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, certain statements included in this Quarterly Report on Form 10-Q may be forward-looking statements, including statements regarding the intent, belief or current expectations of the Company. These statements may include those concerning our possible or assumed future results of operations, business, strategy and current and future acquisitions, as well as the assumptions on which such statements are based. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements generally are identified by use of the words “anticipates,” “believes,” “estimates,” “hopes,” “may,” “will,” “seeks,” “protects,” “potential,” “predicts,” “expects,” “plans,” “intends,” “would,” “could,” “should,” or similar expressions, although not all forward-looking statements contain these identifying words. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed below, the risk factors discussed in Part II, Item 1A - “Risk Factors” of this Quarterly Report on Form 10-Q (if any) and in Part I, Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (together, the “Risk Factors”), the factors discussed in Part I, Item 3 in this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures About Market Risk”, and any risks and uncertainties identified in our other filings with the SEC, as such risks, uncertainties and other important factors may be updated from time to time in our subsequent reports. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions and speak only as of the date they are made. We undertake no obligation to revise, update or publicly release the results of any revision to these forward-looking statements to reflect changed assumptions, new information or the occurrence of unanticipated events, unless required by law. Some factors that could cause actual results to differ materially from those anticipated in these forward-looking statements include, but are not limited to, our ability and intention to: ◦ Sustain growth or profitability, particularly in light of an uncertain U.S. or worldwide economy, including the possibility of an economic downturn or recession, global conflicts, continuing inflation, elevated interest rates, 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 customer; ◦ Generate sufficient cash flow to make interest and debt payments, reinvest in our business, and pursue desired activities and businesses plans while satisfying restrictive covenants relating to debt obligations; ◦ Acquire businesses on acceptable terms, execute on our investment strategies, successfully manage our growth, and integrate and realize anticipated synergies from such acquisitions; ◦ Continue to expand our businesses and operations internationally in the wake of numerous risks, including adverse currency fluctuations, difficulty in staffing and managing international operations, higher operating costs as a percentage of revenues, or the implementation of adverse regulations; ◦ Maintain our financial position, operating results and cash flows in the event that we incur new or unanticipated costs or tax liabilities, including those relating to federal and state income tax and indirect taxes, such as sales, value-added, and telecommunication taxes; ◦ Manage certain risks related to the unauthorized use of our content and the infringement of our intellectual property rights by developers and users of generative artificial intelligence (“AI”); ◦ Prevent system failures, security breaches, and other technological issues; ◦ Accurately estimate the assumptions underlying our effective worldwide tax rate; ◦ Maintain favorable relationships with critical third-party vendors that are financially stable; ◦ Create compelling digital media content facilitating increased traffic and advertising levels and additional advertisers or an increase in advertising spend, and effectively target digital media advertisements to desired audiences; ◦ Manage certain risks inherent to our business, such as costs associated with fraudulent activity, system failure, or security breach; effectively maintaining and managing our billing systems; the time and resources required to -32- manage our legal proceedings; liability for legal and other claims; or adhering to our internal controls and procedures; ◦ Compete with other similar providers with regard to price, service, and functionality; ◦ Achieve business and financial objectives in light of burdensome domestic and international telecommunications, internet, or other regulations, including regulations related to data privacy, access, security, retention, and sharing; ◦ Successfully adapt to technological changes and diversify services and related revenues at acceptable levels of financial return; ◦ Successfully develop and protect our intellectual property, both domestically and internationally, including our brands, content, copyrights, patents, trademarks, and domain names from infringement by third parties, and avoid infringing upon the proprietary rights of others; ◦ Manage certain risks associated with environmental, social, and governmental matters, including related reporting obligations, that could adversely affect our reputation and performance; ◦ Recruit and retain key personnel and maintain the beneficial aspects of our corporate culture globally; ◦ Meet our publicly announced guidance or other expectations about our business and future operating results; and ◦ Avoid disruptions to our operations, financial position, and reputation as a result of the collapse of certain banks and potentially other financial institutions. In addition, other factors that could cause actual results to differ materially from those anticipated in these forward-looking statements or materially impact our financial results include the risks associated with new accounting pronouncements, as well as those associated with natural disasters, public health crises, pandemics, and other catastrophic