Earnings Call Transcript - ZD Q3 2023

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Ziff Davis Third Quarter 2023 Earnings Call. My name is Paul, and I will be the operator assisting you today. 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.

Bret Richter, CFO

Thank you. Good morning, and welcome to the Ziff Davis Investor Conference Call for Q3 2023. As the operator mentioned, I am Bret Richter, Chief Financial Officer of Ziff Davis, and I am joined by our Chief Executive Officer, 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 email questions to investor@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.

Vivek Shah, CEO

Thank you, Bret, and good morning, everyone. Our third quarter financial results reflect solid and encouraging improvement in a number of parts of our business. Most notably, our organic growth rate was flat in the quarter after six consecutive quarters of low to mid-single-digit decline. We believe our business is turning the corner and is set up for positive organic growth in 2024. Let's begin with our Digital Media segment, where our organic growth rate in Q3 was positive, led by the connectivity business, which grew high single digits in the quarter and continues to be among our most consistent performers. Our Speedtest app continues to be popular with users, having reached an all-time high in monthly iOS installs in the U.S. Ookla also claimed the top spot in CC Group's list of most cited sources by telecom industry analysts. Our WiFi planning tools at Ekahau continue to be market leaders, and we're proud that they're being used for WiFi deployment at the 2024 Summer Olympics. In our health and wellness vertical, we grew mid-single digits, with continued strength in both consumer and professional-focused pharma advertising and strong subscription growth at our Lose It! weight management and nutritional wellness app. We just passed the one-year anniversary of our Lose It! acquisition, and we are very pleased with its financial results and exciting near-term product development roadmap. In gaming, we grew high single digits as IGN is experiencing very strong traffic growth, particularly on social and video-based platforms. While Humble also grew in the quarter, we didn't see the expected benefit from new game releases as we experienced delays with some launches and underperformance in others. In shopping, RetailMeNot was stable with year-over-year increases in usage of loyalty products such as cash back and our browser extension, and we're still working on traffic recovery at Offers.com. Our tech vertical continues to be the outsized drag on revenue, down high teens organically. That's an improvement over the first two quarters of the year, which is a reminder of the headwind that it's been for us. And while it will continue to be a drag on revenue growth for the remainder of the year, we believe it can join the rest of our businesses on the path back to positive organic growth. I'll point out that when excluding Tech, our advertising revenues grew in Q3. In Cybersecurity and Martech, Q3 revenue declined mid-single digits year-over-year and was almost flat to Q2. Our email marketing business continued to grow organically, driven by increased usage by customers and strong new business. Our largest decline continues to be in VPN, but we are encouraged by the trends in this business. For the third consecutive quarter, we grew our VPN customer adds, and these gains should flow through the VPN revenue in the coming quarters. Now let me shift to an update on AI. We are actively leveraging our AI partnership with Xyla to fast-track opportunities within our connectivity division. Utilizing proprietary Ookla data, we have made fast progress on our now-casting capabilities, which use machine learning to showcase the value potential of Ookla's insight for the financial services industry. For instance, we are working on a model capable of estimating key financial performance metrics of telecom market participants based on Ookla's unique data sets. We've also launched Ookla's first AI-copilot, which uses a large language model with global real-time telecommunications knowledge to support our analyst teams in developing customer insights and thought leadership content from Ookla's proprietary data and knowledge base. We are making steady progress integrating AI applications across our Everyday Health Group portfolio, including from our Xyla partnership, in editorial workflow efficiency, new product features, and content personalization. Our cybersecurity business, VIPRE, developed a conversational experience for their endpoint detection and response incident management product. We expect VIPRE users to be able to utilize an AI chatbot to swiftly analyze