# ZIFF DAVIS, INC. (ZD) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ZIFF DAVIS, INC.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1084048/000108404824000013/zd-20231231.htm
Accession: 0001084048-24-000013
Filing date: 2024-02-26
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ZD/
All MD&A years: /company/ZD/mda/
Previous year: /company/ZD/mda/fy2022/ (FY 2022)
Next year: /company/ZD/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. These forward-looking statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. 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 in the section titled “Cautionary Note on Forward Looking Information” and in Part I, Item 1A “Risk Factors” in this Annual Report on Form 10-K.

Overview

Ziff Davis, Inc. was incorporated in 2014 as a Delaware corporation through the creation of a holding company structure. Ziff Davis, Inc., together with its subsidiaries (“Ziff Davis”, “the Company”, “our”, “us”, or “we”), is a vertically focused digital media and internet company whose portfolio includes brands in technology, shopping, gaming and entertainment, connectivity, health, cybersecurity, and martech. Our Digital Media business specializes in the technology, shopping, gaming and entertainment, connectivity, and healthcare markets, offering content, tools, and services to consumers and businesses. Our Cybersecurity and Martech business provides cloud-based subscription services to consumers and businesses including cybersecurity, privacy, and marketing technology.

Dispositions

In February 2021, we sold certain Voice assets in the United Kingdom and, in September 2021, we sold our B2B Backup business.

On October 7, 2021, we completed the separation of our cloud fax business (the “Separation”) into an independent publicly traded company, Consensus Cloud Solutions, Inc. (“Consensus”). In connection with the Separation, we changed our name to Ziff Davis, Inc. from J2 Global, Inc. (for certain events prior to October 7, 2021, the Company may be referred to as J2 Global). The Separation was achieved through the Company’s distribution of 80.1% of the shares of Consensus common stock to holders of J2 Global common stock as of the close of business on October 1, 2021, the record date for the distribution. The J2 Global stockholders of record received one share of Consensus common stock for every three shares of J2 Global’s common stock and we retained a 19.9% interest in Consensus following the Separation (“Investment in Consensus”). Before the Separation, we reported our results as Digital Media and Cloud Services. In connection with the Separation, we now refer to these segments as Digital Media and Cybersecurity and Martech.

The accounting requirements for reporting the Separation of Consensus as a discontinued operation were met when the Separation was completed on October 7, 2021. Accordingly, the accompanying consolidated financial statements for all periods presented reflect the results of the Consensus business as a discontinued operation. Ziff Davis did not retain a controlling interest in Consensus.

Revenue Overview

Our consolidated revenues are currently generated primarily from two basic business models, each with different financial profiles and variability. Our Digital Media business is driven primarily by advertising revenues, has relatively higher sales and marketing expense, and has seasonal strength in the fourth quarter. Our Cybersecurity and Martech business is driven primarily by subscription revenues with relatively stable and predictable margins from quarter to quarter. In addition to growing our business organically, on a regular basis we acquire businesses to grow our customer bases, expand and diversify our service offerings, enhance our technologies, acquire skilled personnel, and enter into new markets. We continue to pursue additional acquisitions, which may include companies operating under business models that differ from those we operate under today. Such acquisitions could impact our consolidated profit margins and the variability of our revenues.

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Revenues from customers classified by revenue source are as follows (in thousands):

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2023","","2022","","2021"],["Digital Media"],["Advertising","$","747,254","","","$","788,135","","","$","838,075"],["Subscription and licensing","283,473","","","244,694","","","197,354"],["Other","42,244","","","46,343","","","33,871"],["Total Digital Media revenues","$","1,072,971","","","$","1,079,172","","","$","1,069,300"],["Cybersecurity and Martech"],["Subscription","$","291,209","","","$","312,626","","","$","348,611"],["Total Cybersecurity and Martech revenues","$","291,209","","","$","312,626","","","$","348,611"],["Corporate","$","\u2014","","","$","\u2014","","","$","\u2014"],["Elimination of inter-segment revenues","(152)","","","(801)","","","(1,189)"],["Total Revenues","$","1,364,028","","","$","1,390,997","","","$","1,416,722"]]
[[/GREPCENT_TABLE]]

Performance Metrics

We use certain metrics to generally assess the operational and financial performance of our businesses. For our advertising businesses, net advertising revenue retention is an indicator of our ability to retain the spend of our existing advertisers year over year, which we view as a reflection of the effectiveness of our advertising platform. Similarly, we monitor the number of our advertisers and the revenue per advertiser, as defined below, as these metrics provide further details related to our reported revenue and contribute to certain of our business planning decisions.

