Ziff Davis, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Ziff Davis, Inc. is a vertically focused digital media and internet company whose content focuses on technology, gaming, entertainment, and health and wellness. Their Cybersecurity and Martech business provide cloud-based information services to consumers and businesses.

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The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Ziff Davis, Inc., is a diversified digital media and internet company, operating primarily through two business segments: Digital Media and Cybersecurity and Martech. * Digital Media: This segment focuses on online content delivery through various channels such as websites, mobile, apps, and social media. Their revenues include advertising, subscriptions, and licensing fees. Ziff Davis aims to generate a strong brand following with their loyal user base. * Cybersecurity and Martech: This segment provides cloud-based information services for businesses. It includes IT security offerings and digital marketing technology.

Industry and Competitive Landscape * The digital media industry is characterized by rapid changes and heavy competition. Companies must constantly innovate and adapt to maintain their market share. There’s a constant need to attract users and retain them to drive advertising and subscription revenues. * The cybersecurity and martech segments are also competitive and constantly evolving as new technologies are rapidly produced and companies try to achieve greater growth in the market. * In the digital media space, Ziff Davis faces a variety of competitors, ranging from large media conglomerates with deep pockets to niche content producers. The competition is high as user preference and taste varies significantly. There are various large media conglomerates, like Hearst Corporation, Conde Nast, and Meredith Corporation who produce magazine titles like Food and Wine, Cosmopolitan, and People, and digital outlets that face major competition. * In the cybersecurity and martech space, Ziff Davis competitors can be categorized into two broad groups- large and well-established cybersecurity and martech vendors such as Cisco, Palo Alto Networks, and Microsoft, who leverage economies of scale. On the other hand, startups and niche players, like Okta and HubSpot. They offer unique, specific, and highly technical solutions, and often focus on customer lock-in strategies. * The market favors companies that possess unique and innovative business model, that focus on developing proprietary technologies, and that create strong customer lock-in.

What Makes ZD Different

ZD’s unique strength comes from its vertically-focused business strategy across different technology and industry markets and from the use of machine learning. ZD focuses on using their extensive industry knowledge and the ability to effectively integrate acquisitions, so as to provide the best product at a great price. With its unique approach, the company focuses on creating customer loyalty, so as to gain recurring revenues, as they sell across different markets with the same model and tech. Their expertise in customer service and satisfaction, also creates barriers to entry for newer companies. In addition, it offers services that integrate information and data with the other products they offer, creating added benefits for their consumers.

Moat Analysis

  • Intangible Assets: Ziff Davis has built brands and expertise across key verticals, like technology, gaming, and cybersecurity. They have also developed strong relationships with consumers and businesses alike. Brand strength is not a major source of an economic moat, due to the number of competitors they face across multiple industries. However, their reputation and reliability are considered strong.
  • Switching Costs: Their cybersecurity and martech segments have strong switching costs that create some lock-in. These solutions require complex integration with customer systems and processes. However, the Digital Media segment is prone to high switching costs. * Cost Advantages: ZD has built great economies of scale through its acquisitions which help them to deliver products and services at a lower cost compared to their competitors.

  • Network Effects: In the digital media space, ZD’s presence is highly niche and doesn’t enjoy direct or indirect network effects.

    Moat Rating: 2 / 5

    • The moat is relatively narrow and inconsistent, primarily due to switching costs in the cybersecurity/martech segments and also from cost advantages brought upon by the acquisitions. Their position and expertise within specific industries provides some defensibility in the present marketplace, but are constantly threatened by new competitors, changes in technology, and customer preferences.