and clarify the actions of potentially malicious scripts, thereby enhancing the detection of actual threats to individuals and organizations. We are anticipating deploying the beta of this feature by the end of the year. Last quarter, we announced that we launched a new AI-driven chatbot for game help, starting first with the hit game, The Legend of Zelda: Tears of the Kingdom. This chatbot was solely trained on IGN's expert content and enabled us to engage users in a new way by allowing logged-in members to ask very specific game help questions. IGN has now rolled out the AI chatbot for game help across nine game titles, and the early results have been encouraging. These are just a few examples of AI-enabled activities taking place at the company. At the same time, we continue to closely monitor the role of AI in search. Last quarter, we shared that our organic traffic referral from Bing, which is still the only at-scale search experience incorporating Gen AI was up, and that continues. This time, we sought to understand the prevalence of AI-generated responses to search queries. To do this, we sampled keywords across our top domain that drive the majority of our search traffic. Within this set, just 20% of keywords prompted an AI-generated response from Bing, meaning that for 80% of the highest value keywords, an AI response was not even generated. Similarly, we sampled keywords in Google's SGE, which is still in Google Labs, and found that only 23% of our most valuable keywords prompted an AI-generated response. Our key takeaway is that AI-generated responses are currently prompted at a much lower rate than some might have contemplated. We also wanted to understand the click-through rates when our keywords return an AI-generated response versus those that do not. On Bing, AI-generated responses had a higher click-through rate compared to those that did not. We currently cannot measure click-through rates in Google SGE, but don't have any reason to expect a different outcome. We believe this important analysis confirms our view that fears about AI-enabled search have been overdone. Our SEO experts at Moz share similar views based on their experience and expertise in the space. We believe that search operators continue to understand the importance of the value exchange between search providers and publishers and access to content for traffic and that they will protect this exchange. However, we strongly believe that non-search AI platforms will need to compensate rights holders for their content. We are committed to upholding the rights of content creators and demonstrate this through proactive involvement in industry efforts. Our participation in the News Media Alliance, including holding a seat on the NMA Board, an endorsement of their white paper, as well as our contributions to their comments to the U.S. copyright office, reflect our stance on preventing unauthorized and uncompensated use of publisher content. Now just a few words about M&A. The overall deal market continues to hover around 10-year lows in terms of volume and value. And this has certainly shown up in our own M&A activity, where we have closed just two acquisitions this year. We attribute the M&A slowdown to a persistent gap in the valuation expectations of buyers and sellers. However, our philosophy on M&A has not changed, and we are optimistic that as new realities settle in for many businesses in our sector, we will be very well positioned to create shareholder value through M&A. We remain very eager to deploy capital for acquisitions at a time when our powder is especially dry and continue to believe our patience will be rewarded. Let me provide you with an update on our ESG efforts. As mentioned on our last call, our emissions reduction targets were recently validated by the Science Based Targets Initiative. SBTi defines and promotes best practices in near-term science-based target setting. We now have comprehensive Scope 1, 2, and 3 emission reduction targets in place, effectively committing to cut our emissions in half by 2030. We have already been working with our major suppliers, facilities, teams, and building managers and will continue to do so over the next several years to ensure we meet these targets. It's also worth noting that Ziff Davis has obtained independent third-party verification of our 2022 greenhouse gas inventory and will do so moving forward. Next week, we'll host our third Annual Purpose Summit, a company-wide event where employees hear from colleagues throughout Ziff Davis who are making a difference through their work and effect change within their communities. It's a highlight on my calendar. With that, I'll hand the call back to Bret to discuss our financial results in greater detail.

