Ziff Davis Inc
NASDAQ:ZD
Earnings Call Analysis
Q4-2023 Analysis
Ziff Davis Inc
The company's focus on environmental, social, and governance (ESG) factors has been rewarded with a 'B' score from the CDP, noteworthy for a first-time participant. They've also achieved a 100 score on the Human Rights Campaign Foundation's Corporate Equality Index, establishing it as a top workplace for LGBTQ+ employees. The Board of Directors has been strengthened through the addition of three new directors with significant tech and telecom sector experience.
Q4 2023 saw a modest revenue decline of 1.7% to $389.9 million and a slight reduction in adjusted EBITDA to $167.6 million. However, adjusted diluted EPS increased by 3.1% to $2.33. Full-year revenue was down 1.9% to $1.364 billion, with adjusted EBITDA decreasing 4.9% to $482.3 million, and adjusted diluted EPS down 6.9% to $6.19. The B2B technology business was a significant contributor to these declines, yet segments like consumer tech connectivity, e-mail, IGN, and health and wellness exhibited positive organic growth.
The company's advertising revenue faced a downturn, dropping 3.7% in Q4 and 5.2% for the fiscal year. On the brighter side, the subscription and licensing revenue increased by 4.1% in Q4 and 3.1% over twelve months, indicating resilience in these segments. The company managed an advertising revenue retention rate of approximately 87%.
The company boasts a strong balance sheet with $738 million in cash, providing leverage capacity and giving it a solid foundation for mergers and acquisitions (M&A), which forms a core part of their strategy. Despite a capital deployment of $109 million in buying back common shares, no significant acquisitions were made in Q4, although one has already been completed in early 2024.
The free cash flow for 2023 was substantial, totaling $211 million, showing an improvement over the prior year. The guidance going forward suggests optimism, with projected growth rates for 2024 revenue, adjusted EBITDA, and adjusted diluted EPS being considerably higher than the previous year. At the high end, the guidance anticipates growth rates of approximately 7.8%, 8%, and 9.4%, respectively, and at the low end approximately 3.4%, 3.7%, and 3.9%. This signals a return to growth aligned with the company's long-term targets, and interestingly, it does not account for any additional M&A in 2024, suggesting potential further upside.
To support future growth, the company expects to increase annual capital expenditures (CapEx) to between $90 million and $100 million, focusing on enhancing facilities, systems, and employee capabilities in anticipation of expected growth rates in the coming years.
The company plans to rejuvenate its Virtual Private Network (VPN) segment, which has faced customer acquisition challenges. By improving product performance and exploring unique white label partnership opportunities, they are setting the stage for growth in the VPN domain in the second half of 2024.
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Good day, ladies and gentlemen, and welcome to the Ziff Davis Fourth Quarter and Year-End 2023 Earnings Conference Call. My name is Paul and I will be the operator assisting you today. [Operator Instructions]On this call will be Vivek Shah, CEO of Ziff Davis; and Bret Richter, Chief Financial Officer of Ziff Davis.I will now turn the call over to Bret Richter, Chief Financial Officer of Ziff Davis. Thank you, you may begin.
Thank you. Good morning, everyone. And welcome to the Ziff Davis investor conference call for q4 and fiscal year 2023. As the operator mentioned, I am Bret Richter, Chief Financial Officer of Ziff Davis and I am joined by our Chief Executive Officer of Vivek Shah.A presentation is available for today's call. A copy of this presentation is available on our website. When you launch the webcast, there is a button on the viewer on the right hand side which will allow you to expand the slides. If you have not received a copy of the press release, you may access it through our corporate website at www.ziffdavis.com. In addition, you'll be able to access the webcast from this site.After completing the formal presentation, we'll be conducting a Q&A. The operator will instruct you at that time regarding the procedure for asking questions. In addition, you can e-mail questions to investor at ziffdavis.com.Before we begin our prepared remarks allow me to read the safe harbor language. As you know this call and the webcast will include forward-looking statements. Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results. Some of those risks and uncertainties include but are not limited to the risk factors that we have disclosed in our SEC filings, including our 10-K filings, recent 10-Q filings, various proxy statements and 8-K filings as well as additional risk factors that we have included as part of the slideshow for the webcast. We refer you to discussions in those documents regarding safe harbor language as well as forward-looking statements.Now, let me turn the call over to Vivek for his remarks.
