ZIFF DAVIS, INC. 10-Q

Item 1. Financial Statements ZIFF DAVIS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands except share and per share data) March 31, 2024 December 31, 2023 ASSETS Cash and cash equivalents $ 734,779 $ 737,612 Short-term investments 16,404 27,109 Accounts receivable, net of allowances of $ 6,484 and $ 6,871 , respectively 446,883 337,703 Prepaid expenses and other current assets 95,036 88,570 Total current assets 1,293,102 1,190,994 Long-term investments 139,964 140,906 Property and equipment, net of accumulated depreciation of $ 346,793 and $ 327,015 , respectively 190,897 188,169 Intangible assets, net 400,562 325,406 Goodwill 1,624,628 1,546,065 Deferred income taxes 8,733 8,731 Other assets 69,145 70,751 TOTAL ASSETS $ 3,727,031 $ 3,471,022 LIABILITIES AND STOCKHOLDERS’ EQUITY Accounts payable $ 360,153 $ 123,256 Accrued employee related costs 26,262 50,068 Other accrued liabilities 44,012 43,612 Income taxes payable, current 18,019 14,458 Deferred revenue, current 199,880 184,549 Other current liabilities 15,008 15,890 Total current liabilities 663,334 431,833 Long-term debt 1,001,884 1,001,312 Deferred income taxes 65,261 45,503 Income taxes payable, noncurrent 8,486 8,486 Deferred revenue, noncurrent 7,172 8,169 Other long-term liabilities 78,882 82,721 TOTAL LIABILITIES 1,825,019 1,578,024 Commitments and contingencies (Note 8 ) Preferred stock, $ 0.01 par value. Authorized 1,000,000 and none issued — — Preferred stock - Series A, $ 0.01 par value. Authorized 6,000 ; total issued and outstanding zero — — Preferred stock - Series B, $ 0.01 par value. Authorized 20,000 ; total issued and outstanding zero — — Common stock, $ 0.01 par value. Authorized 95,000,000 ; total issued and outstanding 46,134,708 and 46,078,464 shares at March 31, 2024 and December 31, 2023, respectively 461 461 Additional paid-in capital 475,926 472,201 Retained earnings 1,503,838 1,491,956 Accumulated other comprehensive loss ( 78,213 ) ( 71,620 ) TOTAL STOCKHOLDERS’ EQUITY 1,902,012 1,892,998 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 3,727,031 $ 3,471,022 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 March 31, 2024 2023 Total revenues $ 314,485 $ 307,142 Operating costs and expenses: Direct costs 47,067 45,730 Sales and marketing 117,000 115,920 Research, development, and engineering 17,774 17,914 General, administrative, and other related costs 96,783 101,263 Total operating costs and expenses 278,624 280,827 Income from operations 35,861 26,315 Interest expense, net ( 1,769 ) ( 4,480 ) Loss on sale of businesses ( 3,780 ) — Unrealized loss on short-term investments held at the reporting date, net ( 10,705 ) ( 20,345 ) Gain on investments, net — 357 Other loss, net ( 104 ) ( 908 ) Income before income tax (expense) benefit and loss from equity method investment 19,503 939 Income tax (expense) benefit ( 8,231 ) 616 Loss from equity method investment, net of income taxes ( 645 ) ( 9,182 ) Net income (loss) $ 10,627 $ ( 7,627 ) Net income (loss) per common share: Basic $ 0.23 $ ( 0.16 ) Diluted $ 0.23 $ ( 0.16 ) Weighted average shares outstanding: Basic 45,860,033 46,987,249 Diluted 45,955,365 46,987,249 See Notes to Condensed Consolidated Financial Statements (Unaudited) -4- ZIFF DAVIS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited, in thousands) Three months ended March 31, 2024 2023 Net income (loss) $ 10,627 $ ( 7,627 ) Other comprehensive income (loss), net of tax: Foreign currency translation adjustment ( 6,530 ) 3,713 Change in fair value on available-for-sale investments, net of tax benefit of $ 19 and tax expense of $ 109 for the three months ended March 31, 2024 and 2023, respectively ( 63 ) 324 Other comprehensive income, net of tax ( 6,593 ) 4,037 Comprehensive income (loss) $ 4,034 $ ( 3,590 ) See Notes to Condensed Consolidated Financial Statements (Unaudited) -5- ZIFF DAVIS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Three months ended March 31, Cash flows from operating activities: 2024 2023 Net income (loss) $ 10,627 $ ( 7,627 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 48,453 54,623 Non-cash operating lease costs 2,770 2,933 Share-based compensation 8,872 8,402 Provision for credit losses on accounts receivable 50 441 Deferred income taxes, net ( 2,709 ) ( 7,442 ) Loss on sale of businesses 3,780 — Loss from equity method investments 645 9,182 Unrealized loss on short-term investments held at the reporting date, net 10,705 20,345 Gain on investments, net — ( 357 ) Other 1,278 2,776 Decrease (increase) in: Accounts receivable 55,365 27,626 Prepaid expenses and other current assets ( 9,423 ) ( 7,658 ) Other assets ( 2,078 ) ( 2,048 ) Increase (decrease) in: Accounts payable ( 62,270 ) 6,922 Deferred revenue 15,169 12,085 Accrued liabilities and other current liabilities ( 5,676 ) ( 4,896 ) Net cash provided by operating activities 75,558 115,307 Cash flows from investing activities: Purchases of property and equipment ( 28,129 ) ( 30,017 ) Acquisition of businesses, net of cash received ( 44,524 ) ( 8,001 ) Proceeds from sale of equity investments — 3,174 Proceeds from sale of businesses, net of cash divested 1,238 — Other ( 66 ) ( 3,947 ) Net cash used in investing activities ( 71,481 ) ( 38,791 ) Cash flows from financing activities: Repurchase of common stock ( 3,923 ) ( 2,875 ) Deferred payments for acquisitions ( 2,418 ) ( 6,679 ) Other 30 71 Net cash used in financing activities ( 6,311 ) ( 9,483 ) Effect of exchange rate changes on cash and cash equivalents ( 599 ) 1,676 Net change in cash and cash equivalents ( 2,833 ) 68,709 Cash and cash equivalents at beginning of period 737,612 652,793 Cash and cash equivalents at end of period $ 734,779 $ 721,502 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 March 31, 2024 Common stock Additional paid-in Retained Accumulated other Total Stockholders’ Shares Amount capital earnings comprehensive loss Equity Balance, January 1, 2024 46,078,464 $ 461 $ 472,201 $ 1,491,956 $ ( 71,620 ) $ 1,892,998 Net income — — — 10,627 — 10,627 Other comprehensive loss, net of tax benefit of $ 19 — — — — ( 6,593 ) ( 6,593 ) Issuance of restricted stock, net 56,244 — ( 5,152 ) 1,229 — ( 3,923 ) Share-based compensation — — 8,872 — — 8,872 Other, net — — 5 26 — 31 Balance, March 31, 2024 46,134,708 $ 461 $ 475,926 $ 1,503,838 $ ( 78,213 ) $ 1,902,012 Three months ended March 31, 2023 Common stock Additional paid-in Retained Accumulated other Total Stockholders’ Shares Amount capital earnings comprehensive loss Equity Balance, January 1, 2023 47,269,446 $ 473 $ 439,681 $ 1,537,830 $ ( 85,373 ) $ 1,892,611 Net loss — — — ( 7,627 ) — ( 7,627 ) Other comprehensive loss, net of tax expense of $ 109 — — — — 4,037 4,037 Issuance of restricted stock, net 16,647 — ( 3,336 ) 461 — ( 2,875 ) Share-based compensation — — 8,402 — — 8,402 Other, net — — 66 1 — 67 Balance, March 31, 2023 47,286,093 $ 473 $ 444,813 $ 1,530,665 $ ( 81,336 ) $ 1,894,615 See Notes to Condensed Consolidated Financial Statements (Unaudited) -7- 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 Securities and Exchange Commission ("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. For the three months ended March 31, 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 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 -8- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 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. In addition, the guidance 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 the guidance is to enable investors to better understand an entity’s overall performance and assess potential future cash flows. The guidance is effective on December 31, 2024 and for prospective interim periods within fiscal years beginning after December 15, 2024, on a retrospective basis. 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 these provisions 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 of equal to or greater than 5% of the amount computed by multiplying pretax income by statutory income tax rate. The amendments also require 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 5% of total income taxes paid. The amendments eliminate some of the previously required disclosures for all entities relating to estimates of the change in unrecognized tax benefits reasonably possible within twelve months. The amendments in this update are effective on a prospective basis on December 31, 2024. Early adoption is permitted. This update will result in the required additional disclosures being included in our consolidated financial statements, once adopted. 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 revenue 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 Revenue 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. -9- 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. -10- 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 March 31, 2024 2023 Digital Media Advertising and performance marketing $ 156,096 $ 156,082 Subscription and licensing 73,467 69,148 Other 9,489 8,981 Total Digital Media revenues $ 239,052 $ 234,211 Cybersecurity and Martech Subscription and licensing $ 75,452 $ 73,016 Total Cybersecurity and Martech revenues $ 75,452 $ 73,016 Elimination of inter-segment revenues ( 19 ) ( 85 ) Total Revenues $ 314,485 $ 307,142 The Company recorded $ 74.1 million and $ 65.1 million of revenue for the three months ended March 31, 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, they are considered to be functional intellectual property where the performance obligations are satisfied at a point in time. -11- 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 March 31, 2024, the aggregate amount of transaction price that is allocated to future performance obligations was approximately $ 44.1 million and is expected to be recognized as follows: 61 % by December 31, 2024, 30 % by December 31, 2025, and 9 % 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 months ended March 31, 2024, the Company recorded $ 7.5 million of incremental revenue from the businesses acquired during the first quarter of 2023 and 2024. Net income contributed by these acquisitions was not separately identifiable due to the Company’s integration activities and is impracticable to provide. 