Bret Richter, CFO

Thank you, Vivek. Let's discuss our financial results. Our earnings release reflects both our GAAP and adjusted financial results for Q3 2023. We will focus our discussion today, and my commentary will primarily relate to our Q3 2023 adjusted financial results and comparisons to prior periods. Slide 4 reflects the summary of our third quarter financial results. We reported revenue of $341 million for the third quarter of 2023 as compared with revenue of $341.9 million for the 2022 comparable period, reflecting a decline of 0.3%. FX was slightly favorable as compared with the prior year period. Q3 2023 adjusted EBITDA was $113.7 million as compared with $120.1 million for the prior year period, reflecting a decline of 5.3%. Our adjusted EBITDA margin for the quarter was 33.3%, which is an improvement as compared with Q2 2023's margin of 32.7%. We reported third quarter adjusted diluted EPS of $1.50. As Vivek noted, many of our businesses reflect significant year-over-year performance improvements. In our Digital Media segment, our gaming, connectivity and health and wellness businesses each grew organically in the third quarter. RetailMeNot was essentially flat year-over-year, but shopping was down. Collectively, our Digital Media businesses contributed positive Q3 organic growth. And while our Cyber and Martech businesses declined year-over-year, the quarterly rate of decline decelerated compared with the first half of 2023. Again, our technology businesses and in particular, our B2B technology business, had a disproportionately negative impact on our overall performance. Excluding our technology vertical, Ziff Davis revenue would have increased by nearly 2% during the third quarter compared with our prior year. Adjusted EBITDA margins were up sequentially but down year-over-year, reflecting our continued commitment to investing in the headcount that we believe is required to pursue opportunities for growth. The year-over-year margin decline of approximately 180 basis points equals about $6 million, which, while reflecting a number of factors, is equivalent to our year-over-year increase in staff costs and investment in our growth initiatives. Slides 5 and 6 reflect performance summaries for our two primary sources of revenue: advertising and subscription. Slide 5 reflects the company's advertising revenue performance. Advertising revenue declined by 2% in Q3 2023 as compared with the prior year period. This represents a significant improvement as compared with the first half 2023 decline of 8%. This performance was also heavily impacted by the challenges within Tech. Excluding Tech, the year-over-year advertising revenue growth would have been more than 1%. Trailing 12-month advertising revenue declined by 7% compared with the prior year. As noted, a number of our non-tech businesses reflect Q3 growth, including Gaming and Health. Last quarter, we noted that we expected our second half advertising revenue to meaningfully improve as compared with the first half in Q3 is consistent with these expectations. Our net advertising revenue retention and annual trailing 12-month statistic measured quarterly was 89%, primarily reflecting the year-over-year decline in advertising revenue. As defined in the slide, during the third quarter, Ziff Davis served nearly 1,800 advertisers with an average quarterly revenue per advertiser of more than $100,000. These metrics reflect a slightly more consolidated set of advertisers as compared with the prior year period with a higher average revenue contribution per advertiser. Slide 6 depicts our subscription revenue performance. Q3 2023 subscription revenue grew 1% as compared with the prior year period and 3% during the last 12 months. The table on the bottom of Slide 6 includes subscription metrics for the last seven quarters. We had more than 3.2 million subscribers in Q3 2023, reflecting a modest sequential increase. There were sequential gains within Humble Bundle and Lose It! offset in part by a modest reduction in cybersecurity subscribers. Our Q3 2023 average quarterly revenue per subscriber was $44.84, again, a modest sequential increase. Churn also declined sequentially from 3.51% to 3.22%. The company's Q3 2023 other revenues increased approximately 7% year-over-year, primarily reflecting higher revenue from Humble Bundle publishing, DailyOM and Ekahau Sidekick sales. Slide 7 provides quarterly organic and total revenue growth rates for the last 11 quarters. Revenues from businesses owned for at least a full 12 months are included in organic revenue, while acquired revenue relates to businesses we've owned for less than 12 months. Third quarter 2023 organic revenue was flat and as expected reflected a significant improvement as compared with the 6% organic decline during the first half of 2023. Turning to our balance sheet, please refer to Slide 8. As of the end of Q3 2023, we had $661 million of cash and cash equivalents and $170 million of short- and long-term investments. We also have significant leverage capacity both on a gross and net leverage basis. Our increase in long-term investments reflects our recent investment in Xyla, which as discussed on our second quarter earnings call occurred early in the third quarter. During the quarter, we repurchased 605,000 shares of our common stock for a cost of approximately $41 million. This increased our year-to-date stock repurchases to nearly 1.6 million shares. We have approximately 4.7 million remaining shares authorized under our stock repurchase program, and we will continue to be opportunistic with regards to future stock repurchases. Our third quarter net leverage ratios reflect our recent stock repurchase activity. As of the end of the third quarter, gross leverage was 2.1 times trailing 12 months adjusted EBITDA, and our net leverage was 0.7 times and 0.4 times, including the value of our financial investments. We did not have any acquisitions during the third quarter. Still, we remain very active in sourcing and evaluating transactions and sense that the gap between buyer and seller expectations in the current M&A environment may well be on a path to narrowing. Earlier this year, we shared that we were exploring strategic alternatives for our B2B business. We engaged in active dialogue with numerous third parties that ultimately determined not to pursue a transaction with any of those parties at this time. As we discussed on our prior call, portfolio rationalization is an important and healthy exercise for any company; not all announced pursuits result in a transaction. We appreciate the contributions of so many of our colleagues during this exploration. Going forward, we will continue to work to align B2B's activities and priorities to maximize its potential. Turning to Slide 10. We are reaffirming the fiscal year 2023 guidance range that we originally presented in February 2023, and as our Q3 results largely reflect the second half 2023 economic stabilization that we were hoping for. Of course, as noted, certain of our businesses continue to be challenged by the macroeconomic environment as well as industry-specific factors, including our technology business and our game publishing business. We currently expect our full-year revenue to be between the low and midpoint of our guidance range, with adjusted EBITDA and adjusted diluted EPS closer to the bottom end of our guidance range. This reflects the fact that certain of our businesses typically exhibit fourth quarter seasonal strength and that we are still cautiously optimistic that the macro environment will remain stable for the balance of 2023. Following our business outlook slides, are certain supplemental materials, including reconciliation statements for the various non-GAAP measures to their nearest GAAP equivalent. This section includes a reconciliation on Slide 14 that reflects free cash flow. Year-to-date 2023 free cash flow was approximately $145 million. Changes in working capital negatively impacted year-to-date free cash flow in 2023 as compared with 2022 when the change in working capital contributed to free cash flow. We continue to work to return to our normal cadence of working capital. Overall, we are pleased with our Q3 2023 results. Our businesses are focused on a strong finish for 2023, and we are pleased with the revenue stabilization we saw this quarter as we begin to plan for 2024.