Thank you, Bret, and good morning, everyone. Our fourth quarter financial results give us confidence that we've turned the corner as a company and that our business is set up for solid growth in 2024.The second half of 2023 represented a meaningful improvement over the first half. And while 2023 was the first and hopefully last time in our history as a public company that revenues fell. Our outlook for 2024 reflects a clear return to growth.It's also worth reminding everyone that during what was a very challenging operating environment, Ziff Davis' revenues declined a relatively modest 1.4% over the last 2 years. Adjusted EBITDA over that 2 year period was essentially flat. I believe it's a valuable reminder of the resilience and downside protection offered by our portfolio approach.Our diversification in ad categories and the combination of advertising, subscription and licensing based Internet businesses has allowed us to maintain a very attractive financial position and build an enviable balance sheet during what has been an eviscerating period for many in our industry. We view ourselves as being in a position of strength and believe 2024 represents an inflection point for us.In our Digital Media segment, while we were down a little more than a percentage point in revenue in Q4, with continued headwinds at our B2B tech business, we saw high single digit growth for the first time in 2023 from our consumer tech properties. That's a very positive sign as the tech category has been the most significant headwind for us these past 2 years.On the B2B side, we anticipate stabilizing the business based on a strengthening of the enterprise tech market in 2024. IGN had another solid mid-single digit growth quarter as did Humble's core bundles business.In Q4, IGN and Map Genie launched innovative video ad solutions, significantly boosting our video ad inventory to meet rising advertiser demand and spend.The game publishing side of Humble continues to see delays in game releases and lower sales representing a drag on growth in the quarter.Our connectivity business had a terrific low teens growth quarter with Speedtest hitting an incredible milestone of 50, billion tests taken and Ekahau AI Pro winning 2023 Innovation of the Year from The Wi-Fi Awards. Our connectivity business has been the strongest and most consistent grower in the portfolio.Our health business has also been a steady contributor of growth, capping off a year of high single-digit revenue growth. Notably, Lose It! achieved record bookings in Q4. We believe Lose It!'s success will be buttressed by the popularity of the new GLP-1 class of weight loss drugs, which require an even greater focus on diet and nutrition to promote healthy weight loss.Shopping was a tale of 2 cities. While RetailMeNot's total commissionable orders were up in the quarter, reflecting a relatively strong holiday season, we saw a decline in average order value. Along with continued pressures at Offers.com, the shopping business tipped into negative territory. However, our shopping business is set up for a strong 2024 with organic improvements in the addition of a recently acquired gift card business.In our Cybersecurity and Martech segment, the trend of quarter-over-quarter improvements continued. Revenues fell approximately 4% with VPN representing the vast majority of the drag. The good news is that we believe our sustained efforts at VPN customer acquisition are paying off, and we're confident that we will be back to growth in the second half of 2024.Our e-mail marketing business' growth rate improved to high-single digits, and we believe that this momentum will carry into 2024. Major focus for e-mail marketing will be expanding our go-to-market reach. In Q4 2023, we expanded our outside sales capacity to better engage midsized enterprises, and we recently released the first in a series of upgrades to our APIs, which should better enable us to sell through independent software vendors and SaaS marketplaces.E-mail marketing is another example of our multiyear strategy in which we acquire businesses with the initial focus on managing them to a strong profitable core and then building organically off of a solid foundation. This shrink to grow strategy is playing out in our Moz SEO business right now. It's solidly profitable. And with new leadership installed at Moz, our focus has shifted to getting it to growth.For 2024, the midpoint of our guidance represents 5.6% of revenue growth, reflecting improvements in organic growth along with the contribution of revenues from recently acquired businesses. It excludes the contribution from any additional acquisitions we may consummate over the course of the year, and we're increasingly bullish on our ability to close deals as the M&A market thaws.In 2023, half of our businesses grew organically and half declined. In 2024, we anticipate that ratio substantially improve with the lion's share of our businesses growing. And to be clear, we expect all of them to return to growth by 2025. We don't believe in owning businesses in structural decline. Cycles happen and impermanent headwinds emerge, and we've proven highly adept at managing those.The key to our acquisition system is having the discipline and vision to distinguish between cyclically challenged businesses and those that are structurally challenged. We believe 2024 will be a noticeably improved environment for M&A.We believe the valuation gaps are closing. Private equity owners are eager for liquidity and strategics are rationalizing portfolios. Our pipeline is filling up and our balance sheet can support a substantial amount of deal activity.Now, let me discuss just a few of our AI initiatives. Across the organization, we're continuing to leverage AI for exciting new product experiences and efficiencies across our operations.In Q4, Ekahau launched new AI enabled product features to their Optimizer product. The upgraded Ekahau optimizer features AI driven insights for improved WiFi performance, identifying configuration and design related issues. It delivers customized optimization recommendations and proposed configuration changes to the network.Our What to Expect property rolled out an innovative AI shopping helper for expecting parents. This tool interprets consumers' needs from their inputs and uses our database of expert reviewed content to deliver customized product recommendations.Similarly, Health eCareers introduced a new AI career companion. This