events outside of our control. Overview Ziff Davis, Inc. was incorporated in 2014 as a Delaware corporation through the creation of a holding company structure. Ziff Davis, Inc., together with its subsidiaries (“Ziff Davis”, “the Company”, “our”, “us” or “we”), is a vertically focused digital media and internet company whose portfolio includes brands in technology, shopping, gaming and entertainment, connectivity, health and wellness, cybersecurity, and martech. Our Digital Media business specializes in the technology, shopping, gaming and entertainment, connectivity, and healthcare markets, offering content, tools, and services to consumers and businesses. Our Cybersecurity and Martech business provides cloud-based subscription and license services to consumers and businesses including cybersecurity, privacy, and marketing technology. Our consolidated revenues are currently generated primarily from two basic business models, each with different financial profiles and variability. Our Digital Media business is driven primarily by advertising and performance marketing revenues, has relatively higher sales and marketing expenses, and has seasonal strength in the fourth quarter. Our Cybersecurity and Martech business is driven primarily by subscription and licensing 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 results. -33- Revenue Overview Revenues from external customers classified by revenue source are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Digital Media Advertising and performance marketing $ 193,626 $ 183,008 $ 520,063 $ 514,173 Subscription and licensing 77,450 71,858 223,681 209,167 Other 12,491 13,085 30,692 31,692 Total Digital Media revenues $ 283,567 $ 267,951 $ 774,436 $ 755,032 Cybersecurity and Martech Subscription and licensing $ 70,039 $ 73,051 $ 214,475 $ 219,263 Total Cybersecurity and Martech revenues $ 70,039 $ 73,051 $ 214,475 $ 219,263 Elimination of inter-segment revenues (26) (17) (46) (152) Total Revenues $ 353,580 $ 340,985 $ 988,865 $ 974,143 Performance Metrics We use certain metrics to generally assess the operational and financial performance of our businesses. For our advertising and performance marketing businesses, net advertising and performance marketing revenue retention is an indicator of our ability to retain the spend of our existing customers year over year, which we view as a reflection of the effectiveness of our advertising and performance marketing platforms. Similarly, we monitor the number of our customers and the revenue per customer, as defined below, as these metrics provide further details related to our reported revenue and contribute to certain of our business planning decisions. The following table sets forth certain key operating metrics for our Digital Media advertising and performance marketing business for the three months ended September 30, 2024 and 2023: Three months ended September 30, 2024 2023 Net advertising and performance marketing revenue retention (1) 91.8% 88.9% Customers (2) 1,733 1,785 Quarterly revenue per customer (3) $111,722 $102,525 (1) Net advertising and performance marketing revenue retention equals (i) the trailing twelve months revenue recognized related to prior year customers in the current year period (excluding revenue from acquisitions during the stub period) divided by (ii) the trailing twelve months revenue recognized related to prior year customers in the prior year period (excluding revenue from acquisitions during the stub period). This excludes customers that generated less than $10,000 of revenue in the measurement period. (2) Excludes customers that spent less than $2,500 in the quarter. (3) Represents total gross quarterly advertising and performance marketing revenues divided by customers as defined in footnote (2). For our subscription and licensing businesses, the number of customers that we serve is an indicator of our customer retention and growth. The average quarterly revenue per customer and the churn rate also contribute to insights that contribute to certain of our business planning decisions. -34- The following table sets forth certain key operating metrics for our Digital Media and Cybersecurity and Martech subscription and licensing businesses for the three months ended September 30, 2024 and 2023: Three months ended September 30, 2024 2023 (7) Digital Media Customers (in thousands) (1)(2) 2,239 1,905 Average quarterly revenue per customer (2)(3) $34.56 $37.73 Churn rate (2)(4)(5) 2.59% 3.14% Cybersecurity and Martech Customers (in thousands) (1)(6) 1,251 1,395 Average quarterly revenue per customer (3) $55.99 $52.37 Churn rate (4) 3.13% 3.28% Consolidated Total Customers (in thousands) (1)(2)(6) 3,490 3,300 Average quarterly revenue per customer (2)(3) $42.21 $43.92 Churn rate (2)(4)(5) 2.85% 3.20% (1) Represents the quarterly average of the end of month customer counts. (2) The metric includes the sale of perpetual software licenses, revenue for which is recorded at a point-in time rather than over-time. (3) Represents quarterly gross subscription and licensing revenues divided by customers as defined in footnote (1). (4) Churn rate is calculated as (i) the average revenue per customer in the prior month multiplied by the number of cancellations in the current month, calculated at each business and aggregated; divided by (ii) subscription and licensing revenue in the current month, calculated at each business and aggregated. (5) Within the Digital Media segment, the churn rate calculation for Ookla includes the sum of the monthly revenue from the specific cancelled agreements in the numerator. (6) Resellers within Cybersecurity and Martech segment are counted as one customer when there is not visibility into the number of underlying customers served by the reseller. (7) Certain prior period key performance metrics in the consolidated table above have been adjusted for our Cybersecurity and Martech