Operator, Operator

The first question today is from Shweta Khajuria at Evercore.

Shweta Khajuria, Analyst

I've got two questions, please. One for Vivek and one for Bret. So the first one, Vivek, could you please talk about general ad demand trends that you saw through the third quarter and then the fourth quarter so far as the quarters progressed? And then did you see any impact from the geopolitical issues going on starting in October? And then a question for Bret is on M&A. Vivek talked about the M&A environment. It seems like there's not a lot of change. But at a high level, could you please remind us some of the opportunities and verticals that you are thinking about or could be incremental to the Ziff Davis portfolio?

Vivek Shah, CEO

Thank you, Shweta. So I'll start with your question around the advertising market and some of the trends that we're seeing. So again, I think it's always helpful to unpack this by category. And so our single largest category, as you know, about 40-plus percent of our overall advertising business is health and wellness. And that continues to be very strong for the reasons I outlined earlier in the call. So we feel very bullish about where the pharma ad market is in particular, and where our assets and how we're positioned within that market near and long term. The second biggest vertical is our retail and shopping vertical, which again, I think the challenges we have are not really macro there. It's really just some of the issues we've had with Offers.com, which is a much smaller of our shopping properties, but where we're really focused on some recovery. But RetailMeNot, it's holding up really nicely. And obviously, the all-important holiday season, which it's hard to answer now what we're going to see in the holiday shopping season, but we're cautiously optimistic. And then the next largest category is gaming. And again, I think gaming has been an area of strength for us from an advertising point of view. So I would say that of the four categories, the main categories we're in, we're feeling reasonably good about three of them. The tech category continues to be a challenge. It is, as I said, sort of a mid- to high-teens problem for us in Q3. It is narrowing from a decline point of view as we go through the year, and we anticipate it to narrow into Q4, but that's going to continue to be a headwind. But as I've said in the past, I view that as largely cyclical, and I think it's not uncommon from the other media and advertising players who have large concentrations of tech advertising.

Bret Richter, CFO

Thanks for the question, Shweta. I think I'd answer it in two ways. I think the first way is sort of the macro view, which is, when we think about M&A across the company and our investable resources and liquidity to deploy, we're actually looking at all seven of our platforms for growth and recognizing the markets that they're in and the specific dynamics. Since I've been with the company, which is nearly two years, the concentration of our M&A has been in connectivity and health and wellness, which have been two of our strongest performing segments. So we could look at acquisitions like Lose It! and Emma's Diary in the U.K. for our health business. We've done several acquisitions in our connectivity business, including CellRebel last summer, where we picked up new data capabilities to round out our portfolio and make our overall proposition for our customers stronger. So to some degree, we play to our strengths and there are opportunities in the market for our strong businesses. But we've also fortified our gaming business, which has an incredible platform through IGN and we've supplemented that platform with acquisitions like Map Genie, which extends our game help and our ability to serve that vertical and customer base.