conversational chatbot enables health care job seekers to describe their ideal job scenario and receive customized job listings.Health eCareers also rolled out an AI driven cover letter creator designed to align user profiles and resumes with specific job listings, providing them with a tailored cover letter to support their job application efforts.Our Lose It! app took a significant step forward by integrating an AI enabled feature that simplifies the way users log meals. We believe utilizing voice commands in natural language as compared to typing in meals consumed makes the app much more accessible and user friendly.With a full rollout scheduled for all users in the second quarter of 2024, we're excited about the potential this feature has to enhance user engagement and streamline meal tracking.We remain enthusiastic about the value AI can bring to Ziff Davis, but we do not accept AI platforms using our copyright content without rightful compensation.Our highly researched and carefully verified articles significantly contribute to GenAI training datasets. Analysis by The Washington Post and the Allen Institute For AI highlights Ziff Davis as a top source of text for Google's C4 LLM training dataset, ranking us alongside publishers such as The New York Times. In fact, we were the fifth largest source of tokens in that analysis.We are committed to defending our rights and pursuing licensing agreements. To that end, we are actively engaged with the News Media Alliance as it explores potential licensing frameworks to more effectively manage the use of publishers' content.As I've stated before, we believe both of these statements to be true. AI has the transformational potential to create meaningful value for Ziff Davis, and AI companies must respect our copyrights.Finally, let me provide you with an update on our ESG efforts. Last summer, we submitted the CDP climate questionnaire, widely considered the gold standard of environmental reporting. We were very pleased to learn that just a few weeks ago, we received a, B, a highly respectable score, especially as a first time participant. We look forward to taking part in CDP annually and making it a component of our ongoing reporting.With respect to our 2030 science based emissions reduction targets, we are actively working with our largest suppliers to ensure we are on track to meet our targets.On the social front, I'm pleased to share that we earned a score of 100 on the Human Rights Campaign Foundation 2023-2024 Corporate Equality Index. And Ziff Davis was once again named one of the best places to work for LGBTQ+ employees.As it pertains to governance, over the past year, we've refreshed our Board of Directors, adding 3 new directors who bring valuable perspective and experience. Jana Barsten, former KPMG Global Audit Sector Leader for the Tech Industry; Kirk McDonald, former CEO of GroupM North America and Neville Ray, former President of Technology at T-Mobile. Our Board has never been stronger.2024 is off to a promising start. With momentum in several of our businesses and our first M&A transaction of the year already closed, we believe that Ziff Davis is well positioned to execute upon our total growth strategy and return to creating shareholder value.With that, let me hand the call back to Bret.
Thank you, Vivek. Let's discuss our financial results. Our earnings release reflects both our GAAP and adjusted financial results for Q4 and fiscal year 2023. We will focus our discussion today, and my commentary will primarily relate to our Q4 2023 adjusted financial results and their comparisons to prior periods.Let's turn to Slide 4 for the summary of our quarterly financial results. Q4 2023 revenue was $389.9 million as compared with revenue of $396,7 million for the prior year period, reflecting a decline of 1.7%.Q4 adjusted EBITDA was $167.6 million as compared with $168.3 million for the prior year period, reflecting a small year-over-year reduction. Our adjusted EBITDA margin for the quarter was 43%, an improvement as compared with the 42.4% margin that we reported for the prior year period.We reported fourth quarter adjusted diluted EPS of $2.33. This figure reflects a 3.1% increase as compared with our Q4 2022 adjusted results.Turning to Slide 5. Fiscal year 2023 total revenue declined 1.9% to $1.364 billion as compared with fiscal year 2022. Adjusted EBITDA declined 4.9% to $482.3 million as compared with fiscal year 2022 adjusted EBITDA, primarily reflecting the decline in revenue.Our adjusted EBITDA margin for fiscal year 2023 was 35.4%. Adjusted diluted EPS declined 6.9% to $6.19 as compared with fiscal year 2022 adjusted diluted EPS. As we have discussed, the primary contributor to our 2023 fiscal year revenue decline was our B2B technology business.With regard to the fourth quarter of 2023, consumer tech connectivity, e-mail, IGN and health and wellness each contributed positive organic growth. Excluding B2B, Q4 2023 revenue would have declined only 0.3% as compared with 2022 and fiscal year revenue would have grown slightly.Overall, 2023 was a challenging year. However, our second half results reflect significant improvement as compared with our first half results. For the full fiscal year, despite pressure on growth and a modest total revenue decline, we generated significant adjusted EBITDA and adjusted diluted EPS.On Slide 6 and 7, we have provided performance summaries for our 2 primary sources of revenue, advertising and subscription and licensing. Slide 6 reflects our Q4 and fiscal year 2023 advertising revenue. Q4 2023 advertising revenue declined 3.7% as compared with the prior year period and fiscal year 2023 advertising revenue declined by 5.2% as compared with 2022. Excluding our B2B tech business, advertising revenues would have declined by 1.4% in Q4 and 1.9% for all of 2023.Our net advertising revenue retention, an annual trailing 12-month statistic that we update quarterly, was approximately 87% for Q4 2023, reflecting recent pressures on digital advertising revenues. As defined in the slide, in the fourth quarter, Ziff Davis had 1,943 advertisers with an average quarterly revenue per advertiser of approximately $120,000, slightly higher than the comparable Q4 2022 metric.Slide 7 depicts our subscription and licensing revenue performance. Q4 2023 subscription and licensing revenue grew 4.1% as compared with the prior year period, and these revenues grew 3.1% during the last 12 months. The table