2024 Acquisition On February 5, 2024, we completed an acquisition of 100 % of the equity interest in TDS Gift Cards, a California-based digital gifting and branded payments platform, which is reported within our Digital Media segment and 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. Total consideration for this transaction was $ 187.5 million, or $ 44.5 million, net of cash acquired. The following table summarizes the allocation of the preliminary purchase consideration for the acquisition of TDS Gift Cards as of March 31, 2024 (in thousands): Assets and Liabilities Valuation Cash $ 142,957 Accounts receivable and other current assets 171,500 Intangible assets 101,754 Goodwill 85,901 Other assets 289 Accounts payable and other current liabilities ( 290,272 ) Deferred tax liability, noncurrent ( 23,788 ) Other noncurrent liabilities ( 861 ) Total $ 187,480 The initial accounting for the 2024 acquisition is incomplete due to the timing of available information and is subject to change. The Company has recorded provisional amounts as of March 31, 2024. -12- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued The fair value of the assets acquired includes accounts receivable of $ 170.9 million, of which none is expected to be uncollectible. None of the goodwill recognized is expected to be deductible for income tax purposes. The preliminary amounts assigned to intangible assets by type for the acquisition during the three months ended March 31, 2024 are summarized in the table below (in thousands): Gross Carrying Value Weighted average estimated life Customer relationships $ 82,762 10 years Trade names and trademarks 1,716 2 years Other purchased intangibles 17,276 10 years Total gross carrying value $ 101,754 The Condensed Consolidated Statement of Operations and the Condensed Consolidated Balance Sheet as of March 31, 2024, reflect the results of operations of the 2024 acquisition since the date of the acquisition. 2023 Acquisition The Company completed an immaterial Digital Media acquisition during the three months ended March 31, 2023, paying the purchase price in cash. The Condensed Consolidated Statement of Operations since the date of the acquisition, reflect the results of operations of the 2023 acquisition. Goodwill recognized associated with this acquisition during the three months ended March 31, 2023 was $ 3.8 million, all of which is expected to be deductible for income tax purposes. Approximately $ 4.2 million of definite-lived intangibles were recorded in connection with the acquisition during the three months ended March 31, 2023. 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”). As of each of March 31, 2024 and December 31, 2023, the Company held approximately 1.0 million shares of the common stock of Consensus. As of March 31, 2024 and December 31, 2023, the carrying value of the investment in Consensus was $ 16.4 million and $ 27.1 million, respectively, and is included in ‘Short-term investments’ in the Condensed Consolidated Balance Sheets. The Company accounts for its investment in Consensus at fair value under the fair value option, and the related fair value gains and losses are recognized in earnings. During the three months ended March 31, 2024 and 2023, the Company sold zero and 52,393 shares, respectively, of common stock of Consensus in the open market. Losses on equity securities recorded in ‘Unrealized loss on short-term investments held at the reporting date, net’ in the Condensed Consolidated Statements of Operations consisted of the following (in thousands): Three months ended March 31, 2024 2023 Net losses during the period $ ( 10,705 ) $ ( 19,988 ) Less: gains on securities sold during the period — 357 Unrealized losses recognized during the period on short-term investments held at the reporting date, net $ ( 10,705 ) $ ( 20,345 ) 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 March 31, 2024 and December 31, 2023, the carrying value of the investment in Xyla was $ 25.3 million, including transaction costs, and is included in ‘Long-term investments’ in the Condensed Consolidated Balance Sheets. -13- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 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 March 31, 2024, both the carrying value and the maximum exposure of the Company’s investment in corporate debt securities was approximately $ 15.6 million, with a contractual maturity date that was more than 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 March 31, 2024 and December 31, 2023 were approximately $ 0.6 million and $ 0.7 million, respectively. There were no investments in an unrealized loss position as of March 31, 2024 and December 31, 2023. During the three months ended March 31, 2024 and 2023, the Company did not recognize any other-than-temporary impairment losses on its debt securities. 