The following table sets forth certain key operating metrics for our Digital Media advertising business for the three months ended December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["","Three months ended December 31,"],["","2023","","2022"],["Net advertising revenue retention (1)","87.1","%","","92.0","%"],["Advertisers (2)","1,943","","","2,044"],["Quarterly revenue per advertiser (3)","$","119,975","","","$","118,370"]]
[[/GREPCENT_TABLE]]

(1)Net advertising revenue retention equals (i) the trailing twelve month revenue recognized related to prior year advertisers in the current year period (excluding revenue from acquisitions during the stub period) divided by (ii) the trailing twelve month revenue recognized related to prior year advertisers in the prior year period (excluding revenue from acquisitions during the stub period). This excludes advertisers that generated less than $10,000 of revenue in the measurement period.

(2)Excludes advertisers that spent less than $2,500 in the quarter within certain divisions.

(3)Represents total gross quarterly advertising revenues divided by advertisers as defined in footnote (2).

For our subscription and licensing businesses, the number of subscribers that we serve is an indicator of our customer retention and growth. The average monthly revenue per customer and the churn rate also contribute to insights that contribute to certain of our business planning decisions.

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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 December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["","Three months ended December 31,"],["","2023","","2022 (4)"],["Customers (in thousands) (1)","3,266","","","3,143"],["Average quarterly revenue per customer (2)","$","44.77","","","$","44.69"],["Churn rate (3)","2.86","%","","4.02","%"]]
[[/GREPCENT_TABLE]]

(1)Represents the quarterly average of the end of month customer counts for both the Digital Media and Cybersecurity and Martech businesses. Resellers without visibility into the number of underlying customers served by the reseller are counted as one customer.

(2)Represents quarterly gross subscription and licensing revenues divided by customers as defined in footnote (1).

(3)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. For Ookla, the churn rate calculation included in the consolidated churn rate calculation includes the sum of the monthly revenue from the specific cancelled agreements in the numerator.

(4)Certain prior period key performance metrics in the table above have been adjusted for our Cybersecurity and Martech segment as a result of gaining greater transparency on 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.

[[GREPCENT_TABLE]]
[["","Three months ended December 31, 2022"],["Customers (in thousands)","111"],["Average quarterly revenue per customer","$","(1.64)"],["Churn rate","0.21","%"]]
[[/GREPCENT_TABLE]]

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements and related disclosures in accordance with U.S. generally accepted accounting principles (“GAAP”) and our discussion and analysis of our financial condition and operating results require us to make judgments, assumptions, and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. See Note 2 — Basis of Presentation and Summary of Significant Accounting Policies of the notes to consolidated financial statements in Part II Item 8 of this Annual Report on Form 10-K that describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ significantly from those estimates under different assumptions and conditions and may be material.

The accounting policies described below are those we consider to be the most critical to an understanding of our financial condition and results of operations and that require the most complex and subjective management judgment.

Revenue Recognition

Our Digital Media business generates revenues from advertising and sponsorships, subscriptions, performance marketing, and licensing fees. This business also generates revenues from the sale of display and video advertising; customer clicks to online merchants, and commissions on sales attributed to clicks to online merchants; the sale of content, including advertising, data, and lead generation information to clients; and the sale of subscription services to consumers and businesses. Our Cybersecurity and Martech business generates revenues primarily from customer subscription and usage fees.

The Company is a party to multiple concurrent contracts with the same customer, or a party related to that customer. Some situations may require judgment to determine if those arrangements should be accounted for as a single contract. Consideration of both the form and the substance of the arrangement is required. The Company’s contracts with customers may include multiple performance obligations, including contracts when advertising and licensing services are sold together.

The Company determines the transaction price based on the amount to which the Company expects to be entitled in exchange for services provided. The Company includes any fixed consideration within its contracts as part of the total transaction price. The Company’s contracts occasionally contain some component of variable consideration, such as commissions that are recognized in the period of the commissionable event.

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Our Digital Media business consists primarily of performance obligations that are satisfied over time. Revenue is recognized based on delivery of services over the contract period for advertising and on a straight-line basis or units of output basis over the contract period for subscriptions. The Digital Media business also has licensing arrangements that have standalone functionality. As a result, they are considered to be functional intellectual property where the performance obligations are satisfied at a point in time. Our Cybersecurity and Martech business consists primarily of performance obligations that are satisfied over time. The Company recognizes revenue on a straight-line basis throughout the subscription period, or as usage occurs for services outside of the subscription.

The Company determines whether revenue should be reported on a gross or net basis by assessing whether the Company is acting as the principal or an agent in the transaction, respectively. The Company records revenue on a gross basis with respect to revenue generated (i) by the Company serving online display and video advertising across its owned and operated web properties, on third-party sites, or on unaffiliated advertising networks; (ii) through the Company’s lead-generation business; and (iii) through the Company’s subscriptions, including the resale of various third-party solutions, primarily through its email security line of business. The Company records revenue on a gross basis with respect to reseller revenue because the Company has control of the specified good or service prior to transferring control to the customer. The Company records revenue on a net basis with respect to revenue paid to the Company by certain third-party advertising networks who serve online display and video advertising across the Company’s owned-and-operated web properties and certain third-party platforms, primarily related to the transfer of functional intellectual property.