on the bottom of Slide 7 includes subscription and licensing metrics for the last 8 quarters. Sequentially, total subscription and licensing customers decreased modestly to $3,266,000, primarily reflecting growth at Lose It!, offset by a decline in our VPN and Humble Bundle subscribers.Sequentially, our average quarterly revenue per customer increased to $44.77 and subscription and licensing churn declined 34 basis points sequentially to 2.86%. The improvements in quarterly revenue per customer and churn reflect a number of factors, including the impact of strong performance within Ookla.With regard to the balance of our revenue, the company's Q4 2023 other revenues declined year-over-year to $10.5 million from $14.4 million in Q4 2022, primarily reflecting lower revenue from our video game publishing business.Slide 8 reflects organic and total revenue growth rates for the 2021 to 2023 period. Revenues from businesses owned for at least a full 12 months are included in organic revenue, while inorganic revenue relates to businesses we've owned for less than 12 months. Fourth quarter 2023 organic revenue declined 2%, including the declines at B2B.Please refer to Slide 9. As of the end of Q4 2023, we had $738 million of cash and cash equivalents and approximately $168 million of short and long-term investments. We also continue to have significant leverage capacity both on a gross and net leverage basis.As of the end of 2023, gross leverage was 2.1x trailing 12 months adjusted EBITDA, and our net leverage was 0.6x and only 0.2x if you include the value of our financial investments.During 2023, we deployed capital to repurchase approximately $109 million of our common shares. We did not repurchase shares during the fourth quarter. We also did not close any acquisitions during the fourth quarter.The strength of our balance sheet is one of our most valuable assets, particularly in the context of our M&A strategy. We continue to be active in the pursuit of transactions of various sizes across all of our businesses. Having closed one transaction already in 2024, we look forward to returning to a level of acquisition activity that is more consistent with our company's history. During 2023, we deployed approximately $25 million of capital in support of our current and prior period M&A activity.Turning to Slides 11 and 12, I'll provide a few additional details related to our guidance range. We believe our guidance range reflects the positive momentum that we are seeing in several of our businesses and the expectation of certain performance improvements in others. We believe the macroeconomic environment has stabilized as compared with this time last year and while we would not yet characterize the macro as strong or without risk, our expectations for 2024 do assume that the current environment remains stable.The high end of our guidance for 2024 revenue, adjusted EBITDA and adjusted diluted EPS reflects growth rates of approximately 7.8%, 8% and 9.4% as compared with the unaudited results we present today. The low end reflects growth of approximately 3.4%, 3.7% and 3.9%, respectively. Each of these growth rates are significantly higher than the expectations for 2023 that we discussed at this time last year.Our EPS guidance reflects the adjusted EBITDA range adjusted for net interest expense, higher depreciation from our recent capital investments and slightly higher taxes each as compared with 2023. It also reflects the absence of $3.4 million of other loss that we reported in 2023.The midpoint of our guidance reflects mid- to high-single digit growth in advertising revenue, subscription revenue and licensing revenue growth in the low to mid-single digits and low double-digit other revenue growth, each as compared with the prior year period. The midpoint also reflects modest growth in the first quarter and the year's highest rate of growth in the fourth quarter.Revenue growth is a function of both organic growth and inorganic growth from recent acquisitions. We expect to return to positive organic growth in the second quarter, with the first quarter reflecting relatively flat organic growth year-over-year.Given the seasonality of our digital media properties, we anticipate that more than 20% of our revenues will be realized in the first quarter with approximately 30% expected for the fourth quarter.At the midpoint of our range, the company expects to have an adjusted EBITDA margin of approximately 35.5% for the year. We have slightly raised the range for our projected tax rate to an annual rate of between 23.25% and 25.25% to reflect our anticipated earnings mix and increases in certain local tax rates. Note, these rates are expected to fluctuate quarterly.Additional details related to our anticipated share count are outlined on the slides as well. Note that these figures do not assume additional share repurchases, which may occur during the fiscal year 2024 period.The guidance range reflects a return to growth for our company, and we believe that this plan, which reflects both positive organic growth and the impact of recent acquisitions, places us on a path back towards our long-term total revenue and adjusted EBITDA growth rate targets of approximately 15%.We further believe that this guidance reflects the proper balance of pursuing investments in our business to support growth opportunities in 2024 and beyond and our focus on delivering profitable growth, robust adjusted EBITDA margins and free cash flow generation, all tenets of our value creation strategy.And note that our 2024 guidance does not reflect any additional 2024 M&A, which could represent upside. Following our business outlook slides are our supplemental materials, including reconciliation statements for the various non-GAAP measures to the nearest GAAP equivalent.Please see Slide 18, which includes a reconciliation of free cash flow. Our 2023 free cash flow was $211 million. As shown on Slide 18, Q4 2023 free cash flow reflects a substantial improvement as compared with the prior year period, in part, reflecting an improvement in working capital as compared with the balance of 2023.2023 was a challenging year. And while we are proud of our overall performance, which demonstrates the resilience of our diversified business model, we have now turned our attention to 2024 and are energized to pursue and achieve our plans.With that, I would now ask the operator to rejoin us to instruct you on how to queue for questions.