Legitimate Risks

  • Industry Consolidation: It is an issue to note that the media industry as a whole is undergoing rapid consolidation, which could lead to greater competition and price wars. This has been a problem for many old-school media publishers who struggle to generate a competitive return on invested capital, or face a decline in their profitability. It remains to be seen whether ZD would have to face this issue. * Disruptive Technology: ZD is susceptible to the risk of disruptive technologies. Any new innovation that renders their tech obsolete or not useful will severely harm the business. It is important to note that while the company focuses on proprietary technology, it can’t do anything about future innovations by other players.
    * Economic Slowdowns: Economic downturns could lead to reduced spending on advertising and tech, potentially impacting revenue streams. This is especially true as we are slowly going out of a growth market to a mature one. Thus, the company might find it hard to grow at the same rate in the future. * Acquisition Integration Risk: As ZD is growing primarily through acquisitions, failure to successfully integrate or improve operations from their acquired businesses can hurt profitability. The value they might be trying to extract from the newly acquired businesses may not be as high as expected as well.
  • Competition: The increasing competition in digital media, and cybersecurity and martech, along with more and more players, and the increased pressure for cost-cutting may make it tough for ZD to continue their existing growth and profit margins. Competition in the tech market space may also make it hard for them to gain new and long lasting competitive advantage.
  • Regulatory Changes: Changes in data protection laws, tax laws and regulations governing online business and tech, are also a risk.
  • Reliance on Key Personnel: As mentioned earlier, a number of senior management positions at ZD play a huge role in the company’s growth and performance, and the loss of such talent could have a negative effect on growth and financial figures.

Business Resilience

Ziff Davis has shown a reasonable level of resilience and is known to have recovered well from turbulent market situations. However, while some of their businesses enjoy strong structural competitive advantages, others lack significant defensibility. ZD’s strong focus on long-term shareholder value, their strong track record of executing well on acquisitions, and their focus on providing great product and services across several different industries, help to increase their resilience. However, further growth is not guaranteed, due to some of the aforementioned risks.

Financials

  • ZD’s revenue is spread across their Digital Media and Cybersecurity & Martech segments.
  • The primary source of revenue for their Digital Media segment is advertising. They provide their customers with the ability to purchase impressions, clicks, leads, actions, and other forms of advertising. This is coupled with subscription and licensing revenues. The digital media part of ZD, has historically shown good and sustainable growth, since its inception.

ZD’s Cybersecurity and Martech division, provides various software and analytics services, including customer support. Their revenue comes from software licenses, subscriptions, training, and professional services. They are also known for maintaining a stable growth, thanks to customer lock-in and recurring revenue structures.

  • Revenue Growth: Revenues have increased in each year in the 2019-2023 period. However, the rates have varied wildly, due to acquisitions and changes to their core business. The cybersecurity and Martech revenue is growing faster than the digital media revenue segment. * Margins: ZD’s gross margins have been relatively stable at around 80% with operating margins of around 17-18 percent. These high gross margins are a result of their technology based model, but their relatively smaller operating margins are a result of their high expenses in marketing, R&D, and amortization. They also incur a fair amount of share-based compensation expense.
  • Profitability: Their net profits have been erratic, due to fluctuations in the other non-operating components of the company’s income statement. They had losses in 2020 due to the loss of revenue and other impairments.
  • Capital Structure: ZD maintains a moderate level of debt, mostly due to the acquisitions they’ve had. Debt to equity is around 1, indicating low leverage for the tech industry.
  • Cash Flows: ZD has consistently produced very good cash flows over the past few years, which they usually reinvest into acquisitions, new products, and stock buybacks.
  • Recent Concerns/Problems/Controversies: In 2022, one of ZD’s subsidiaries, RetailMeNot, had some of its advertising business, particularly its “cash back” program, restricted by regulatory scrutiny and this led to a revenue decrease of about 10 percent. Management has addressed this matter, but this concern is still ongoing. In addition, like all companies in the tech industry, rising interest rates and increasing competition could lead to short term struggles for the company. Inflation has been hard to deal with as they’ve also had some large write-downs. However, they have addressed that they plan to reduce costs to offset the decrease in margin. ZD management says that they are focused on a long-term sustainable growth, and will continue to pursue growth strategies for increased profitability.
  • Overall ZD has shown a stable, but not outstanding financial performance with high revenue growth, above average gross margins, and a fairly high leverage structure, that is not out of the ordinary.

Understandability: 3 / 5 * Understanding ZD requires analyzing its two primary business segments, which are different in terms of target customer, revenue streams, and competition. Their technology based business model also needs deeper insight into the business. Their business model is not super easy to understand for anyone who isn’t familiar with the industry.

Balance Sheet Health: 4 / 5

  • ZD has decent liquidity with good cash reserves and a low debt-to-equity ratio. Despite the acquisitions, the company still has some flexibility and cushion to weather financial downturns. Moreover, their revenue streams are pretty well diversified.

company name (ticker symbol) | Moat: / 5 | Understandability: / 5 | Balance Sheet Health: / 5

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