Business Combinations

The Company applies the acquisition method of accounting for business combinations in accordance with GAAP and uses estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets, including identifiable intangible assets and liabilities acquired. Such estimates are complex because of the judgement required in determining these values. The determination of purchase price and the fair value of monetary assets acquired and liabilities assumed is typically the least complex aspect of the Company’s accounting for business combinations due to inherently lower level of judgement required. Due to the higher degree of complexity associated with the valuation of acquired intangible assets, the Company may obtain the assistance of reputable valuation specialists in the allocation of purchase price to the identifiable intangible assets acquired. The valuation of identifiable intangible assets may be based on significant unobservable inputs and assumptions such as, but not limited to, future revenue growth rates, gross and operating margins, customer attrition rates, royalty rates, discount rates, and terminal growth rate assumptions. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Identifiable intangible assets are comprised of purchased customer relationships, trademarks, trade names, developed technologies and other intangible assets. We use our best estimates and assumptions to accurately assign the useful lives of the acquired intangible assets subject to amortization, which are amortized over the period of estimated economic benefit. Fair values are subject to refinement for up to one year after the closing date of an acquisition as information relevant to closing date fair values becomes available. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

Goodwill and Indefinite-Lived Intangible Assets

The Company evaluates its goodwill and indefinite-lived intangible assets for impairment pursuant to FASB ASC Topic 350, Intangibles — Goodwill and Other (“ASC 350”), which provides that goodwill and other intangible assets with indefinite lives are not amortized but tested annually for impairment or more frequently if the Company believes indicators of impairment exist. The Company tests goodwill for impairment annually on October 1st at the reporting unit level, or more frequently if indicators of impairment exist, or if a decision is made to dispose of a business. In connection with the annual impairment test for goodwill, the Company has the option to perform a qualitative assessment in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it was more likely than not that the fair value of the reporting unit is less than its carrying amount, it then performs an impairment test of goodwill. The impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. The Company generally determines the fair value of its reporting units using a mix of an income approach and a market approach. If the carrying value of a reporting unit exceeds the reporting unit’s fair value, an impairment loss is recognized for the difference.

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During the years ended December 31, 2023, 2022, and 2021, the Company recorded a goodwill impairment of $56.9 million, $27.4 million and $32.6 million, respectively. In each period, the fair value of the 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. As the 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. Refer to Note 9 — Goodwill and Intangible Assets to the Notes to Consolidated Financial Statements included in Part II Item 8 of this Annual Report on Form 10-K.

Following the impairment during the year ended December 31, 2023, there was no excess of fair value over the carrying value at the reporting unit, so any decrease in estimated fair value that exceeds the carrying value, would result in an additional impairment charge to goodwill. As of December 31, 2023, this reporting unit had goodwill of approximately $79.2 million. 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.

The Company performed the annual impairment test for intangible assets with indefinite lives for fiscal 2021 using a qualitative assessment primarily taking into consideration macroeconomic, industry, and market conditions, overall financial performance and any other relevant company-specific factors. The Company concluded that there were no impairments in 2021. The Company did not perform an assessment in 2022 and 2023, as there were no intangible assets with indefinite lives during 2022 and 2023.

Long-lived Assets

The Company accounts for long-lived assets, which include property and equipment, operating lease right-of-use assets, and identifiable intangible assets with finite useful lives (subject to amortization), in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360, Property, Plant, and Equipment (“ASC 360”), which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to the expected undiscounted future net cash flows generated by the asset. If it is determined that the asset may not be recoverable, and if the carrying amount of an asset exceeds its estimated fair value, an impairment charge is recognized to the extent of the difference. In addition, the Company reviews the useful lives of its long-lived assets whenever events or changes in circumstances indicate that these lives may be changed.

Recent Accounting Pronouncements

See Note 2 — Basis of Presentation and Summary of Significant Accounting Policies to the Notes to Consolidated Financial Statements included in Part II Item 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements and the Company’s expectations of their impact on its consolidated financial position and results of operations.

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Results of Operations for the Years Ended December 31, 2023 and 2022

See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with SEC on March 1, 2023, for a discussion of our consolidated and segment results of operations for 2022 compared to 2021.

Digital Media

We expect the Digital Media business to improve as we integrate our recent acquisitions and over the longer term as advertising transactions continue to shift from offline to online, and we continue to expand our advertising platforms. The main focus of our platform monetization programs is to provide relevant and useful advertising to visitors to our websites, provide meaningful content that informs and shapes purchase intent, and leverage our brand and editorial assets into subscription platforms. As a result, we expect to continue to take steps to improve the relevance of the ads displayed on our websites and those included within our advertising networks, and improve the effectiveness of our content in driving purchase decisions and subscriptions.

The operating margin we realize on revenues generated from ads placed on our websites is significantly higher than the operating margin we realize from revenues generated from those placed on third-party websites. Growth in advertising revenues from our websites has generally exceeded that from third-party websites. This trend has generally had a positive impact on our operating margins.

