ZIFF DAVIS, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Information In addition to historical information, we have also made forward-looking statements in this report. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes” or similar expressions. 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, 2022 (together, the “Risk Factors”), and the factors discussed in the section in this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures About Market Risk.” Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the Risk Factors and the risk factors set forth in other documents we file from time to time with the SEC. 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 and successfully 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; ◦ Accurately estimate the assumptions underlying our effective worldwide tax rate; ◦ Maintain favorable relationships with critical third-party vendors whose financial condition will not negatively impact the services they provide; ◦ Create compelling digital media content causing 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; time and resources required to 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 manage our growth, including but not limited to our operational and personnel-related resources, and integration of newly acquired businesses; ◦ Successfully adapt to technological changes and diversify services and related revenues at acceptable levels of financial return; -30- ◦ Successfully develop and protect our intellectual property, both domestically and internationally, including our brands, patents, trademarks and domain names, 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; and ◦ Recruit and retain key personnel. 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, 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 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 expense 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. Performance Metrics Revenues from customers classified by revenue source are as follows (in thousands): Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Digital Media Advertising $ 175,083 $ 189,198 $ 331,165 $ 359,265 Subscription 68,161 58,901 137,309 114,477 Other 9,626 10,601 18,607 19,785 Total Digital Media revenues $ 252,870 $ 258,700 $ 487,081 $ 493,527 Cybersecurity and Martech Subscription $ 73,196 $ 78,910 $ 146,212 $ 159,404 Total Cybersecurity and Martech revenues $ 73,196 $ 78,910 $ 146,212 $ 159,404 Elimination of inter-segment revenues (50) (254) (135) (507) Total Revenues $ 326,016 $ 337,356 $ 633,158 $ 652,424 We use certain metrics to generally assess the operational and financial performance of our businesses. For our advertising businesses, net advertising revenue retention is an indicator of our ability to retain the spend of our existing advertisers year over year, which we view as a reflection of the effectiveness of our advertising platform. Similarly, we monitor the number of our advertisers and the revenue per advertiser, as defined below, as these metrics provide further details related to our reported revenue and contribute to certain of our business planning decisions. -31- For our subscription and licensing businesses, the number of subscribers that we serve is an indicator of our customer retention and growth. The average monthly revenue per subscriber and the churn rate also contribute to insights that contribute to certain of our business planning decisions. The following table sets forth certain key operating metrics for our Digital Media advertising business for the three months ended June 30, 2023 and 2022: Three months ended June 30, 2023 2022 Net advertising revenue retention (1) 89.8 % 99.6 % Advertisers (2) 1,924 2,016 Quarterly revenue per advertiser (3) $ 91,000 $ 93,848 (1) Net advertising revenue retention equals (i) the trailing twelve months revenue recognized related to prior year advertisers 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 advertisers in the prior year period (excluding revenue from acquisitions during the stub period). This excludes advertisers that generated less than $10,000 of revenue in the measurement period. (2) Excludes advertisers that spent less than $2,500 in the quarter within certain divisions. (3) Represents total gross quarterly advertising revenues divided by advertisers as defined in footnote (2). 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, 2023 and 2022: Three months ended June 30, 2023 2022 (4) Subscribers (in thousands) (1) 3,175 2,475 Average quarterly revenue per subscriber (2) $44.51 $55.69 Churn rate (3) 3.51% 3.12% (1) Represents the quarterly average of the end of month subscriber counts for both the Digital Media and Cybersecurity and Martech businesses. Cybersecurity and Martech subscribers are defined as a direct customer, including customers who have paused but not cancelled their subscription. If the company provides services through a reseller or a partner and the Company does not have visibility into the number of underlying subscribers, the reseller or partner is counted as one subscriber. (2) Represents quarterly subscription revenues divided by subscribers in the table above. (3) Churn rate is calculated as (i) the average revenue per subscription in the prior month multiplied by the number of cancellations in the current month, calculated at each business and aggregated; divided by (ii) subscription revenue in the current month, calculated at each business and aggregated. For Ookla, the churn rate calculation included in the consolidated