[Operator Instructions] And the first question today is coming from Cory Carpenter from JPMorgan.
I had 2. First, Vivek, I'm just curious how you would characterize the overall health of the ad market in the fourth quarter relative to the prior quarter and the trends that you're seeing year-to-date?And then secondly, more broadly beyond advertising, just if you could expand a bit on what you're seeing that gives you the confidence in the accelerating revenue growth in 2024?
Yes. Thank you, Cory. So maybe I'll start with Q4. And when I think about the ad market, as you know, I think about it by category because it's the best way, I think, to unpack what's going on. So in Q4, the gaming category, the health and wellness category were very strong. Shopping, as I mentioned, in retail was interesting for us in the sense that great volume, but lower average order value for the commissionable orders that we drove. I look at that as just sort of -- less of a statement about the health of retail. I think it's quite healthy. I just think a mix of the type of transactions that we drove. So I look at those verticals as strong.And then in tech, I was really pleased to see that the consumer side of our tech business grow. And that's a very positive sign. So from our point of view, that was important to see. B2B continued to be a challenge. It was in Q4 and for the full year. And just as a point of reference, nearly the entirety of our ad decline in 2023 was a function of tech.So tech is the space we're watching. We believe we're at a point where on the enterprise and B2B side of the tech ad category. We've hit bottom. There's some good signals we're seeing at least within the early goings of 2024. So I think look, generally healthy and it's reflected in our guidance.We think that in the end, the pieces that have been growing will continue to grow and that the areas where we have had challenges we're going to see certainly sequential improvements. And that's kind of to me it's all about the slope and the slope is positive.
The next question is coming from Shweta Khajuria from Evercore ISI.
My first one is on cookie deprecation. Any change -- and I know, Vivek, you've talked about contextual advertising and that you may not be as impacted from deprecation.But I guess my question is, are you seeing any early signs of whether contextual advertising is actually benefiting you as cookies will be deprecated and it's still in the testing phase? So any comment that, you may have on that would be helpful.And then, my second question is, just on the overall M&A environment, your language seems a little bit more optimistic for 2024 in terms of healthier pipeline, strong balance sheet, what you may be seeing on valuations. Any update on how we should think about it?
Yes. No, 2 great questions. So I'll start with the deprecation of the third party cookie, which as you know has started after many years of delay from Google. And so by the end of the year, the Chrome browser, which is the dominant browser in the marketplace will no longer allow for third party cookies. And that has meaningful implication for advertising models that do rely on audience targeting and targeting users across multiple websites.As you know, that's not what we do. We target advertising based on context and the environment in which we find the user. We do use a fair amount of first-party data, which is our own demographic data that we have on our audiences to target advertising. That will not be affected at all.So with respect to our business, the deprecation of the third-party cookie is largely a nonevent for us. Whether or not that translates into what you're asking, which is, well then, will the pendulum in the market swing to contextual premium content targeted advertising, that's the theory. It's too early for me to say that, that theory is yet proving and being demonstrated and it's not built into our guidance.To be very clear, our guidance is not a function of pendulum swinging towards properties like ours. But the theory in the marketplace by many is that what you're describing will happen.The other thing that I think is important about all of this is that in the end, I do think it also comes down to performance. And the degree to which the third-party cookie deprecation impairs the performance of competing ad platforms and our ad platforms continue to perform. And as you know, we're very focused on performance-driven solutions both in terms of our performance marketing services, but also even within display and holding our display advertising to performance metrics, we should be advantaged in that framework as well.On your second question relating to M&A and my views of this, look, we are -- we did our first acquisition, I mentioned it in the prepared remarks, a bolt-on acquisition for our shopping business, a company called TDS, which is in the digital gift cards business. We like this business because it helps merchants with customer acquisition and fundamentally our shopping business, at least on the merchant side is about customer acquisition and driving customer transactions. So it's a really nice glove fit for what we're doing.We're off the board early, which was a good thing to see. I do believe, as I've said that the valuation gap seems to be closing between buyers and sellers. And I think we're into the third year of this in terms of an M&A market that's been relatively inactive.And I just get a sense that we're now at the point where certain owners, PE owners, strategic owners are looking to transact. So again, there's a lot of year to play out, and we'll see. But yes, I think generally speaking, we think we're going to be pretty active in the M&A market this year.
The next question is coming from Ygal Arounian from Citigroup.
Just first follow-up on the cookie question, just to be clear. Is there any cookie-based advertising for you guys are targeting at all or is cookies just 0?