We expect acquisitions to remain an important component of our strategy and use of capital in this business; however, 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.

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.

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Results of Operations

The following table sets forth, for the years ended December 31, 2023 and 2022, information derived from our Statements of Operations as a percentage of revenues.

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2023","","2022"],["Revenues","100%","","100%"],["Operating costs and expenses:"],["Direct costs","15","","14"],["Sales and marketing","36","","35"],["Research, development, and engineering","5","","5"],["General, administrative, and other related costs","31","","29"],["Goodwill impairment on business","4","","2"],["Total operating costs and expenses","90","","86"],["Income from operations","10","","14"],["Interest expense, net","(1)","","(2)"],["Gain on debt extinguishment, net","\u2014","","1"],["Unrealized (loss) gain on short-term investments held at the reporting date, net","(2)","","(1)"],["Gain (loss) on investments, net","\u2014","","(3)"],["Other (loss) income, net","(1)","","1"],["Income from continuing operations before income taxes and income (loss) equity method investment, net","6","","10"],["Income tax expense","(2)","","(4)"],["Income (loss) from equity method investment, net","(1)","","(1)"],["Net income","3%","","5%"]]
[[/GREPCENT_TABLE]]

Revenues

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Percent change"],["(in thousands, except percentages)","2023","","2022","","2023 v. 2022"],["Revenues","$","1,364,028","","","$","1,390,997","","","(2)%"]]
[[/GREPCENT_TABLE]]

Our revenues consist of revenues from our Digital Media business and our Cybersecurity and Martech business. Digital Media revenues primarily consist of advertising revenues and subscription and licensing revenues earned through the granting of access to, or delivery of, certain data products or services to customers, fees paid for generating business leads, and licensing and sale of editorial content and trademarks. Cybersecurity and Martech revenues primarily consist of revenues from “fixed” customer subscription revenues and “variable” revenues generated from actual usage of our services.

Our revenues decreased for the year ended December 31, 2023 compared to the prior period primarily due to the $40.5 million decline in advertising revenue in our Digital Media business and $21.3 million decline in subscription revenue in our Cybersecurity and Martech business, partially offset by an increase of $39.3 million in subscription revenue in the Digital Media business. Included in the revenue during the year ended December 31, 2023 was $21.3 million of incremental revenue contributed by businesses acquired during 2022 and $3.0 million of revenue contributed by businesses acquired in 2023. These revenue declines were offset in part by organic revenue growth in certain of our businesses. Revenue from an acquired business becomes organic revenue in the first month in which the Company can compare a full month in the current year against a full month under its ownership in a prior year.

Direct costs

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Percent change"],["(in thousands, except percentages)","2023","","2022","","2023 v. 2022"],["Direct Costs","$","197,292","","","$","195,554","","","0.9%"],["As a percent of revenue","14.5%","","14.1%"]]
[[/GREPCENT_TABLE]]

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Direct costs are primarily comprised of costs associated with content fees, production costs, royalty fees, and hosting costs. The increase in direct costs for the year ended December 31, 2023 compared to the prior period was primarily due to an $8.5 million increase in web hosting and database hosting fees, partially offset by a $3.5 million decrease in royalty fees and a $2.8 million decrease in content fees and similar costs.

Sales and Marketing

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Percent change"],["(in thousands, except percentages)","2023","","2022","","2023 v. 2022"],["Sales and Marketing","$","487,365","","","$","490,777","","","(0.7)%"],["As a percent of revenue","35.7%","","35.3%"]]
[[/GREPCENT_TABLE]]

Sales and marketing costs consist primarily of internet-based advertising, sales and marketing, personnel costs, and other business development-related expenses. Our internet-based advertising relationships consist primarily of fixed cost and performance-based (cost-per-impression, cost-per-click, and cost-per-acquisition) advertising relationships with an array of online service providers. The decrease in sales and marketing expenses during the year ended December 31, 2023 compared to the prior period was primarily due to $5.9 million lower marketing expenses, partially offset by $2.4 million higher travel related costs.

Research, Development, and Engineering

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Percent change"],["(in thousands, except percentages)","2023","","2022","","2023 v. 2022"],["Research, Development, and Engineering","$","68,860","","","$","74,093","","","(7.1)%"],["As a percent of revenue","5.0%","","5.3%"]]
[[/GREPCENT_TABLE]]

Research, development, and engineering costs consist primarily of personnel-related expenses. The decrease in research, development, and engineering costs for the year ended December 31, 2023 compared to the prior period was primarily due to $3.6 million lower personnel-related costs due primarily to an increase in capitalized costs related to the nature of projects in 2023 as compared with projects in 2022.