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 March 31, 2024 and 2023, the Company recognized a loss from equity method investment, net of income taxes of $ 0.6 million and $ 9.2 million, net of tax expense (benefit), respectively. The losses in the periods presented were primarily the result of losses in the underlying investments. As of March 31, 2024, both the carrying value and the maximum exposure of the Company’s equity method investment was approximately $ 99.0 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. -14- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 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. The investment in Consensus common stock is 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 are included in our assets of and results from continuing operations, respectively. As of March 31, 2024 and 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 $ 16.4 million and $ 27.1 million, respectively, in the Condensed Consolidated Balance Sheets. For the three months ended March 31, 2024 and 2023, the unrealized losses of $ 10.7 million and $ 20.3 million, respectively, were recorded in the Condensed Consolidated Statement of Operations. The fair value of the investment in Consensus common stock is determined using the quoted market prices, which is a Level 1 input. The Company’s investment in certificates of deposit are classified within Level 2. The Company values these Level 2 investments based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data. 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 March 31, 2024 and December 31, 2023, the fair value was determined based upon various probability-weighted scenarios which included discount rate assumptions between 13 % and 14 %, depending on the probability scenario. In addition, the determination of fair value included a conversion timeframe of approximately one to three years , depending on the probability scenario, as of March 31, 2024 and as of December 31, 2023. 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 March 31, 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. 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): March 31, 2024 Level 1 Level 2 Level 3 Fair Value Carrying Value Assets: Cash equivalents: Money market and other funds $ 272,847 $ — $ — $ 272,847 $ 272,847 Certificates of deposit — 2,304 — 2,304 2,304 Short-term investments: Consensus common stock 16,404 — — 16,404 16,404 Long-term investments: Investment in corporate debt securities — — 15,617 15,617 15,617 Total assets measured at fair value $ 289,251 $ 2,304 $ 15,617 $ 307,172 $ 307,172 Liabilities: Contingent consideration $ — $ — $ 2,834 $ 2,834 $ 2,834 Total liabilities measured at fair value $ — $ — $ 2,834 $ 2,834 $ 2,834 -15- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued December 31, 2023 Level 1 Level 2 Level 3 Fair Value Carrying Value Assets: Cash equivalents: Money market and other funds $ 340,928 $ — $ — $ 340,928 $ 340,928 Short-term investments: Consensus common stock 27,109 — — 27,109 27,109 Long-term investments: Investment in corporate debt securities — — 15,699 15,699 15,699 Total assets measured at fair value $ 368,037 $ — $ 15,699 $ 383,736 $ 383,736 Liabilities: Contingent consideration $ — $ — $ 2,834 $ 2,834 $ 2,834 Total liabilities measured at fair value $ — $ — $ 2,834 $ 2,834 $ 2,834 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 months ended March 31, 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): Three months ended March 31, 2024 2023 Contingent Consideration Arrangements Corporate Debt Securities Contingent Consideration Arrangements Corporate Debt Securities Balance as of January 1 $ 2,834 $ 15,699 $ 555 $ 15,586 Fair value adjustments (1) — ( 82 ) — 433 Balance as of March 31 $ 2,834 $ 15,617 $ 555 $ 16,019 (1) The fair value adjustments to the corporate debt securities in the table above were recorded in ‘Change in fair value on available-for-sale investments, net’ in the Condensed Consolidated Statements of Comprehensive Income (Loss) during the three months ended March 31, 2024 and 2023. 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. -16- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued The following table presents the carrying value and the fair value of financial instruments measured at fair value only for disclosure purposes: March 31, 2024 December 31, 2023 Carrying Value Fair Value Carrying Value Fair Value 4.625 % Senior Notes $ 456,898 $ 414,467 $ 456,796 $ 405,408 1.75 % Convertible Notes $ 544,986 $ 519,233 $ 544,516 $ 519,492 6. Goodwill and Intangible Assets Goodwill The changes in carrying amounts of goodwill for the three months ended March 31, 2024 are as follows (in thousands): Digital Media Cybersecurity and Martech Consolidated Balance as of January 1, 2024 $ 1,016,880 $ 529,185 $ 1,546,065 Goodwill acquired (1) 85,900 — 85,900 Goodwill removed due to sale of businesses (2) ( 3,983 ) — ( 3,983 ) Foreign exchange translation ( 1,188 ) ( 2,166 ) ( 3,354 ) Balance as of March 31, 2024 $ 1,097,609 $ 527,019 $ 1,624,628 (1) Goodwill recognized in connection with the acquisition during the three months ended March 31, 2024 (see Note 3 — Business Acquisitions ). (2) During the three months ended March 31, 2024, in a cash transaction, the Company sold an international asset 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 March 31, 2024 and December 31, 2023 reflects accumulated impairment losses of $ 84.2 million in the Digital Media reportable segment. 