segment as a result of gaining greater transparency into a reseller relationship enabling us to identify the underlying customers and for our Digital Media segment to remove certain subscribers who have paused their subscription for more than one month and to include certain subscribers that are within the estimated active usage period of a lifetime subscription. The following table summarizes the adjustments made to previously reported amounts. Three months ended September 30, 2023 Customers (in thousands) 69 Average quarterly revenue per customer $ (0.92) Churn rate (0.02) % Critical Accounting Policies and Estimates In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements. Actual results could differ significantly from those estimates under different assumptions and conditions. Our critical accounting policies are described in our 2023 Annual Report on Form 10-K filed with the SEC on February 26, 2024. During the nine months ended September 30, 2024, there were no significant changes in our critical accounting policies and estimates. See Note 1 — Basis of Presentation and Overview in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional description of significant accounting policies of the Company. -35- During the three and nine months ended September 30, 2024, the Company reassessed the fair value of certain reporting units within the Digital Media and Cybersecurity and Martech reportable segments as a result of a sustained decline in the Company’s stock price, and forecasted reductions in revenue or earnings before interest, taxes, depreciation, and amortization (“EBITDA”) in certain of its reporting units. Based on the quantitative fair value test of two reporting units within the Digital Media reportable segment, the carrying value of the reporting units exceeded their fair value, and the Company recorded an impairment of approximately $85.3 million during the three and nine months ended September 30, 2024. During the three and nine months ended September 30, 2023, the Company reassessed the fair value of certain reporting units within the Digital Media reportable segment as a result of forecasted reduction in revenue and EBITDA in the reporting unit, as well as an increase in interest rates and market volatility that could affect the Company’s assumptions on its discount rates. Based on the quantitative fair value test, the carrying value of one reporting unit exceeded its fair value, and the Company recorded an impairment of approximately $56.9 million during the three and nine months ended September 30, 2023. During each period, the fair value of the relevant reporting unit was determined using an equal weighting of an income approach that was based on the discounted estimated future cash flows of the reporting unit and a market approach that uses the guideline public company approach. We believe the combination of these approaches provides an appropriate valuation because it incorporates the expected cash generation of the reporting unit in addition to how a third-party market participant would value the reporting unit based on public and private market information. As each business is assumed to continue in perpetuity, the discounted future cash flows include a terminal value. Determining fair value using a discounted estimated future cash flow analysis requires the exercise of significant judgment with respect to several items, including the amount and timing of expected future cash flows and appropriate discount rates. The expected cash flows used in the discounted cash flow analyses were based on the most recent forecast for the reporting unit. For years beyond the forecast period, the estimates were based, in part, on forecasted growth rates. The discount rate the Company used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in its reporting unit operations and the rate of return a market participant would expect to earn. Determining fair value using a market approach considers multiples of financial metrics based on trading multiples of a selected peer group of companies. From the comparable companies, a representative market multiple is determined, which is applied to financial metrics to estimate the fair value of the reporting unit. Following the impairments at two reporting units during the three and nine months ended September 30, 2024, there was no excess of fair value over the carrying value at those reporting units. So any further decrease in estimated fair value of these two reporting units will result in an additional impairment charge to goodwill. Further, as of September 30, 2024, there was one additional reporting unit within the Digital Media reportable segment that may be at risk of impairment. In total, goodwill for these three reporting units was $498.4 million as of September 30, 2024. 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. Results of Operations for the Three and Nine Months Ended September 30, 2024 Digital Media We expect our Digital Media business to improve as we integrate our recent acquisitions and grow over the longer term as advertising and performance marketing transactions continue to shift from offline to online, and we continue to expand our related platforms. The main focus of our platform monetization programs is to provide relevant and useful advertising and performance marketing to visitors to our websites, provide meaningful content that informs and shapes purchase intent, and leverage our brand, data, content, and editorial assets into subscription platforms. As a result, we expect to continue to take steps to improve the relevance of the ads displayed on our websites and those included within our advertising networks, and improve the effectiveness of our content in driving purchase decisions and subscriptions. The operating margin we realize on revenues generated from ads placed on our websites is significantly higher than the operating margin