General, Administrative, and Other Related Costs

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Percent change"],["(in thousands, except percentages)","2023","","2022","","2023 v. 2022"],["General, Administrative, and Other Related Costs","$","421,050","","","$","404,263","","","4.2%"],["As a percent of revenue","30.9%","","29.1%"]]
[[/GREPCENT_TABLE]]

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 year ended December 31, 2023 compared to the prior period was primarily due to $12.9 million higher personnel related expenses related in part to higher share-based compensation expense, salaries, and bonus expense, and $2.9 million higher depreciation and amortization expense.

Goodwill Impairment on Business

Goodwill impairment on business was $56.9 million and $27.4 million for the years ended December 31, 2023 and 2022, respectively. The goodwill impairment during all periods was related to reporting units within the Digital Media reportable segment. Refer to Note 9 — Goodwill and Intangible Assets to the Notes to Consolidated Financial Statements included in Part II Item 8 of this Annual Report on Form 10-K for further details.

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Share-Based Compensation Expense

The following table presents the effects of share-based compensation expense in the accompanying Consolidated Statements of Operations during the periods presented (in thousands):

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2023","","2022"],["Direct costs","$","262","","","$","341"],["Sales and marketing","2,686","","","3,083"],["Research, development, and engineering","3,245","","","2,503"],["General. administrative, and other related costs","25,727","","","20,674"],["Total share-based compensation expense","$","31,920","","","$","26,601"]]
[[/GREPCENT_TABLE]]

Non-Operating Income and Expenses

The following table represents the components of non-operating income and expenses for the years ended December 31, 2023 and 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Percent change"],["","2023","","2022","","2023 v. 2022"],["Interest expense, net","$","(20,031)","","","$","(33,842)","","","(40.8)%"],["Gain on debt extinguishment, net","\u2014","","","11,505","","","(100.0)%"],["Unrealized loss on short-term investments held at the reporting date, net","(28,495)","","","(7,145)","","","298.8%"],["Gain (loss) on investments, net","357","","","(46,743)","","","(100.8)%"],["Other (loss) income, net","(9,468)","","","8,437","","","(212.2)%"],["Total non-operating expense","$","(57,637)","","","$","(67,788)","","","(15.0)%"]]
[[/GREPCENT_TABLE]]

Interest expense, net. Interest expense is generated primarily from interest due on outstanding debt, partially offset by interest income generated from interest earned on cash, cash equivalents, and investments. Interest expense, net was $20.0 million and $33.8 million for the years ended December 31, 2023 and 2022, respectively. Interest expense, net decreased during the year ended December 31, 2023 compared to the prior period primarily due to higher interest income as a result of higher interest rates. The increase in interest income was partially offset by additional non-recurring interest on the 1.75% Convertible Notes at a rate of 0.50% per annum. See Note 10 — Debt to the Notes to Consolidated Financial Statements included in Part II Item 8 of this Annual Report on Form 10-K for further details.

Gain on debt extinguishment, net. Gain on debt extinguishment, net was zero and $11.5 million during the years ended December 31, 2023 and 2022, respectively. Gain on debt extinguishment, net of $11.5 million in 2022 related primarily to the repurchases of the 4.625% Senior Notes.

Unrealized loss on short-term investments held at the reporting date, net. Unrealized loss on short-term investment held at the reporting date, net was $28.5 million and $7.1 million during the years ended December 31, 2023 and 2022, respectively. The unrealized loss recorded in 2023 and 2022 represents the change in fair value of our investment in Consensus common stock.

Gain (loss) on investments, net. Gain (loss) on investments, net is generated from gains or losses from investments in equity and debt securities. Gain (loss) on investments, net was $0.4 million and $(46.7) million for the years ended December 31, 2023 and 2022, respectively. Gain (loss) on investment, net recorded in 2023 and 2022 was related to the disposition of Consensus common stock.

Other (loss) income, net. Other (loss) income, net is generated primarily from miscellaneous items and gains or losses on foreign currency. Other (loss) income, net was $(9.5) million and $8.4 million in 2023 and 2022, respectively. The decrease in 2023 compared to 2022 was primarily attributable to changes in gains or losses on foreign currency and a reserve established on a receivable from a buyer of a previously disposed business.

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

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our best estimate of the tax benefits and costs we expect to realize. When necessary, we establish valuation allowances to reduce our deferred tax assets to an amount that will more likely than not be realized.

As of December 31, 2023, the Company had federal net operating loss carryforwards (“NOLs”) of $9.1 million, after considering substantial restrictions on the utilization of these NOLs due to “ownership changes”, as defined in the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The Company estimates that all of the above-mentioned federal NOLs will be available for use before their expiration. $7.5 million of the NOLs expire through the year 2037 depending on the year the loss was incurred and $1.6 million of the NOLs carry forward indefinitely.

As of December 31, 2023, the Company had interest expense limitation carryovers of $1.9 million, which last indefinitely. The Company also had federal capital loss limitation carryforwards as of December 31, 2023 of $21.8 million that begin to expire in 2026. In addition, as of December 31, 2023, the Company had available state research and development tax credit carryforwards of $5.4 million, which last indefinitely. The Company had no foreign tax credit carryforwards as of December 31, 2023.