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 March 31, 2024, this reporting unit had goodwill of approximately $ 79.2 million. Intangible Assets Subject to Amortization As of March 31, 2024, intangible assets subject to amortization relate primarily to the following (in thousands): Historical Cost Accumulated Amortization Net Trade names and trademarks $ 349,490 $ 199,293 $ 150,197 Customer relationships 774,154 569,148 205,006 Other purchased intangibles 396,962 351,603 45,359 Total $ 1,520,606 $ 1,120,044 $ 400,562 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 $ 347,895 $ 192,111 $ 155,784 Customer relationships 692,634 555,384 137,250 Other purchased intangibles 379,703 347,331 32,372 Total $ 1,420,232 $ 1,094,826 $ 325,406 -17- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Amortization expense, included in ‘General, administrative, and other related costs’ in our Condensed Consolidated Statements of Operations, was approximately $ 26.3 million and $ 33.3 million for the three months ended March 31, 2024 and 2023, respectively. 7. Debt Long-term debt consists of the following (in thousands): March 31, 2024 December 31, 2023 4.625 % Senior Notes $ 460,038 $ 460,038 1.75 % Convertible Notes 550,000 550,000 Total Notes 1,010,038 1,010,038 Credit Agreement — — Less: Unamortized discount ( 2,386 ) ( 2,463 ) Deferred issuance costs (1) ( 5,768 ) ( 6,263 ) Total long-term debt $ 1,001,884 $ 1,001,312 (1) Includes $ 5.0 million and $ 5.5 million of carrying amount of deferred issuance costs on the 1.75 % Convertible Notes as of March 31, 2024 and December 31, 2023, respectively, and $ 0.8 million and $ 0.8 million of carrying amount of deferred issuance costs on the 4.625 % Senior Notes as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, $ 550.0 million of principal will mature in 2026 and $ 460.0 million of principal will mature in 2030. 4.625 % Senior Notes 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 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 -18- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 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 March 31, 2024. Cumulatively as of March 31, 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 months ended March 31, 2024 and March 31, 2023. 1.75 % Convertible Notes 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. 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 March 31, 2024 and December 31, 2023, the market trigger conditions did not meet the conversion requirements of the 1.75 % Convertible Notes and, accordingly, the 1.75 % Convertible Notes are classified as long-term debt on our Condensed Consolidated Balance Sheets. As of March 31, 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. -19- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued The following table provides the components of interest expense related to the 1.75 % Convertible Notes (in thousands): Three months ended March 31, 2024 2023 Contractual interest expense $ 2,406 $ 2,406 Amortization of deferred issuance costs 470 466 Total interest expense related to 1.75 % Convertible Notes $ 2,876 $ 2,872 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”). Subject to certain conditions and approvals, the Company may, from time to time, request increases in the commitments under the Credit Agreement in an aggregate amount up to $ 250.0 million, for a total aggregate commitment of up to $ 350.0 million. The final maturity of the credit facility will occur on April 7, 2026. 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. The Company is permitted to make voluntary prepayments of the 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 March 31, 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 March 31, 2024. -20- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 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. 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. 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. As part of the settlement of the Chancery Court Derivative Action described above, the Company and its directors and officers intend to defend against the remaining claims in these other actions. The Company does not believe, based on current knowledge, that the foregoing legal proceedings or claims, 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. 