we realize from revenues generated from those placed on third-party websites. Growth in advertising and performance marketing revenues from our websites has generally exceeded that from third-party websites. This trend has generally had a positive impact on our operating margins. We expect acquisitions to remain an important component of our strategy and use of capital in this business; however, for a number of reasons, including macroeconomic conditions, in a given period, we may close greater or fewer acquisitions than in prior periods or acquisitions of greater or lesser significance than in prior periods. Moreover, future acquisitions of businesses with different business models, may impact Digital Media’s overall operating profit margins. -36- Cybersecurity and Martech The main focus of our Cybersecurity and Martech service offerings is to reduce or eliminate costs, increase sales and enhance productivity, mobility, business continuity, and security of our customers as the technologies and devices they use evolve over time. As a result, we expect to continue to take steps to enhance our existing offerings and offer new services to continue to satisfy the evolving needs of our customers. We expect acquisitions to remain an important component of our strategy and use of capital in this business; however, for a number of reasons, including macroeconomic conditions, in a given period, we may close greater or fewer acquisitions than in prior periods or acquisitions of greater or lesser significance than in prior periods. Moreover, future acquisitions of businesses with different business models, may impact Cybersecurity and Martech’s overall operating profit margins. Revenues (in thousands, except percentages) Three months ended September 30, Percentage Change Nine months ended September 30, Percentage Change 2024 2023 2024 2023 Revenues $ 353,580 $ 340,985 3.7% $ 988,865 $ 974,143 1.5% Our revenues consist of revenues from our Digital Media business and our Cybersecurity and Martech business. Digital Media revenues primarily consist of advertising and performance marketing revenues and subscription and licensing revenues. Advertising and performance marketing revenues are earned from the delivery of advertising services on websites that are owned and operated by us or on those websites that are part of Digital Media’s advertising network, from fees paid for generating business leads, and other related products and services. Subscription and licensing revenues are primarily earned through the granting of access to, or delivery of, certain data products or services to customers and licensing and sale of editorial content and trademarks. Cybersecurity and Martech revenues primarily consist of revenues from “fixed” customer subscription and licensing revenues and “variable” revenues generated from actual usage of our services. Our revenues increased during the three months ended September 30, 2024 compared to the prior period primarily due to a $10.6 million increase in advertising and performance marketing revenue and $5.6 million increase in subscription and licensing revenue in our Digital Media business, partially offset by $3.0 million decrease in subscription and licensing revenue in our Cybersecurity and Martech business. Our revenues increased during the nine months ended September 30, 2024 compared to the prior period primarily due to a $14.5 million increase in subscription and licensing revenue and a $5.9 million increase in advertising and performance marketing revenue in our Digital Media business, partially offset by a $4.8 million decrease in subscription and licensing revenue in our Cybersecurity and Martech business. Included in revenue during the three and nine months ended September 30, 2024 was $20.7 million and $40.0 million, respectively, of incremental revenue contributed by businesses acquired in 2024. Direct costs (in thousands, except percentages) Three months ended September 30, Percentage Change Nine months ended September 30, Percentage Change 2024 2023 2024 2023 Direct costs $ 53,243 $ 55,526 (4.1)% $ 152,900 $ 148,677 2.8% As a percent of revenues 15.1 % 16.3 % 15.5 % 15.3 % Direct costs represent the Company’s costs of revenue and primarily include costs associated with compensation for personnel directly involved in revenue generation, content fees, production costs, royalty fees, hosting and licensing costs, processing fees, and depreciation and amortization expense. The decrease in direct costs for the three months ended September 30, 2024 compared to the prior period was primarily due to a $2.0 million decrease in web hosting fees. The increase in direct costs for the nine months ended September 30, 2024 compared to the prior period was primarily due to a $3.8 million increase in processing fees and a $2.4 million increase in database hosting fees, partially offset by a $2.3 million decrease in depreciation and amortization. -37- Sales and Marketing (in thousands, except percentages) Three months ended September 30, Percentage Change Nine months ended September 30, Percentage Change 2024 2023 2024 2023 Sales and marketing $ 127,418 $ 125,062 1.9% $ 369,184 $ 360,916 2.3% As a percent of revenues 36.0 % 36.7 % 37.3 % 37.0 % 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 (e.g. cost-per-impression, cost-per-click, and cost-per-acquisition) advertising relationships with an array of online service providers. The increase in sales and marketing expenses during the three months ended September 30, 2024, compared to the prior period was primarily due to a $5.2 million increase in personnel-related expenses, partially offset by a $2.8 million decrease in advertising expenses. The increase in sales and marketing expenses during the nine months ended September 30, 2024 compared to the prior period was primarily due to a $10.0 million increase in personnel-related expenses and $4.3 million increase