do think that can only help. Got it.

Thank you very much.

We now hear from Brian Smilic with J.P. Morgan. Hey, guys. This is Dignan for Brian. Appreciate you taking the question. Just wondering, I guess you kind of touched on it, but as you evaluate kind of the potential value. Creating opportunities across the portfolio. You know, what factors are kind of most important, you know, to continue investing in the business, pursuing a transaction or maybe taking a different approach? Thanks. Yeah, no, thanks for asking the question. The connectivity sale, I think, demonstrated that we're going to act when the market undervalues a business. And I think the market is undervaluing all of the businesses collectively and then and then the business. So we will continue to evaluate opportunities. And really, it's kind of simple. Every decision is measured against sort of the impact on our share price. Right. So this is value per share. And we saw that the connectivity transaction had a meaningful impact on ZD stock price. And so, you know, look, we're open to dialogue. We're going to do things as long as it. It creates value. But what we're not going to do is do it to get cash. We don't need cash right now, but we do need share value growth. So to me, I am and we are acutely focused on the per share price of ZD. And if we believe a transaction has a positive impact on that, we will entertain that transaction.

That's helpful. Thank you.

We now have Steven Juke with UBS. Okay.

Thanks, guys.

Hi, Brad.

So I was thinking... Welcome.

Yeah, thank you. I was wondering if you can help us think through, because it feels like some of the structural pressures on the business, you know, should be coming off because... It's painful as some of the declines from Google search traffic has been in the past. It sounds like that has largely de-indexed as a contributor. So even if it continues to decline, it's not going to... Can they affect you as meaningfully going into the future? So that's, I guess, one vector to think about. And then I guess among sort of the advertising verticals that you have, so can you talk about some of the pressures that you might have seen in the background and where that... Ends up, you know, six months, 12 months from that, because I mean, bring up the gaming and entertainment segment. I think nobody wants to be there ahead of GTA, but it seems like the sector itself had probably a lot of rationalization in terms of content development over the last several years. So maybe there's less marketers there. So can you talk about... You know, on a vertical by vertical basis, like where you are in terms of that vertical specific rationalization and where we are on the path to start seeing the total dollars and advertising start to recover them. Thanks. Yeah, no, it's great. And I'm glad you asked to do it vertical by vertical because often that's the most productive way to start to think about our company. So I'll start with tech and shopping. As I said, you know, the loss is narrowing. So your calculation is right.

That the you know, the the the challenges should start to mitigate and the opportunities to start to to start to add up and get to a positive growth perspective. I'm not in the I'm not going to be in. Prediction business right now, we're quarter to quarter in in our commentary. But again, the the direction there, I think, looks pretty good on the game and entertainment side, as I as you just rightly pointed out, it's a little bit of a sector issue and. And you know how much more content rationalization and how is the underlying health of the video game industry going to play out is a big factor on the game and entertainment piece. If you're on the side of hey, things are going to start. to improve going into 2027 that'll be good if you say hey there's another year or another few quarters of rationalization look we're going to still be you know muddling as as we're doing right now I think on the health and wellness. aside for us it's actually there there's we've got a little bit of a structural issue on the med page side where clearly we're getting you know we're losing share and. And you know that that's not because position engagement is low position engagement with med page remains really strong but and and we're doing things to expand into new distribution channels things like you know getting integrated. HR is at point of care, but there we're seeing some competitive tension. Having said all of that the pharma side of it look the consumer pharma side of it looks very good. So I think it's an interplay between those two things right can consumer pharma outrun what's happening on on the direct providers.

And then obviously lose it and some of the other non pharma businesses. So look, I think that the way I would characterize it all without making a prediction as to when the inflection point is. Is directionally everything seems in the right direction, but nothing's up right in aggregate. And that, you know, we're we're we're we obviously understand that. And we're doing everything we can to point the company back to growth. Thank you. Thank you. With no remaining questions in the queue, I turn the floor back over to your call hosts for closing remarks.

Thank you, Mike.

And of course, thanks, everybody, for your continued interest, your continued investment, and for joining us today on our call. We look forward to wrapping up 2026, heading into 2000. with you in this interim period and then hosting you all again when we announce our year end results. Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day.

Thank you for your participation.

Goodbye.