churn rate calculation includes the sum of the monthly revenue from the specific cancelled agreements in the numerator. (4) Key operating metrics in prior periods in the table above have been adjusted for our Cybersecurity and Martech business as a result of gaining greater transparency on a reseller relationship enabling us to identify the underlying subscribers. Further, additional adjustments have been made to subscribers in the Cybersecurity and Martech business to further conform to the Company’s subscriber definition. The following table summarizes the adjustments made to previously reported amounts. Three months ended June 30, 2022 Subscribers (in thousands) 82 Average quarterly revenue per subscriber $ (1.95) Churn rate 0.20 % 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 2022 Annual Report on Form 10-K filed with the SEC on March 1, 2023. During the three and six months ended June 30, 2023, there were no significant changes in our critical accounting policies and estimates. See Note 1 - Basis of Presentation and Overview to the Notes to Condensed Consolidated Financial Statements included in Part I Item 1 of this Quarterly Report on Form 10-Q for additional description of significant accounting policies of the Company. -32- Results of Operations for the Three and Six Months Ended June 30, 2023 Digital Media We expect the 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 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, we cannot predict whether our current pace of acquisitions will remain the same within this business, especially in light of the current 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 within this space, but 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, we cannot predict whether our current pace of acquisitions will remain the same within this business, especially in light of the current 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 within this space but 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 2023 2022 2023 2022 Revenues $ 326,016 $ 337,356 (3.4)% $ 633,158 $ 652,424 (3.0)% Our revenues consist of revenues from our Digital Media business and our Cybersecurity and Martech business. Digital Media revenues primarily consist of advertising revenues and subscriptions 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 revenues and “variable” revenues generated from actual usage of our services. Our revenues decreased during the three months ended June 30, 2023 compared to the 2022 period primarily due to a $14.0 million decline in advertising revenue in our Digital Media business and a $5.7 million subscription revenue decline in our Cybersecurity and Martech business, partially offset by a $9.5 million increase in subscription revenue in the Digital Media business. Our revenues decreased during the six months ended June 30, 2023 compared to the 2022 period primarily due to a $27.9 million decline in advertising revenue in our Digital Media business and a $13.0 million decline in subscription revenue in our Cybersecurity and Martech business, partially offset by an increase of $23.4 million in subscription revenue in the Digital Media business. Included in revenue during the three and six months ended June 30, 2023 was $9.1 million and $21.1 million, respectively, of incremental revenue contributed by businesses acquired during 2022. -33- Cost of Revenues (in thousands, except percentages) Three months ended June 30, Percentage Change Six months ended June 30, Percentage Change 2023 2022 2023 2022 Cost of revenue $ 47,421 $ 46,004 3.1% $ 93,151 $ 92,104 1.1% As a percent of revenue 14.5 % 13.6 % 14.7 % 14.1 % Cost of revenues is primarily comprised of costs associated with content fees, production costs, and hosting costs. The increase in cost of revenues for the three and six months ended June 30, 2023 compared to the 2022 period was primarily driven by higher advertising-related inventory costs in our Digital Media business, partially offset by lower content fulfillment and similar costs. Sales and Marketing (in thousands, except percentages) Three months ended June 30, Percentage Change Six months ended June 30, Percentage Change 2023 2022 2023 2022 Sales and Marketing $ 119,934 $ 123,777 (3.1)% $ 235,854 $ 241,539 (2.4)% As a percent of revenue 36.8 % 36.7 % 37.3 % 37.0 % Our 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 decrease in sales and marketing costs during the three months ended June 30, 2023, compared to the 2022 period was primarily due to a decrease in personnel-related expenses, lower expenses for outside services related to software development and lower revenue share costs. The decrease in sales and marketing expenses during the six months ended June 30, 2023, compared to the 2022 period was primarily due to a decrease in personnel-related expenses and lower software-related costs. Research, Development, and Engineering (in thousands, except percentages) Three months ended June 30, Percentage Change Six months ended June 30, Percentage Change 2023 2022 2023 2022 Research, Development, and Engineering $ 17,817 $ 19,721 (9.7)% $ 35,731 $ 38,148 (6.3)% As a percent of revenue 5.5 % 5.8 % 5.6 % 5.8 % Our 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, 2023, compared to the 2022 period was primarily due to lower engineering costs as more costs were capitalized in 2023 than in 2022. The decrease in research, development, and engineering costs for the six months ended June 30, 2023, compared to the 2022 period was primarily due to lower personnel-related expenses