in expenses for software purchases, partially offset by a $7.3 million decrease in advertising expenses. Research, Development, and Engineering (in thousands, except percentages) Three months ended September 30, Percentage Change Nine months ended September 30, Percentage Change 2024 2023 2024 2023 Research, development, and engineering $ 15,255 $ 17,597 (13.3)% $ 49,824 $ 53,328 (6.6)% As a percent of revenues 4.3 % 5.2 % 5.0 % 5.5 % Research, development, and engineering costs consist primarily of personnel-related expenses. The decrease in research, development, and engineering costs for the three months ended September 30, 2024, compared to the prior period was primarily due to a $2.8 million decrease in personnel-related costs as a result of an increase in capitalized costs related to the nature of the projects during the third quarter of 2024 compared to 2023. The decrease in research, development, and engineering costs for the nine months ended September 30, 2024 compared to the prior period was primarily due to a $3.6 million decrease in personnel-related costs as a result of an increase in capitalized costs related to the nature of the projects during the nine months ended September 30, 2024 compared to 2023. General, Administrative, and Other Related Costs (in thousands, except percentages) Three months ended September 30, Percentage Change Nine months ended September 30, Percentage Change 2024 2023 2024 2023 General, administrative, and other related costs $ 101,695 $ 99,269 2.4% $ 296,558 $ 302,481 (2.0)% As a percent of revenues 28.8 % 29.1 % 30.0 % 31.1 % Our general, administrative, and other related costs consist primarily of personnel-related expenses, depreciation and amortization, changes in the fair value associated with contingent consideration, share-based compensation expense, bad debt expense, professional fees, severance, and insurance costs. The increase in general, administrative, and other related costs for the three months ended September 30, 2024 compared to the prior period was primarily due to a $3.7 million increase in personnel-related expenses and a $2.1 million increase in legal-related fees, partially offset by a $4.1 million decrease in depreciation and amortization expense. The decrease in general, administrative, and other related costs for the nine months ended September 30, 2024 compared to the prior period was primarily due to a $13.1 million decrease in depreciation and amortization expense and a $6.1 million decrease in expense from changes in estimated amounts of deferred acquisition payments related to previously acquired businesses, partially offset by a $9.0 million increase in personnel-related expenses and a $5.0 million increase in third-party debt modification costs, acquisition-related fees, and other legal-related fees. -38- Goodwill Impairment on Business Goodwill impairment on business was $85.3 million for the three and nine months ended September 30, 2024, respectively, and $56.9 million for the three and nine months ended September 30, 2023, respectively. The goodwill impairment during all periods was related to reporting units within the Digital Media reportable segment. Refer to Note 6 — Goodwill and Intangible Assets in Part I Item 1 of this Quarterly Report on Form 10-Q for further details. Share-Based Compensation Expense The following table presents share-based compensation expense in the Condensed Consolidated Statements of Operations during the periods presented (in thousands): Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Direct costs $ 68 $ 76 $ 191 $ 246 Sales and marketing 1,014 323 2,865 2,285 Research, development, and engineering 769 840 2,930 2,581 General, administrative, and other related costs 8,310 5,535 24,647 19,281 Total share-based compensation expense $ 10,161 $ 6,774 $ 30,633 $ 24,393 Non-Operating Income and Expenses The following table represents the components of non-operating income and expenses for the three and nine months ended September 30, 2024 and 2023 (in thousands): Three months ended September 30, Percentage Change Nine months ended September 30, Percentage Change 2024 2023 2024 2023 Interest expense, net $ (4,024) $ (2,817) 42.8 % $ (7,597) $ (17,780) (57.3) % Loss on sale of businesses — — 0.0% (3,780) — 100% Loss on investments, net — (6,019) (100.0) % (7,654) (29,203) (73.8) % Other (loss) income, net (2,633) (3,571) (26.3) % 2,530 (5,982) NM Total non-operating expense $ (6,657) $ (12,407) (46.3) % $ (16,501) $ (52,965) (68.8) % 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 increased during the three months ended September 30, 2024 compared to the prior period primarily due to lower interest income on investments due to a decline in cash equivalents. Interest expense, net decreased during the nine months ended September 30, 2024 compared to the prior period primarily due to the absence from 2024 results of a non-recurring $7.7 million of interest expense related to the 1.75% Convertible Notes at a rate of 0.50% per annum. Loss on sale of business . Loss on sale of business during the nine months ended September 30, 2024 represents the loss on disposal of an international business at Digital Media within the shopping vertical. Loss on investments, net. Loss on investments, net is generated from realized and unrealized gains or losses from investments in equity and debt securities. Loss on investments, net recorded during the periods included the change in the fair value of our investment in Consensus common stock prior to the disposition of the investment and the results of the disposition of Consensus common stock, which occurred during the second quarter of 2024. Other (loss) income, net. Other (loss) income, net is generated primarily from miscellaneous items and gains or losses on foreign currency. The change was primarily attributable to a reversal of a reserve established in connection with deferred