Vivek Shah, CEO

But surprisingly, if you look back, we haven't done a lot of M&A, obviously, in 2023. One of our two acquisitions was in our tech vertical. The reason is that we saw a platform there that we believe that, in the current weakened market protect, there was opportunity there to supplement its growth. And similarly, as we continue to see stability in our cyber and martech businesses, we can turn and start to look at those businesses to find opportunities for further M&A. So while immediately, I'll use the word, we're frustrated by the current environment to a degree, we know how to do these deals. I think that we are going to ultimately be rewarded for our patience and our pipeline continues to be robust, and it's just a matter of time before we start closing transactions.

Shweta Khajuria, Analyst

Vivek, did you see any impact from the Israel war on the advertising business?

Vivek Shah, CEO

No, no, no.

Operator, Operator

The next question is coming from Ross Sandler from Barclays.

Ross Sandler, Analyst

Vivek, two questions. I know it's early to be talking about guidance for next year, but maybe just the framework for thinking about how you guys can grow above or below the premium display market. Let's say the ad market grows 5% next year. What's the equation for your advertising business to be above or below that now that we're kind of lapping the tech issue and the Offers.com issue this year? So how do we think about that? And then the second question is, have you guys looked at how AI service is embedded within RetailMeNot and Everyday Health might improve kind of the user interface or any opportunity that you see to kind of infuse chatbots or other AI-like services in those websites? Any thoughts there?

Vivek Shah, CEO

Thank you, Ross. Let me begin with our outlook for 2024. It’s still early, but I see Q3 as a pivotal moment for us. We've experienced six consecutive quarters of low- to mid-single-digit organic declines, and we've managed to remain organically flat in Q3, with growth in the Digital Media segment. This is a positive indication of our direction for 2024. You’re also correct that we’ll benefit from year-over-year growth comparisons next year. We're optimistic about that. Furthermore, the technological challenges in advertising that we faced are starting to improve. For these reasons, we feel confident about our potential to grow at or above market levels. It’s important to consider the market from a category perspective rather than a broad one. Additionally, we maintain a balanced portfolio between display and performance marketing. Notably, 65% of our display business is in the health sector, and I view much of it as performance-oriented. The distinction we make between display and performance is based on our pricing strategy—whether we charge per ad served or based on clicks, actions, or bounties. This does not imply that display lacks performance; in fact, it's performance-driven. Overall, we feel positive about our prospects. On the AI question, I believe that AI can significantly enhance user interfaces. It goes beyond just content access, such as navigating complex game guides or intricate medical information, and even optimizing savings through platforms like RetailMeNot by combining cash back, coupon codes, and sales. Additionally, on the software side, improvements in user interfaces through AI will enhance engagement for our software businesses like Moz Pro, Campaigner, and VIPRE, allowing us to connect with customers in a more effective way.

Operator, Operator

The next question is coming from Shyam Patil from SIG.

Shyam Patil, Analyst

I have a couple of questions. First, regarding cookie deprecation starting next year in Google’s ecosystem, how are you planning for this and how prepared do you think the industry is? Additionally, for next year, do you anticipate the revenue seasonality to be similar to what we've seen in 2023, or do you expect it to be more back-end loaded? Can you discuss revenue seasonality for next year?

Vivek Shah, CEO

Shyam, so with respect to cookie deprecation, again, remember, our advertising model doesn't rely on or really involve the collection of cookies to then target people outside of our properties. And that's where that makes a lot of sense or you're using third-party cookies to inform the placement of advertising on your properties. That is not what we do. Our advertising is a function of context. We place advertising based on the contextual relevance. When we do use data to further refine targeting on our own properties, it's our own data set. So in that sense, none of what's happening with cookie deprecation has an impact or effect on what we do. You might consider that there could be an influence on others in the advertising market, leading contextual targeting to regain its significance. If that occurs, it would be beneficial for us. Additionally, our performance marketing focuses on driving clicks, conversions, leads, and other activities from our platforms directly to other platforms. Importantly, we have excelled in building a comprehensive user database, including email addresses. We likely possess one of the largest email databases in the market, which holds significant value as email is a persistent identifier that can be employed in various ways to engage customers, whether via email or through other platforms. Therefore, while the cookie deprecation issue does not impact us, it is crucial to understand that we view ourselves as database marketers; we simply operate within our own closed ecosystem. On the question around quarters, if 2024 is too early to talk about, quarters are probably really too early to talk about. And so probably wait another quarter to really get into that. But look, the seasonality is a known seasonality. You know it. Q4 is always going to be heavy. Q1 is always our lightest quarter, and the middle quarters are kind of in between. And so it's going to resemble that, I think, again, too.