Income tax expense was $24.1 million and $58.0 million in 2023 and 2022, respectively. Our effective tax rates for 2023 and 2022 were 32.2% and 44.2%, respectively.

The decrease in our annual effective income tax rate in 2023 compared to prior period was primarily attributable to the following:

1.a decrease in our effective income tax rate due to tax expense of $13.4 million recognized during 2022 for recording a deferred tax liability related to our investment in Consensus common stock with no similar item occurring during 2023; and

2.a decrease in our effective income tax rate during 2023 due to a higher net reduction in our reserves as compared to 2022 for uncertain tax positions, primarily due to the lapse of the statute of limitations in certain jurisdictions; partially offset by

3.an increase in our effective income tax rate during 2023 due to the goodwill impairment recognized for book purposes with no corresponding tax benefit recognized.

In order to provide additional understanding in connection with our foreign taxes, the following represents the statutory and effective tax rate by significant foreign country:

[[GREPCENT_TABLE]]
[["","Ireland","","United Kingdom","","Canada"],["Statutory tax rate","12.5%","","23.5%","","26.5%"],["Effective tax rate (1)","14.1%","","24.5%","","23.0%"]]
[[/GREPCENT_TABLE]]

(1)Effective tax rate excludes certain discrete items.

The statutory tax rate is the rate imposed on taxable income for corporations by the local government in that jurisdiction. The effective tax rate measures the taxes paid as a percentage of pretax profit. The effective tax rate can differ from the statutory tax rate when a company can exempt some income from tax, claim tax credits, or due to the effect of book-tax differences that do not reverse and discrete items.

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.

The Organization for Economic Co-operation and Development (“OECD”) established a Pillar Two Framework that was supported by over 130 countries worldwide. On December 15, 2022, the European Union (“EU”) Member States adopted the EU’s Pillar Two Directive, which generally provides for a minimum effective tax rate of 15% with effective dates of January 1, 2024 and January 1, 2025, for different aspects of the directive. A significant number of other countries are also implementing similar legislation. The Company is continuing to evaluate the impact on future periods of the Pillar Two Framework and pending legislative adoption by additional individual countries in which we operate. Although we are unable to predict when and how the Pillar Two Framework will be enacted into law, based on the countries in which we operate, the Company does not believe that the adoption of the Pillar Two Framework will have a material effect on our liability for corporate taxes and our consolidated effective tax rate.

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Equity Method Investment

Loss from equity method investment, net. Loss from equity method investment was generated from our investment in the OCV Fund I, LP (the “OCV Fund”) for which we receive annual audited financial statements. The investment in the OCV Fund is presented net of tax and on a one-quarter lag due to the timing and availability of financial information from OCV. If the Company becomes aware of a significant decline in value that is other-than-temporary, the loss will be recorded in the period in which the Company identifies the decline.

Loss from equity method investment, net was $9.3 million and $7.7 million, net of tax benefit for the years ended December 31, 2023 and 2022, respectively. The increase in loss from equity method investment, net in 2023 was primarily due to a larger decline in the value of the underlying investments.

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):

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2023","","2022"],["External revenue","$","1,072,819","","","$","1,078,391"],["Inter-business revenue","152","","","781"],["Total revenue","1,072,971","","","1,079,172"],["Operating costs and expenses","931,980","","","880,240"],["Operating income","$","140,991","","","$","198,932"]]
[[/GREPCENT_TABLE]]

Digital Media’s net sales of $1.1 billion in 2023 decreased $5.6 million, or 0.5% compared to 2022 primarily due to an organic decline in certain businesses, offset in part by $21.3 million of incremental revenue during 2023 contributed by businesses acquired in 2022 and organic growth in certain other businesses. The Company considers revenue from an acquired business to become organic revenue in the first month in which the Company can compare that full month in the current year against the corresponding full month under its ownership in the prior year.

Digital Media’s operating costs and expenses of $932.0 million in 2023 increased $51.7 million, or 5.9%, compared to 2022 primarily due to an increase of $29.5 million in goodwill impairment recognized during 2023 compared to 2022 and higher general and administrative and sales and marketing expenses.

As a result of these factors, Digital Media’s operating income of $141.0 million in 2023 decreased $57.9 million, or 29.1%, from 2022.

Cybersecurity and Martech

The financial results are presented as follows (in thousands):

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2023","","2022"],["External revenue","$","291,209","","","$","312,606"],["Inter-business revenue","\u2014","","","20"],["Total revenue","291,209","","","312,626"],["Operating costs and expenses","248,151","","","262,426"],["Operating income","$","43,058","","","$","50,200"]]
[[/GREPCENT_TABLE]]

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Cybersecurity and Martech’s net sales of $291.2 million in 2023 decreased $21.4 million, or 6.8%, compared to 2022 primarily due to the organic decline in certain businesses during the year.