consideration from a buyer of a previously disposed business during the nine months ended September 30, 2024 and changes in gains or losses on foreign currency. -39- 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 estimates 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 $(12.5) million and $(5.3) million for the three months ended September 30, 2024 and 2023, respectively, and $(27.8) million and $(11.2) million for the nine months ended September 30, 2024 and 2023, respectively. Our effective tax rate was (34.9)% and (20.7)% for the three months ended September 30, 2024 and 2023, respectively, and 149.0% and (1,040.8)% for the nine months ended September 30, 2024 and 2023, respectively. The change in our effective income tax rate for the three months ended September 30, 2024 compared to the prior period was primarily attributable to the following: 1. a larger goodwill impairment recognized for book purposes during 2024 as compared to 2023. For both years, since the impairment related to excess financial statement goodwill with no tax basis, no corresponding tax benefits were recognized; 2. an increase to tax expense in 2024 due to a discrete tax benefit of $1.8 million recognized during 2023 related to adjusting certain tax attributes with no similar event during 2024; and 3. an increase to tax expense in the third quarter of 2024 due to the absence of a $1.5 million discrete tax benefit recognized in the third quarter of 2023 related to the recognition of unrealized losses related to our investment in Consensus common stock, which was disposed of during the second quarter of 2024. The change in our effective income tax rate for the nine months ended September 30, 2024 compared to the prior period was primarily attributable to the following: 1. a larger goodwill impairment recognized for book purposes during 2024 as compared to 2023. For both years, since the impairment related to excess financial statement goodwill with no tax basis, no corresponding tax benefits were recognized; 2. an increase in our effective income tax rate due to a recognition of a valuation allowance against a portion of our U.S. capital loss carryforwards, which resulted in a discrete tax charge of $2.5 million; and 3. a decrease in the amount of unrealized losses recognized on our investment in Consensus common stock, which resulted in a lower tax benefit during the nine months ended September 30, 2024. Judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business. Certain of these tax positions have in the past been, and are currently being, challenged, and this may have a significant impact on our effective tax rate if our tax reserves are insufficient. Equity Method Investment (Loss) income from equity method investment, net of income taxes. Income or loss from equity method investment is primarily generated from our investment in the OCV Fund I, LP (the “OCV Fund”) for which we receive annual audited financial statements. The 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. Loss from equity method investment was $0.1 million, net of income tax, for the three months ended September 30, 2024 compared to income from equity method investment of $0.1 million, net of income tax, for the three months ended September 30, 2023. Income from equity method investment was $8.1 million, net of income tax, for the nine months ended September 30, 2024 compared to loss from equity method investments of $9.7 million, net of income tax, for the nine months ended September 30, 2023. The decrease in income from equity method investment, net during the three months ended September 30, 2024 compared to the prior period was primarily due to a decline in the value of the underlying investment. The decrease in loss from equity method investment, net during the nine months ended September 30, 2024 compared to the prior period was primarily due to an increase in the value of the underlying investment between the periods. -40- 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 September 30, Nine months ended September 30, 2024 2023 2024 2023 Revenues $ 283,554 $ 267,934 $ 774,403 $ 754,880 Inter-business revenues 13 17 33 152 Total 283,567 267,951 774,436 755,032 Operating costs and expenses 308,309 280,856 732,554 702,752 Operating (loss) income $ (24,742) $ (12,905) $ 41,882 $ 52,280 Digital Media’s revenues of $283.6 million for the three months ended September 30, 2024 increased $15.6 million, or 5.8%, compared to the prior period primarily due to a $10.6 million increase in advertising and performance marketing revenue and a $5.6 million increase in subscription and licensing revenue, partially offset by a $0.6 million decline in other revenue. The increase in advertising and performance marketing revenue was due primarily to higher revenue of $6.6 million within the Company’s technology business and $4.3 million within the Company’s gaming and entertainment business, both due primarily to acquisitions during 2024. The increase in subscription and licensing revenue was due primarily to higher revenue of $3.2 million within the connectivity business and $2.2 million within the Company’s health and wellness business. Digital Media’s revenues of $774.4 million for the nine months ended September 30, 2024 increased $19.5 million, or 2.6%, compared to the prior period primarily due to a $14.5 million increase in subscription and licensing revenue and a $6.0 million increase in advertising and performance marketing revenue, partially offset by a $1.0 million decline in other revenue. The increase in subscription and licensing revenue was due primarily to higher revenue of $7.3 million within the Company’s connectivity business and $6.3 million within the health and wellness business. The increase in advertising and performance marketing revenue was due primarily to higher revenue of $7.7 million within the Company’s gaming and entertainment businesses