So there is single-digit millions a year of revenue relating to reach extension, where we look to reach our audience off domain on third party properties. That requires cookies.Having said that, the -- so it's small number. But the evolution of that, we believe, will go to e-mail hash ID based matching of users. And we have an e-mail database in the United States in excess of 100 million. So e-mail data collection has been a priority at this company for years, partly in anticipation of this.And so I might flip it, Ygal, and just say that, we're now thinking about we have an asset here that allows for reach extension and off domain targeting given that we have this pretty large asset, should we be leaning more into that in this in this period of time where cookies are being deprecated.So the answer is, it's small. The thing that's going to replace we believe cookies will be e-mail hash and we believe we're very strong there.We also are unsold ad inventory. So as you know when we look to sell our advertising inventory, we do this on an insertion order basis. We are not focused on the programmatic monetization of our inventory. That has never been a focus for our company. But when we don't sell advertising, that advertising is bought on a programmatic basis.And if yield starts to suffer in the programmatic land, because CPMs start to suffer in the programmatic land because of cookie deprecation, then presumably our yield on programmatic would come down. But again, we're talking low like couple of points of revenue is the representation of programmatic at the company.So no, but even there it's not always clear when people are buying us programmatically. Are they buying contextual? Are they buying domain targeted? Are they buying a cookie match? Can you use an e-mail hash match? There's a lot in there.So overall, my view of cookie deprecation is difficult for many in the ecosystem, neutral and possibly positive to us.
Okay. Really helpful. Certainly, a lot to keep an eye on as cookies as we go through the year. On GenAI and I guess, GenAI search, in particular, you've given some data points in the past around how you thought GenAI search was driving traffic or incrementally more traffic to you guys. Is that still the case? Do you still see that happening? I know it's still small, but how do you think about that? And how does that factor to how you're thinking about pursuing licensing with the Media Alliance on scripting your data?
Yes. So we do continue to keep track and the trends continue. So again, being the only GenAI search engine in wide circulation continues to drive a significant amount of growth in referrals and significantly greater than their overall growth. So Bing continues to be a very good and growing traffic source for us.And then as you know, on the Google side, the SGE experience as they call it, which is their GenAI experience is not in wide circulation, it is in Google Labs. And the only thing we can really see there is the rates in which we are seeing generative responses to queries and that is dropping.So. I forget the statistic, but I think it's now under 20% of queries that lead to traffic for us even have a GenAI response. So the rates of GenAI inside of the search experience are actually going down, we could speculate as to why that happens, but I think they're trying to test to see what queries will -- what queries require GenAI response and improves the overall experience and which don't.Overall, I think that theory that we were hearing that GenAI equals 0 clicks and therefore, publishers won't get clicked. I don't see it. There's no evidence of it. In fact, it's been the contrary. So I kind of look at that one as a bit of a settled issue in my own mind. We're going to keep watching it.But I don't -- that's not the piece of the GenAI equation that I'm thinking a lot about. The piece that I am thinking a lot about is compensation. And so, as long as the search operators in their usage, large language models continue with the age-old value trade of you can have access to my content to crawl for search indexing as well as GenAI as long as I get appropriate traffic, that value equation is fine for us.The issue we have is all of these other instances of large language models using our data, and I quoted some statistics in my prepared remarks, it's substantial and building businesses and revenue streams on the back of our copyright content, there needs to be compensation for that.We have registered that point of view with the large language model operators. Nothing to report, except that there is dialogue going on. You have seen in the marketplace, I think some reports of deals. I think that's good to see because it demonstrates that I think some of the LLMs really understand that they do need to pay for copyright content for both training and for retrieval in a rack type system, both, I think, require compensation.
Okay. And then the right way to think about that would be just all kind of incremental margin flowing through because of --
Yes, that would --
-- field that's actually quite meaningful for you guys.
It could be incremental licensing revenue. It's too early to speculate what that would look like when that would happen. I think part of this is how much of our publisher is going to continue to do one-off deals? Or is this going to get adjudicated in a different way and a third party will create a licensing framework that everyone can benefit from. Those things still need to be determined. Is this adjudicated in ports? Is this adjudicated legislatively? Is this done just through business agreements, all of that needs to be worked out.
The next question is coming from Ross Sandler from Barclays.
Just a quick follow-up on that last point on the AI licensing. So there's an article out that Google is paying Reddit $60 million to scrape data for AI training. And you mentioned, Vivek, some of the percentages that your websites represent in terms of -- I think, it was tokens or just aggregate text. How do we think about like the size of Reddit and that $60 million from one entity compared to the size of all your websites?And then I would envision that this is going to happen across not just one entity, but a single-digit handful of entities. So could you put some rough numbers around that? And then I got one follow-up on the ad business.