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 million as of each of March 31, 2024 and December 31, 2023, respectively, which are included in ‘Accounts payable’ and ‘Other long-term liabilities’ on the Condensed Consolidated Balance Sheet. It is reasonably possible that additional liabilities could be incurred resulting in additional expense, which could have a material impact to our financial results. -21- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 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 42.2 % and ( 65.6 )% for the three months ended March 31, 2024 and 2023, respectively. The Company’s effective tax rate for the three months ended March 31, 2024 was impacted disproportionately by the recognition of a valuation allowance against a portion of its U.S. capital loss carryforwards, which resulted in a discrete tax charge of $ 3.2 million. The Company’s effective tax rate for the three months ended March 31, 2023 was impacted disproportionately due to the unrealized loss on the Company’s investment in Consensus, net of the gain on investment, during the first quarter of 2023, which resulted in a discrete tax benefit of approximately $ 5.0 million. Additionally, the Company recognized a discrete tax benefit of approximately $ 1.0 million related to the release of reserves for uncertain tax positions. As of March 31, 2024 and December 31, 2023, the Company had $ 36.6 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 Statement 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 March 31, 2024 and December 31, 2023, the Company’s prepaid taxes were $ 3.4 million and $ 4.7 million, respectively. 10. Stockholders’ Equity On August 6, 2020, the Company’s Board of Directors 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 months ended March 31, 2024 and 2023, no shares were repurchased under the 2020 Program. Cumulatively as of March 31, 2024, 5,258,692 shares were repurchased under the 2020 Program, at an aggregate cost of $ 401.8 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 March 31, 2024 was 4,741,308 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 March 31, 2024 and 2023, the Company purchased and retired 58,237 and 36,652 shares at an aggregate cost of approximately $ 3.9 million and $ 2.9 million, resp ectively, from plan participants for this purpose. 11. Share-Based Compensation The Company’s share-based compensation plans include the 2015 Stock Option Plan (the “2015 Plan”) and 2001 Employee Stock Purchase Plan (the “Purchase Plan”). Each plan is described below. The 2015 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance share units, and other share-based awards. 4,200,000 shares of the Company’s common stock are authorized to be used for 2015 Plan purposes. Options under the 2015 Plan may be granted at exercise prices determined by the Board of Directors, provided that the exercise prices shall not be less than the higher of the par value or 100 % of the fair market value of the Company’s common stock subject to the option on the date the option is granted. As of March 31, 2024, 435,135 shares underlying options and 726,367 shares of restricted stock units were outstanding under the 2015 Plan. At March 31, 2024, there were 126,565 additional shares underlying options, shares of restricted stock and other share-based awards available for grant under the 2015 Plan. -22- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 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 March 31, 2024 2023 Direct costs $ 61 $ 76 Sales and marketing 758 924 Research, development, and engineering 1,090 783 General, administrative, and other related costs 6,963 6,619 Total share-based compensation expense $ 8,872 $ 8,402 Restricted Stock and Restricted Stock Units The Company has awarded restricted stock and restricted stock units to its Board of Directors 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 of Directors, generally three to four years for senior staff (excluding market-based awards discussed below) and three to eight years for the Chief Executive Officer. The Company granted 347,275 and 271,614 shares of restricted stock units (excluding awards with market conditions below) (“RSUs”) during the three months ended March 31, 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 2015 Plan. 