Cybersecurity and Martech operating costs and expenses of $248.2 million in 2023 decreased $14.3 million, or 5.4%, compared to 2022 primarily due to lower sales and marketing expenses and lower general and administrative expenses.

As a result of these factors, Cybersecurity and Martech operating income of $43.1 million in 2023 decreased $7.1 million, or 14.2%, from 2022.

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 services, acquisitions, and continued investments in sales and marketing. We also use cash flows from operations to service our debt obligations and the repurchase of our shares.

Cash, Cash Equivalents and Investments

Cash, cash equivalents, and investments consisted of (in thousands):

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022"],["Cash and cash equivalents","$","737,612","","","$","652,793"],["Short-term investments","27,109","","","58,421"],["Long-term investments","140,906","","","127,871"],["Cash, cash equivalents and investments","$","905,627","","","$","839,085"]]
[[/GREPCENT_TABLE]]

Cash, cash equivalents, and investments held within domestic and foreign jurisdictions were as follows (in thousands):

[[GREPCENT_TABLE]]
[["","December 31,"],["","2023","","2022"],["Cash, cash equivalents and investments held in domestic jurisdictions","$","742,010","","","$","671,587"],["Cash, cash equivalents and investments held in foreign jurisdictions","163,617","","","167,498"],["Cash, cash equivalents and investments","$","905,627","","","$","839,085"]]
[[/GREPCENT_TABLE]]

For information on short-term and long-term investments of the Company, refer to Note 5 — Investments to the Notes to Consolidated Financial Statements included in Part II Item 8 of this Annual Report on Form 10-K.

Financings

On November 15, 2019, the Company issued $550.0 million aggregate principal amount of 1.75% convertible senior notes due November 1, 2026 (the “1.75% Convertible Notes”). Prior to the spin-off of Consensus, the conversion rate on the 1.75% Convertible Notes was 7.9864 shares of the Company’s common stock for each $1,000 principal amount of 1.75% Convertible Notes, which represents a conversion price of approximately $125.21 per share of the Company’s common stock. The spin-off constituted an event under the 1.75% Convertible Notes that required an adjustment and the conversion rate increased to 9.3783 shares of the Company’s common stock for each $1,000 principal amount of 1.75% Convertible Notes (or 5,158,071 shares), which represents a conversion price of approximately $106.63 per share of the Company’s common stock. As of December 31, 2022 and December 31, 2023, the market trigger conditions did not meet the conversion requirements of the 1.75% Convertible Notes and, consequently, none of the 1.75% Convertible Notes have been converted. The Company may not redeem the 1.75% Convertible Notes prior to November 1, 2026.

On April 7, 2021, the Company entered into a $100.0 million Credit Agreement (the “Credit Agreement”). Subject to customary conditions, the Company may, from time to time, request increases in the commitments under the Credit Agreement in an aggregate amount up to $250.0 million, for a total aggregate commitment of up to $350.0 million. The final maturity of the Credit Facility will occur on April 7, 2026.

On June 2, 2021, June 21, 2021, August 20, 2021, and September 16, 2021, the Company entered into First, Second, Third and Fourth Amendments (together the “Amendments”) to the Credit Agreement. The Amendments (i) provided for the

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issuance of a senior secured term loan under the Credit Agreement, in an aggregate principal amount of $485.0 million (the “Bridge Loan Facility”), (ii) permitted the spin-off of the Company’s cloud fax business into a new publicly traded company, and (iii) provided for certain other changes to the Credit Agreement.

In connection with the spin-off of Consensus, the Company drew the full amount of the Bridge Loan Facility and used the proceeds of the Bridge Loan Facility to redeem the 3.25% Convertible Notes. During the year ended December 31, 2021, the Company satisfied its conversion obligation related to the 3.25% Convertible Notes by paying the principal of $402.4 million in cash and issued 3,050,850 shares of the Company’s common stock. On October 7, 2021, as part of the Separation, Consensus issued $500.0 million of senior notes due 2028 to Ziff Davis, which Ziff Davis then exchanged such notes with the lenders under the Credit Agreement and Credit Agreement Amendments by and among the subsidiaries of Ziff Davis party thereto as guarantors, Citicorp North America Inc. and MUFG Union Bank, N.A. and MUFG Union Bank, N.A., as administrative agent for the lenders, in exchange for extinguishment of the indebtedness outstanding under the Bridge Loan Facility. Such lenders or their affiliates agreed to resell the 2028 notes to qualified institutional buyers in the United States pursuant to Rule 144A. On October 8, 2021, the Company announced that it had accepted tender offers to purchase $83.3 million in aggregate principal of its 4.625% Senior Notes for an aggregate purchase price of $90.0 million. The tender offer expired on October 22, 2021.