and $6.1 million within the technology business, both due primarily to acquisitions during 2024, partially offset by lower advertising and performance marketing revenue of $7.2 million within the Company’s health and wellness businesses. Digital Media’s operating costs and expenses of $308.3 million for the three months ended September 30, 2024 increased $27.5 million, or 9.8%, compared to the prior period due to higher goodwill impairment of $28.4 million in the third quarter of 2024 compared to the third quarter of 2023. Digital Media’s operating costs and expenses of $732.6 million for the nine months ended September 30, 2024 increased $29.8 million, or 4.2%, compared to the prior period primarily due to higher goodwill impairment of $28.4 million in the nine months of 2024 compared to the nine months of 2023 and higher sales and marketing expenses, partially offset by lower research, development, and engineering costs. As a result of these factors, Digital Media’s operating loss of $24.7 million for the three months ended September 30, 2024 increased $11.8 million, or 91.7%, compared to the prior period. Digital Media’s operating income of $41.9 million for the nine months ended September 30, 2024 decreased $10.4 million, or 19.9%, compared to the prior period. -41- Cybersecurity and Martech The financial results are presented as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Revenues $ 70,026 $ 73,051 $ 214,462 $ 219,263 Inter-business revenues 13 — 13 — Total 70,039 73,051 214,475 219,263 Operating costs and expenses 55,158 60,541 168,638 181,633 Operating income $ 14,881 $ 12,510 $ 45,837 $ 37,630 Cybersecurity and Martech’s revenues of $70.0 million for the three months ended September 30, 2024 decreased $3.0 million, or 4.1%, compared to the prior period. The decrease of $3.0 million was primarily driven by lower revenue of approximately $1.9 million within the Company’s cybersecurity business from the Company’s consumer privacy services. Cybersecurity and Martech’s revenues of $214.5 million for the nine months ended September 30, 2024 decreased $4.8 million, or 2.2%, compared to the prior period. The decrease of $4.8 million was driven by lower revenue of approximately $3.1 million within the Company’s cybersecurity business from the Company’s consumer privacy services. Cybersecurity and Martech’s operating costs and expenses of $55.2 million for the three months ended September 30, 2024 decreased $5.4 million, or 8.9%, compared to the prior period primarily due to lower general, administrative, and related costs and lower direct costs. Cybersecurity and Martech’s operating costs and expenses of $168.6 million for the nine months ended September 30, 2024 decreased $13.0 million, or 7.2%, compared to the prior period primarily due to lower general, administrative, and related costs and lower direct costs. As a result of these factors, Cybersecurity and Martech’s operating income of $14.9 million for the three months ended September 30, 2024 increased $2.4 million, or 19.0%. Cybersecurity and Martech’s operating income of $45.8 million for the nine months ended September 30, 2024 increased $8.2 million, or 21.8%. Liquidity and Capital Resources Our primary sources of liquidity and capital resources are cash flows from operations and debt financing. We continue to invest in the development and expansion of our operations using available cash flows from operations. Ongoing investments include, but are not limited to, improvements in our offerings, investments in new products and s ervices, acquisitions, and continued investments in sales and marketing. We also use cash flows from operations to service our debt obligations and for the repurchase of our shares. Cash, Cash Equivalents, and Investments Cash, cash equivalents, and investments consisted of (in thousands): September 30, 2024 December 31, 2023 Cash and cash equivalents $ 386,122 $ 737,612 Short-term investments — 27,109 Long-term investments 152,817 140,906 Cash, cash equivalents and investments $ 538,939 $ 905,627 Cash, cash equivalents, and investments held within domestic and foreign jurisdictions were as follows (in thousands): September 30, 2024 December 31, 2023 Cash, cash equivalents, and investments held in domestic jurisdiction $ 455,415 $ 742,010 Cash, cash equivalents, and investments held in foreign jurisdiction 83,524 163,617 Cash, cash equivalents, and investments $ 538,939 $ 905,627 For information on short-term and long-term investments of the Company, refer to Note 4 — Investments in Part I Item 1 of this Quarterly Report on Form 10-Q for further details. -42- Financings On June 18, 2024, the Company entered into a New Lender Joinder Agreement and Eighth Amendment (the “Joinder and Amendment”) to the Credit Agreement. The Joinder and Amendment provides for, among other things, (i) an increase in the Aggregate Revolving Loan Commitment by an aggregate principal amount of $250.0 million for a total of $350.0 million, (ii) an extension of the scheduled maturity date from April 7, 2026 to the earlier of (x) June 18, 2027 or (y) under certain limited circumstances, August 2, 2026, (iii) a “credit spread adjustment” for SOFR-based borrowings of 0.10% across all interest periods, (iv) the inclusion of limited conditionality borrowing mechanics with respect to certain borrowings and (v) certain other related amendments. As of September 30, 2024 and December 31, 2023, there were no amounts outstanding under the Credit Agreement. On July 16, 2024, the Company issued $263.1 million in aggregate principal amount of new 3.625% Convertible Notes due 2028 (the “3.625% Convertible Notes”) and paid an aggregate of approximately $135.0 million in cash in exchange for approximately $400.9 million in aggregate principal amount of the Company’s 1.75% Convertible Notes (collectively, the “Exchange Transaction”) pursuant to separate, privately negotiated exchange