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 three months ended March 31, 2023, the Company awarded 167,606 PSUs at stock price targets ranging from $ 83.61 to $ 103.76 per share. During the three months ended March 31, 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 will be 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 three months ended March 31, 2024 and 2023 were $ 87.17 and $ 70.07 , respectively. -23- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued The assumptions used in determining the weighted-average fair values of PSUs granted are as follows: Three months ended March 31, 2024 2023 Underlying stock price at valuation date $ 66.88 $ 77.80 Expected volatility 32.9 % 32.0 % Risk-free interest rate 4.3 % 4.1 % Restricted stock award activity for the three months ended March 31, 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 95,718 $ 70.17 163,181 $ 36.27 Vested ( 36,330 ) 70.92 — — Forfeited ( 154 ) 77.75 — — Nonvested at March 31, 2024 59,234 $ 69.69 163,181 $ 36.27 Restricted stock unit activity for the three months ended March 31, 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 506,425 $ 88.36 270,772 $ 77.09 Granted 347,275 66.87 308,970 87.17 Vested ( 114,635 ) 86.29 — — Forfeited ( 12,698 ) 82.28 ( 6,015 ) 75.96 Outstanding at March 31, 2024 726,367 $ 78.49 573,727 $ 82.53 (1) Represents the number of shares at 100% achievement. As of March 31, 2024, the Company had unrecognized share-based compensation cost of approximately $ 84.1 million associated with these restricted stock awards and restricted stock units. This cost is expected to be recognized over a weighted-average period of 1.8 years for RSAs and PSAs and 2.6 years for RSUs and PSUs. -24- 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 March 31, 2024 2023 Numerator for basic and diluted net income (loss) per common share: Net income (loss) $ 10,627 $ ( 7,627 ) Plus: 1.75 % Convertible Notes interest expense (after-tax) — — Net income (loss) available to the Company’s common shareholders $ 10,627 $ ( 7,627 ) Denominator: Basic weighted-average outstanding shares of common stock 45,860,033 46,987,249 Diluted effect of: Equity incentive plans 95,332 — Convertible debt — — Diluted weighted-average outstanding shares of common stock 45,955,365 46,987,249 Net income (loss) per share: Basic $ 0.23 $ ( 0.16 ) Diluted $ 0.23 $ ( 0.16 ) For the three months ended March 31, 2024 and 2023, there were 846,160 and 1,830,097 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 period and the net loss during the 2023 period. During each of the three months ended March 31, 2024 and 2023, 5,158,071 , shares related to convertible debt were excluded from diluted shares because they were anti-dilutive under the if-converted method for the diluted net income per share calculation of the convertible debt instrument. 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. -25- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued Information on reportable segments and reconciliation to income from operations is as follows (in thousands): Three months ended March 31, 2024 2023 Revenue by reportable segment: Digital Media $ 239,052 $ 234,211 Cybersecurity and Martech 75,452 73,016 Elimination of inter-segment revenues (1) ( 19 ) ( 85 ) Total segment revenues 314,485 307,142 Corporate — — Total revenues $ 314,485 $ 307,142 Operating costs and expenses by reportable segment (3) : Digital Media 207,447 205,742 Cybersecurity and Martech 56,043 61,413 Elimination of inter-segment operating expenses ( 19 ) ( 85 ) Total segment operating expenses 263,471 267,070 Corporate (2) 15,153 13,757 Total operating costs and expenses 278,624 280,827 Operating income by reportable segment: Digital Media operating income 31,605 28,469 Cybersecurity and Martech operating income 19,409 11,603 Total segment operating income 51,014 40,072 Corporate (2) ( 15,153 ) ( 13,757 ) Income from operations $ 35,861 $ 26,315 (1) Inter-segment revenues relate to the Digital Media reportable segment. (2) Corporate includes costs associated with general, administrative, and other related costs that are managed on a global basis and that are not directly attributable to any particular segment. (3) 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. 14. Supplemental Cash Flow Information Supplemental data (in thousands): Three months ended March 31, 2024 2023 Interest paid $ — $ — Income taxes paid, net of refunds $ 6,511 $ 5,329 -26- ZIFF DAVIS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued 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 March 31, 2024 (in thousands): Unrealized Gains (Losses) on Investments Foreign Currency Translation Total Balance as of January 1, 2024 $ 537 $ ( 72,157 ) $ ( 71,620 ) Other comprehensive loss, net of tax ( 63 ) ( 6,530 ) ( 6,593 ) Balance as of March 31, 2024 $ 474 $ ( 78,687 ) $ ( 78,213 ) There were no reclassifications out of accumulated other comprehensive loss for the three months ended March 31, 2024 and 2023, respectively. 16. Subsequent Event On March 22, 2024, the Company’s Board of Directors approved the Ziff Davis, Inc. 2024 Equity Incentive Plan (the “2024 Plan”), subject to stockholders’ approval, to replace the 2015 Plan, which stockholders previously approved and which was set to expire on February 10, 2025, in accordance with its terms. On May 7, 2024, at the Company’s annual meeting of stockholders, the 2024 Plan was approved by the stockholders of the Company and will expire on March 21, 2034, unless earlier terminated by the Board of Directors. As a result, the 2015 Plan was terminated effective May 7, 2024. -27-