and lower engineering costs as more costs were capitalized in 2023 than in 2022. General and Administrative (in thousands, except percentages) Three months ended June 30, Percentage Change Six months ended June 30, Percentage Change 2023 2022 2023 2022 General and Administrative $ 101,949 $ 101,967 0.0% $ 203,212 $ 204,184 (0.5)% As a percent of revenue 31.3% 30.2% 32.1 % 31.3 % Our general and administrative 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 and administrative expense for the three months ended June 30, 2023, compared to the 2022 period was primarily due to lower depreciation and amortization expense, partially offset by an increase in personnel-related expenses. The decrease in general and administrative expense for the six months ended June 30, 2023 compared to the 2022 period was primarily due to lower depreciation and amortization expense and non-income tax expense, partially offset by an increase in personnel-related expenses. -34- Share-Based Compensation Expense The following table presents the effects of 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, 2023 2022 2023 2022 Cost of revenues $ 94 $ 142 $ 170 $ 226 Sales and marketing 1,038 1,106 1,962 1,675 Research, development and engineering 958 852 1,741 1,481 General and administrative 7,127 5,603 13,746 11,038 Total share-based compensation expense $ 9,217 $ 7,703 $ 17,619 $ 14,420 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, 2023 and 2022 (in thousands): Three months ended June 30, Percentage Change Six months ended June 30, Percentage Change 2023 2022 2023 2022 Interest expense, net $ (10,483) $ (9,569) 9.6 % $ (14,963) $ (19,859) (24.7) % Gain on debt extinguishment, net — 2,613 (100.0) % — 1,393 (100.0) % Unrealized loss on short-term investments held at the reporting date, net (3,196) (27,317) (88.3) % (23,541) (18,366) 28.2 % (Loss) gain on investments, net — (48,243) 100.0 % 357 (48,243) 100.7 % Other (loss) income, net (1,503) 6,345 (123.7) % (2,411) 8,744 (127.6) % Total non-operating expense $ (15,182) $ (76,171) (80.1) % $ (40,558) $ (76,331) (46.9) % 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 $10.5 million and $9.6 million for the three months ended June 30, 2023 and 2022, respectively, and $15.0 million and $19.9 million for the six months ended June 30, 2023 and 2022, respectively. Interest expense, net increased during the three months ended June 30, 2023, compared to the 2022 period primarily due to 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. The increase was partially offset by higher interest income as a result of higher interest rates and a higher amount of cash and cash equivalents during the second quarter of 2023 compared to the second quarter of 2022, and approximately $1.2 million less interest expense from the 4.625% Senior Notes related to a lower principal balance over the period as a portion of the notes was repurchased. Interest expense, net decreased during the six months ended June 30, 2023 compared to the 2022 period primarily due to higher interest income as a result of higher interest rates and a higher amount of cash and cash equivalents during the period and approximately $2.9 million less interest expense from the 4.625% Senior Notes related to a lower principal balance over the period as the notes were repurchased, partially offset by the additional non-recurring $7.4 million of interest expense on the 1.75% Convertible Notes at a rate of 0.50% per annum discussed above. Gain on debt extinguishment, net. Gain on debt extinguishment, net was zero and $2.6 million during the three months ended June 30, 2023 and 2022, respectively, and zero and $1.4 million during the six months ended June 30, 2023 and 2022, respectively. The gain on debt extinguishment during the three and six months ended June 30, 2022 related to the repurchases of the 4.625% Senior Notes. Unrealized loss on short-term investments held at the reporting date, net. Unrealized loss on short-term investment held at the reporting date, net was $3.2 million and $27.3 million during the three months ended June 30, 2023 and 2022, respectively. Unrealized loss on short-term investment held at the reporting date, net was $23.5 million and $18.4 million during the six months ended June 30, 2023 and 2022, respectively. The unrealized loss recorded in all periods represents the change in fair value of our investment in Consensus Cloud Solutions, Inc. (“Consensus”). -35- (Loss) gain on investments, net. (Loss) gain on investments, net is generated from losses and gains from investments in equity and debt securities. Loss on investments, net was zero and $48.2 million for the three months ended June 30, 2023 and 2022, respectively. Gain on investments, net was $0.4 million for the six months ended June 30, 2023 and loss in investment, net was $48.2 million for the six months ended June 30, 2022. Our (loss) gain on investments, net during all periods was related to the disposition of Consensus common stock. Other (loss) income, net. Other (loss) income, net is generated primarily from miscellaneous items and gains or losses on foreign currency. Other (loss) income, net was $(1.5) million and $6.3 million for the three months ended June 30, 2023 and 2022, respectively, and $(2.4) million and $8.7 million for six months ended June 30, 2023 and 2022, respectively. The change was primarily attributable to changes in gains or losses on 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 $6.5 million and $10.1 million for the three months ended June 30, 2023 and 