Yes, sure. So with respect to -- obviously, we don't have much visibility into the Reddit deal. I can say that in terms of orders of magnitude of tokens, and I'm doing this a little bit from memory. But we're in the top 5 of tokens that were analyzed by the Washington Post and the Allen Institute. Reddit's in the top 5 as well. So we are within that, let's just say, cohort of large token providers. So that's one statement.As to, again, how this evolves, I don't know. I -- speaking on behalf of our company, obviously, we're going to do what we can to maximize value for our company and our shareholders. At the same time, at an industry level, I have to believe that this needs to get consolidated into an industry level licensing framework and royalty framework, not unlike what you have in the music industry that's used a lot as a point of reference.I think that's where you're going to get to scale. I think it just gets hard to continue to do all of these one-off type deals. Obviously, some are happening. And in the end, we're going to sit here and make a judgment as to really what is in our best interest, right? Is it to move early and secure a deal or to wait for things to evolve and find that the unit economics are better. It's a little early to say.And then you have to also recognize that different LLMs may be doing different things and they value different data sets and tokens in different ways. By the way, I'm only talking about the content that is available for -- that can be technically scraped on the open Internet. What I am not talking about are the data sets that we have that are proprietary at Ookla, at Moz, at Lose It!, for instance, that's a different set of data that I also think will have some licensing potential.I mentioned this a few calls ago, in the early days and early days, meaning 2 years ago. We did do a licensing deal for Moz with OpenAI relating to our database of domain authorities. We probably didn't understand it then. We understand it now a little bit better that it was likely used as part of their LLM weighting and using our DAs domain authority data to weight different sources of text.So look, there's a lot here. I would say that and view these as incremental revenue opportunities, not compensation for harm unless there is some fundamental change in the way the search engines operate and I don't believe that's the case.
Got it. Okay. And if we go back to the ad business, and we look at your guidance, the 5% to 7% for '24. How do we think about the inputs to get to that kind of revenue growth? Like if we look at traffic that you're attempting to drive more of your sites or the CPM and you mentioned the new video product at IGN, things like that. How do we kind of bridge to getting to that mid-single digit number between things that you can control and just the overall ad market being in a better place than '24?
Yes. Look, I mean it's -- there's a very unpacked category-by-category answer. I won't give you that in the interest of time. What I will tell you is if -- as long as tech doesn't decline another 20-plus percent, we're fine. And our view with the turn in consumer tech in Q4 and our view into the enterprise market stability, we don't believe that's happening again.
[Operator Instructions] The next question is coming from Kunal Madhukar from UBS.
This is [ Jason ] on for Kunal from UBS. I have a couple of questions. So the first one is on the M&A. I know you guys have been seeing some signs of thawing since the end of last year and that trend is continuing so far. And you also provided some general commentary on sort of the environment where strategic buyers are more willing to transact.Can you unpack that a little bit? Could you provide some commentary on which industry verticals you're seeing the trend? And also apart from that, independently, where do you guys want to grow in your portfolio inside industry vertical? And I have a follow-up.
So Jason, from an M&A point of view, our sourcing activity, as you know, comes in 2 ways. One is we have these 7 platforms, right? And so each of our platforms, tech and gaming and connectivity and health, cybersecurity, Martech, shopping, all of these platforms are each individually looking to source deals. And I would say that they're all having success in engaging in a lot of discussions, both inbound and outbound. So there's a fair amount of sourcing that happens there.And then we're always on the lookout at the corporate level, Bret, myself and our corporate development team looking for new platforms, new verticals in which to enter. So both sets of activities are happening. And because we have this sort of, wide breadth of places to look and people who are looking, we generally see a lot. And I would say tone -- I would just say the tone in each of these is lots of responsiveness, lots of willingness to provide information in diligence processes. These are the things that I look for, right?In the end is how open are they? How willing are they to give information and answer questions, how quickly are they responding? And what we're seeing now is a lot like what we saw in the 2020-2021 in those time periods.In terms of where, I've said this before, I tend to like bolt-ons on the existing verticals for a variety of reasons because they're generally underwritten with a fair amount of synergy value as a function of being bolted on. And so from a cash-on-cash return point of view, those tend to be very good.The second thing is that we have a lot of mouths to beat here. And so the degree to which we can support the corporate -- the capital allocation needs of each of our 7 businesses and platforms, I think we like to be able to do that.And the last is that these deals are sized in a way where there is a good sort of risk-reward found. Having said that, as we did with Everyday Health, which got us into the health vertical and has been, as you know, a very successful business for us and with RetailMeNot, which has gotten us into the shopping vertical, we are always on the lookout for the next vertical.So look, I think it's -- it wouldn't be appropriate for me to say I favor one set over another or any one of these boots because we're in all of these verticals because we like being in these verticals. And so we hope to be able to spread it around.
Yes, Jason. The only thing I might add is if you look back over the last couple of years and you look at where we've allocated capital primarily, we've allocated capital to our businesses that have gone through the transition post-acquisition of reaching a profitable core and our healthy businesses that are either achieving are on the precipice of growth. So we've invested in health. We've invested in connectivity. We've invested in gaming.As Vivek said on his prepared remarks, I think we're starting to see that in our Martech business, our Moz, our e-mail business is growing. So I think as our businesses reach the evolution of sort of structural stability and through that integration phase and start on their path to growth, they become stronger candidates internally for investment capital.
Got it. My second question is on sort of B2B tech space. You guys mentioned that on the call just now that, we might be at the bottom for enterprise B2B space.And speaking of Spiceworks, just curious, is -- one of these competitor, TechTarget, recently announced a merger deal with another competitor. So I'm just curious how your current view on the space has changed after the news?