agreements with certain holders of the 1.75% Convertible Notes. The Company also paid outstanding and accrued interest of $1.5 million on the exchanged 1.75% Convertible Notes. The 3.625% Convertible Notes bear interest at a rate of 3.625% per annum on the principal amount thereof, payable semi-annually in arrears on September 1 and March 1 of each year, beginning on March 1, 2025, to the noteholders of record of the 3.625% Convertible Notes as of the close of business on the immediately preceding August 15 and February 15, respectively. The 3.625% Convertible Notes will mature on March 1, 2028, unless earlier converted or repurchased. The 3.625% Convertible Notes can be settled in cash, the Company’s common stock, or a combination of cash and the Company’s common stock, at $0.01 par value per share, at the Company’s election. See Note 7 – Debt in Part I Item 1 of this Quarterly Report on Form 10-Q for further details. Material Cash Requirements Ziff Davis’ long-term contractual obligations generally include its long-term debt as described in Note 7 – Debt in Part I Item 1 of this Quarterly Report on Form 10-Q, interest on long-term debt, lease payments on its property and equipment, and holdback amounts in connection with certain business acquisitions. These long-term contractual obligations extend through 2031. As of September 30, 2024, we had outstanding $863.7 million in aggregate principal amount of indebtedness. As of September 30, 2024, our total future minimum lease payments were $24.4 million of which approximately $11.2 million future minimum lease payments are due in the succeeding twelve months. As of September 30, 2024, our liability for uncertain tax positions was $37.0 million. In the ordinary course of business, the Company enters into commitments including those related to cloud computing, information technology, security, and information and document management. The Company also has revenue sharing arrangements with annual minimum guarantees based upon third-party website advertising metrics and other contractual provisions. We currently anticipate that our existing cash and cash equivalents, cash generated from operations, and availability under our revolving credit facility, will be sufficient to meet our anticipated needs for working capital, capital expenditures, and share repurchases, if any, for at least the next 12 months. Cash Flows The following table provides a summary of cash flows from operating, investing, and financing activities (in thousands): Nine months ended September 30, Change 2024 2023 Net cash provided by operating activities $ 232,082 $ 227,843 $ 4,239 Net cash used in investing activities $ (264,571) $ (104,738) $ (159,833) Net cash used in financing activities $ (323,096) $ (116,810) $ (206,286) -43- Operating Activities Our net cash provided by operating activities resulted primarily from cash received from our customers offset by cash payments we made to third parties for their services, employee compensation, interest payments associated with our debt, and taxes. The $4.2 million increase in net cash provided by operating activities during the nine months ended September 30, 2024 compared to the prior period was primarily related to the timing of collections from our customers and timing of payments to our vendors during the current period, partially offset by a reduction in prepaid expenses during the current period. The increase in net cash provided by operating activities includes the activities of TDS Gift Cards (“TDS”) from the date of the acquisition, which negatively impacted the Company’s net cash provided by operating activities by $33.0 million. Investing Activities The $159.8 million increase in net cash used in investing activities during the nine months ended September 30, 2024 compared to the prior period was primarily related to higher cash used on business acquisitions during the nine months ended September 30, 2024 compared to the 2023 period, partially offset by proceeds received on the sale of our investment in Consensus common stock and proceeds received related to the sale of disposed businesses. Financing Activities The $206.3 million increase in net cash used in financing activities during the nine months ended September 30, 2024 compared to the prior period was primarily related to cash used to settle a portion of the outstanding principal amount of the Company’s 1.75% Convertible Notes and increased share repurchases. Stock Repurchase Program On August 6, 2020, our Board of Directors (the “Board”) approved a program authorizing the repurchase of up to ten million shares of our common stock through August 6, 2025 (the “2020 Program”). On August 2, 2024 the Board authorized (i) an increase in its 2020 Program pursuant to which the Company may purchase up to an additional five million shares of the Company’s common stock (the “Additional Authorization”) and (ii) an extension of the expiration date of the share repurchase program from August 6, 2025 to August 2, 2029. As a result of the Additional Authorization, the aggregate number of shares of the Company’s common stock under the 2020 Program increased from up to ten million shares to up to 15 million shares of the Company’s common stock. 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 nine months ended September 30, 2024 is as follows (in thousands, except share amounts): Total number of shares repurchased Aggregate purchase price (1) Shares remaining under repurchase authorization as of September 30, 2024 3,500,000 $181,833 6,241,308 (1) Includes the impact of excise taxes. Cumulatively as of September 30, 2024, 8,758,692 shares have been repurchased under the 2020 Program, at an aggregate cost of $583.6 million (including excise tax). These shares were subsequently retired. Refer to Note 10 – Stockholders’ Equity in Item 1 of Part I of this Quarterly Report on Form 10-Q for further details. -44-