2022, respectively, and $5.8 million and $15.1 million for the six months ended June 30, 2023 and 2022, respectively. Our effective tax rate was 27.2% and (33.2)% for the three months ended June 30, 2023, respectively, and 23.7% and 12,760.8% for the six months ended June 30, 2023 and 2022, respectively. The increase in our effective income tax rate for the three months ended June 30, 2023 compared to the 2022 period was primarily attributable to the following: 1. an increase in our effective income tax rate during the three months ended June 30, 2023 due to the larger unrealized loss on our investment in Consensus common stock during the three months ended June 30, 2022 that was not subject to tax since the Company had the ability at the time to dispose of the investment in a tax-free manner based on guidance and requirements set out by the Internal Revenue Service; and 2. an increase in our effective income tax rate during the three months ended June 30, 2023 due to a decrease in the portion of our income being taxed in foreign jurisdictions and subject to lower tax rates than in the U.S. The decrease in our effective income tax rate for the six months ended June 30, 2023 compared to the 2022 period was primarily attributable to the following: 1. a decrease in our effective income tax rate during 2023 due to the unrealized loss on our investment in Consensus common stock that resulted in a discrete tax benefit of approximately $5.8 million; and 2. a decrease in our effective income tax rate during 2023 due to the release of reserves for uncertain tax positions with no similar event during the six months ended June 30, 2022; partially offset by 3. an increase in our effective income tax rate during 2023 due to a decrease in the portion of our income being taxed in foreign jurisdictions and subject to lower tax rates than in the U.S. 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. Equity Method Investment Loss from equity method investment, net. Loss or gain from equity method investment is generated from our investment in 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. Loss from equity method investment, net was $0.6 million and $6.1 million, net of tax benefit for the three months ended June 30, 2023 and 2022, respectively, and $9.8 million and $6.9 million, net of tax benefit for the six months ended June 30, 2023 and 2022, respectively. The decrease in loss from equity method investment, net during the three months ended June 30, 2023 compared to the respective 2022 period was primarily due to less of a decline in the value of the underlying investments. The increase in loss from equity method investment, net during the six months ended June 30, 2023 compared to the respective 2022 period was primarily due to a decrease in the value of the underlying investments. -36- 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, 2023 2022 2023 2022 External revenue $ 252,820 $ 258,343 $ 486,946 $ 493,038 Inter-business revenue 50 357 135 489 Total revenue 252,870 258,700 487,081 493,527 Operating costs and expenses 216,154 214,077 421,896 416,784 Operating income $ 36,716 $ 44,623 $ 65,185 $ 76,743 Digital Media’s net revenue of $252.8 million for the three months ended June 30, 2023 decreased $5.5 million, or 2.1%, compared to the 2022 period primarily due to an organic revenue decline in certain businesses, offset by $9.1 million of incremental revenue during the three months ended June 30, 2023 contributed by businesses acquired in 2022. Digital Media’s net sales of $486.9 million for the six months ended June 30, 2023 decreased $6.1 million, or 1.2%, compared to the 2022 period primarily due to an organic decline in certain businesses, offset by $21.1 million of incremental revenue during the six months ended June 30, 2023, contributed by business acquired in 2022. The Company considers revenue from an acquired business to become organic revenue in the first month in which the Company can compare that full month in the current year against the corresponding full month under its ownership in the prior year. Digital Media’s operating costs and expenses of $216.2 million for the three months ended June 30, 2023 increased $2.1 million, or 1.0%, compared to the 2022 period primarily due to higher advertising costs. Digital Media’s operating costs and expenses of $421.9 million for the six months ended June 30, 2023 increased $5.1 million, or 1.2%, compared to the 2022 period primarily due to higher advertising costs and personnel-related expenses. As a result of these factors, Digital Media’s operating income of $36.7 million for the three months ended June 30, 2023 decreased $7.9 million, or 17.7%, compared to the 2022 period. Digital Media’s operating income of $65.2 million for the six months ended June 30, 2023 decreased $11.6 million, or (15.1)%, compared to the 2022 period. Cybersecurity and Martech The financial results are presented as follows (in thousands): Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 External revenue $ 73,196 $ 79,013 $ 146,212 $ 159,386 Inter-business revenue — (103) — 18 Total revenue 73,196 78,910 146,212 159,404 Operating costs and expenses 59,679 66,333 121,092 134,499 Operating income $ 13,517 $ 12,577 $ 25,120 $ 24,905 Cybersecurity and Martech’s net revenue of $73.2 million for the three months ended June 30, 2023 decreased $5.8 million, or 7.4%, compared to the 2022 period primarily due to the organic decline in certain businesses during the period. Cybersecurity and Martech’s net sales of $146.2 million for the