Yes. No, obviously, we follow the space carefully, and we've seen the merger that you described. Look, I think at the end of the day, the Spiceworks business, we've got a plan in place, some new talent at the organization, and we're confident in their ability to execute against that plan.As you know, we did seek strategic alternatives for the business last year. And it was a good process, probably not well timed given what was going on in the space. I think, in our view, holding the asset made more sense given where it was. And I think we're feeling good about that now because we sense that, that might have been the bottom and maybe that's not the best time to be considering those types of opportunities.The other thing I will say within the Spiceworks business that sometimes you need to go through a process like this to better understand what you have, is that, there is interestingly, inside of the Spiceworks business software that we provide help desk software is what its most well-known for, which is actually free to the user and is ad supported.And we're -- as we look at where GenAI could potentially have the most impact, it might be actually in encoding and software development. And so we may be moving into a time where software development supported by advertising, which hasn't really happened, ad supported software in the enterprise or within the business has not really happened.We actually might be in a moment where that is going to happen. And if that's true, Spiceworks has an interesting position there with an existing health desk software and a few other software tools for the SMB. So just another thing that came out that is a little unique and a little different that we're going to lean into.
And the next question is coming from Shyam Patil from SIG.
This is [ Aaron ] on for Shyam. I've got 2. First, Vivek, you talked a lot about the AI use cases that you're building and rolling out for users on your sites and apps. Could you please provide more of an update on how you're thinking about AI use cases to improve internal operations or productivity across the portfolio?
Well, I can talk about AI in the context of our data management platform, which is called Core. So Core is an internally built data management platform at the company that allows us to build essentially signals that emanate from every interaction between our audience and our content, our audience and our tools, our audience and our applications.And that data set is really important in informing ad placement within our properties. So there's contextual placement, but even we'll do contextual plus a demographic data signal. And that combination has been really important for us over the years.I will tell you that AI being infused into our data management platform, have made our signal capture and signal analysis a lot stronger. And so the degree to which we can use AI to generate better ad performance. I think that's an example of using AI to -- at least, I guess -- I think you're seeing productivity more in terms of margin and efficiency and that type of thing. But this is an example of where it may just help us produce better revenue outcomes and better customer outcomes.The area where I could see efficiency from cost point of view is in programming and encoding. And I sort of alluded to that in the Spiceworks statement I just made to the previous question, but we are seeing success in using this from a coding point of view.
That's helpful. And then second, on the gaming ads business. I know this is levered to product releases in the space. For those of us who aren't as close to gaming, could you just share your view on how the product release pipeline for 2024 is looking at this point?
Yes. So I mean, it looks reasonably good. I think, again, there's some back-end weighting. And there's always been kind of pushing into the year. I will say one thing because I want to make sure that I get this on the tape, so to speak.As you may have all heard, E3 was canceled in Los Angeles in June. That is the major industry gaming event. We announced a week or 2 ago, the launch of IGN Live, which will take place in Los Angeles on the same dates as E3 has and it's been -- the response in the gaming industry amongst fans and publishers and members of the ecosystem has been incredible. And so just an example of IGN using its position and leadership position in the industry. It's a really great effect. I think it's going to be a great event. So I will leave it there.
And the next question is coming from Rishi Jaluria from RBC.
2 questions from me. First, I wanted to go back and talk a little bit about the initiatives you're seeing on the VPN side to drive growth. Can you dive a little bit deeper into what can be done to improve that business outside of, obviously, the macroenvironment and anything external?And then I wanted to go into AI. How is that going to impact the actual P&L? What sort of impact are you thinking about either on the gross margin side with higher COGS and AI workloads or R&D as you build out some of these AI features and functionality?
Yes. So just on the VPN side, the issue we had had on VPN was really a customer acquisition issue. We were getting priced out in the affiliate channels against competition who are willing to pay bounties and endure customer acquisition costs that were quite a bit higher than LTV. It was sort of an upside down chase for subscriptions. That has started to mitigate. And I think you can't -- our competition really couldn't continue that in perpetuity.So in 2023, I think our sign-ups grew something like 15% or new billings grew 33%. So as that starts to play itself out, we're going to flip the equation and really turn to growth.I also think that the product has significantly improved, a lot has been done product-wise to improve its efficacy and its performance, which really helps drive retention. So there's a lot going on. We've also got some white label things that we do that are unique to us, and we've got some interesting white label partnership opportunities in front of us. So all of that, I think, adds up to why we are feeling good about VPN coming back to growth in the second half of 2024, which is really important for our cyber security and Martech segment.Just to finish up on your last question. Rishi, I would say right now, it does -- AI is not showing up in the P&L from the point of view of the cost savings or a significant change in our CapEx. I think we are integrating it into our workflows. We're finding ways to do it. I think, efficiently, we're certainly hiring people, but not in a way that has a radical impact on our level of capital expenditure or on our mid-30s EBITDA margin.
There are no other questions in queue at this time. I would now like to hand the call back to Bret Richter for any closing remarks.
Thank you, Paul, and thank you, everyone, for joining us today as we wrap up 2023 and turn our attention to 2024. As we have put out a release, we'll be participating in conferences in the coming weeks, and we hope to see some of you there and again on our first quarter call.
Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.