On June 10, 2022, the Company entered into a Fifth Amendment to the Credit Agreement, which provided for the issuance of a senior secured term loan in an aggregate principal amount of $90.0 million (the “Term Loan Facility”), which had a maturity date that was 60 days following the date of funding of the Term Loan Facility. On September 15, 2022, the Company entered into a Sixth Amendment to its existing Credit Agreement, which provided for the issuance of a senior secured term loan in an aggregate principal amount of approximately $22.3 million (“Term Loan Two Facility”). During the year ended December 31, 2022, the Company completed non-cash exchanges of 2.8 million shares of its common stock of Consensus with the lenders under the Fifth and the Sixth Amendments to settle the Company’s obligations of $112.3 million outstanding aggregate principal amount of the Term Loan Facility and Term Loan Two Facility plus related interest.

During the year ended December 31, 2022, the Company repurchased approximately $181.2 million in aggregate principal amount of the 4.625% Senior Notes for an aggregate purchase price of approximately $167.7 million. No repurchases of 4.625% Senior Notes were effectuated during the year ended December 31, 2023.

As of December 31, 2023 there were no amounts drawn under the Credit Agreement.

Material Cash Requirements

Ziff Davis’ long-term contractual obligations generally include its long-term debt as described above, 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. Refer to Note 4 — Business Acquisitions, Note 10 — Debt, and Note 11 — Leases to the Notes to the Consolidated Financial Statements included in Part II Item 8 of this Annual Report on Form 10-K, for further details on holdback payments, long-term debt, and operating leases.

As of December 31, 2023, we and our subsidiaries had outstanding $1.0 billion in aggregate principal amount of indebtedness. As of December 31, 2023, our total future minimum lease payments are $34.1 million, of which approximately $16.9 million future minimum lease payments are due in the succeeding twelve months. As of December 31, 2023, our liability for uncertain tax positions was $36.1 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 millions):

[[GREPCENT_TABLE]]
[["","Year ended December 31,","","Change"],["","2023","","2022","","2023 v. 2022"],["Net cash provided by operating activities","$","319,962","","","$","336,444","","","$","(16,482)"],["Net cash used in investing activities","$","(127,408)","","","$","(220,771)","","","$","93,363"],["Net cash used in financing activities","$","(114,791)","","","$","(140,832)","","","$","26,041"]]
[[/GREPCENT_TABLE]]

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Operating Activities

Our operating cash flows resulted primarily from cash received from our customers offset by cash payments we made to third parties for their services, employee compensation, interest payments associated with our debt, and taxes. The $16.5 million decrease in net cash provided by operating activities in 2023 compared to 2022 was primarily related to the timing and amount of cash receipts in ‘Accounts Receivable’, lower earnings before non-cash adjustments, an increase in prepaid expenses, and higher income tax payments during 2023, partially offset by the timing of payments in ‘Accounts Payable’.

Investing Activities

The $93.4 million decrease in net cash used in investing activities in 2023 compared to 2022 was primarily related to lower cash used on business acquisitions during 2023 compared to 2022 and our investment in available-for-sale securities during 2022, which did not recur in 2023, partially offset by current period investment in equity securities without readily determinable fair value.

Financing Activities

The $26.0 million decrease in net cash used in financing activities in 2023 compared to 2022 was primarily related to the absence of repurchases of our 4.625% Senior Notes, which occurred during 2022; partially offset by 1) higher cash used on share repurchases in 2023, and 2) the absence of term loan proceeds during 2023.

Stock Repurchase Program

On August 6, 2020, our Board of Directors approved a program authorizing the repurchase of up to ten million shares of our common stock through August 6, 2025 (the “2020 Program”). In connection with the authorization, the Company entered into certain Rule 10b5-1 trading plans with a broker-dealer to facilitate the repurchase program. During the years ended December 31, 2023, December 31, 2022, and December 31, 2021, the Company repurchased 1,585,846, 736,536 and 445,711 shares (which were subsequently retired) respectively, at an aggregate cost of $104.9 million, $71.3 million, and $47.7 million, respectively (including an immaterial amount of commission fees) under the 2020 Program. Refer to Note 14 — Stockholders’ Equity to the Notes to Consolidated Financial Statements included in Part II Item 8 of this Annual Report on Form 10-K for further details.

As a result of the repurchases, the number of shares of the Company’s common stock available for purchase as of December 31, 2023 is 4,741,308 shares.

A summary of share repurchases under the 2020 Program during the year ended December 31, 2023 is as follows (in thousands, except share amounts):

[[GREPCENT_TABLE]]
[["Total number of shares repurchased","","Aggregate purchase price (1)","","","","Shares remaining under repurchase authorization as of December 31, 2023"],["1,585,846","","$104,919","","","","4,741,308"]]
[[/GREPCENT_TABLE]]

(1)Excludes the impact of excise taxes.

Cumulatively at December 31, 2023, 5,258,692 shares were repurchased, under the 2020 Program, at an aggregate cost of $401.8 million (including excise tax).