six months ended six months ended June 30, 2023 decreased $13.2 million, or (8.3)%, compared to the 2022 period primarily due to the organic decline in certain businesses during the period. -37- Cybersecurity and Martech’s operating costs and expenses of $59.7 million for the three months ended June 30, 2023 decreased $6.7 million, or 10.0%, compared to the 2022 period primarily due to lower sales and marketing expenses and lower general and administrative expenses, including lower depreciation and amortization expense. Cybersecurity and Martech’s operating costs and expenses of $121.1 million for the six months ended June 30, 2023 decreased $13.4 million, or (10.0)% compared to the 2022 period primarily due to lower sales and marketing expenses and lower general and administrative expenses, including lower depreciation and amortization expense. As a result of these factors, Cybersecurity and Martech’s operating income of $13.5 million for the three months ended June 30, 2023 increased $0.9 million, or 7.5%, from the 2022 period. Cybersecurity and Martech’s operating income of $25.1 million for the six months ended June 30, 2023 increased $0.2 million, or 0.9%. Liquidity and Capital Resources Cash, Cash Equivalents, and Investments Cash, cash equivalents, and investments consisted of (in thousands): June 30, 2023 December 31, 2022 Cash and cash equivalents $ 679,090 $ 652,793 Short-term investments 35,816 58,421 Long-term investments 114,356 127,871 $ 829,262 $ 839,085 Cash, cash equivalents, and investments held within domestic and foreign jurisdictions were as follows (in thousands): June 30, 2023 December 31, 2022 Cash, cash equivalents, and investments held in domestic jurisdiction $ 653,271 $ 671,587 Cash, cash equivalents, and investments held in foreign jurisdiction 175,991 167,498 Cash, cash equivalents, and investments $ 829,262 $ 839,085 For information on short-term and long-term investments of the Company, refer to Note 4 - Investments to the Notes to Condensed Consolidated Financial Statements included in Part I Item 1 of this Quarterly Report on Form 10-Q. Financings As of June 30, 2023 and December 31, 2022, there were no amounts drawn under the Credit Agreement. During the six months ended June 30, 2022, the Company repurchased approximately $76.1 million in aggregate principal amount of the 4.625% Senior Notes for an aggregate purchase price of approximately $73.6 million. No repurchases of 4.625% Senior Notes were effectuated during the six months ended June 30, 2023. Material Cash Requirements Ziff Davis’ long-term contractual obligations generally include its long-term debt, interest on long-term debt, lease payments on its property and equipment and holdback amounts in connection with certain business acquisitions. As of June 30, 2023, we and our subsidiaries had outstanding $1.0 billion in aggregate principal amount of indebtedness. As of June 30, 2023, our total future minimum lease payments are $49.6 million, of which approximately $21.9 million are due in the succeeding twelve months. There were no material changes to our cash requirements during the three months ended June 30, 2023. 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 stock repurchases, if any, for at least the next 12 months. -38- Cash Flows Our primary sources of liquidity are cash flows generated from operations, together with cash and cash equivalents. The following table provides a summary of cash flows from operating, investing, and financing activities (in thousands): Six months ended June 30, Change 2023 2022 Net cash provided by operating activities $ 155,035 $ 192,484 $ (37,449) Net cash used in investing activities $ (65,321) $ (161,301) $ 95,980 Net cash used in financing activities $ (64,612) $ (61,679) $ (2,933) Operating Activities Our operating cash flows 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 $37.4 million decrease in net cash provided by operating activities during the six months ended June 30, 2023 compared to the 2022 period was primarily related to a net decrease in collections from our customers due to timing and increase in prepaid expenses, partially offset by the effect of timing of payments to our vendors. Investing Activities The $96.0 million decrease in net cash used in investing activities during the six months ended June 30, 2023 compared to the 2022 period was primarily related to lower cash used on business acquisitions during the six months ended June 30, 2023 compared to the 2022 period and our investment in available-for-sale securities during the six months ended June 30, 2022, which did not recur in 2023 period. Financing Activities The $2.9 million increase in net cash used in financing activities during the six months ended June 30, 2023 compared to the 2022 period was primarily related to the absence of term loan proceeds during the 2023 period, partially offset by 1) the absence of repurchases of our 4.625% Senior Notes, which occurred during the six months ended June 30, 2022, and 2) lower cash used on share repurchases during the 2023 period compared to the 2022 period. Stock Repurchase Program On August 6, 2020, our Board of Directors 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, 2023 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, 2023 980,418 $63,900 5,346,736 (1) Includes the impact of excise taxes. Cumulatively at June 30, 2023, 4,653,264 shares were repurchased, under the 2020 Program, at an aggregate cost of $360.8 million (including excise tax). These shares were subsequently retired. -39-