Operator, Operator

The next question is coming from Cory Carpenter from JPMorgan.

Cory Carpenter, Analyst

I have two questions about AI. I wanted to explore the 20% of keywords prompting AI responses that you mentioned during the call. First, I’m curious what you discovered regarding which of your verticals or properties were directed to the AI experience and which were not, as well as any insights gained from that. Secondly, do you believe this 20% figure is potentially low? Is this a characteristic of Ziff Davis or is it consistent across the industry?

Vivek Shah, CEO

Yes, great questions, Cory. And so I'm glad you asked about this because I did think and find it to be a very interesting analysis. So remember, last quarter, the analysis was, well, Bing is the only at-scale generative search product in the marketplace, how is it going for us? And the analysis said, it's going really well. And by the way, that's continued into this quarter. But then we wanted to dig in deeper and say, okay, but how often is the SERP, the search engine result page, how often is it actually infused by AI versus non-AI? And I think we were somewhat surprised at the low incidence and prevalence levels of that with respect to the keywords that matter to us. Now the next, and by the way, we did that from Google also because that we could see in Google SGE. The next analysis probably, Cory is, what you're asking, which is, is this dissimilar to other keyword categories and to other properties. And we haven't done that yet. So that's an interesting question. It's something we should analyze and understand. But at least with respect to us, the incidence levels were lower than expected and were consistent between Bing and Google, which I also found somewhat interesting. We examined the differences in clicks between pages with generative search and those with non-generative AI components. We found that the generative search actually yielded higher clicks. This aligns with my previous observations, though I would describe the results as consistent. It appears that the generative element could positively impact the click-through rate, though it's still early to draw definitive conclusions. Regarding Google SGE, we could not separate its reporting from that of standard Google, but with Bing, we can clearly attribute results to its specific experience. I’ve noted before that the concerns I hear seem exaggerated and overly simplistic, which is not the primary focus of our analysis. We aim to address these concerns as we present more data. Additionally, our subsidiary, Moz, a prominent SEO authority, confirms what I've shared, providing another valuable internal data point.

Operator, Operator

The next question is coming from Ygal Arounian from Citi.

Unidentified Analyst, Analyst

This is Max asking for Ygal. You mentioned investing more in headcount and growth initiatives for next year. Could you explain where you are focusing your investments and in what areas of the business you are hiring for these growth initiatives? Additionally, regarding Xyla, it seems like the partnership is progressing well with connectivity. What can you share about the first partnership in health and wellness, and how do you see that developing next year?

Bret Richter, CFO

Thank you for your question, Max. Our main point regarding our headcount spending is that we do not see 2023 as a year where maintaining our margin is essential, and we're not focused solely on achieving that last bit of profitability. Although we've experienced an improvement each quarter, the macro environment remains uncertain, particularly for some of our businesses. As Vivek mentioned, Q3 represents a turning point as we achieved flat organic growth, and we're determined to finish 2023 on a strong note. Throughout the year, we've invested in areas of our business where we see opportunities for growth, including health, connectivity, and gaming, despite the latter's dependence on market strength. We're willing to invest where we recognize potential. As we move towards the end of 2023, we acknowledge the need for talent in our dynamic business. We will continue to invest but will also identify areas for potential pullback when necessary, based on where opportunities arise.

Vivek Shah, CEO

And Max, just on your question on Xyla. I'm happy you picked up on the point, which is Xyla as a partner is helping us across the entire company, which has been really exciting. They've got a perspective, a skill set, a set of capabilities that are really helpful for us across all the various businesses and real concrete things are happening. With respect to health and wellness, nothing's been launched yet. We're hopeful that early part of next year, we'll start launching and rolling out products. We're very careful in health. And obviously, you've seen or know of the executive order; we have to be very careful in the health space with respect to whatever we do in AI. So we want to be measured, thoughtful, and deliberate. We're certainly, I think, on the front edge of this, but we have to be awfully careful in this space.

Operator, Operator

The next question is coming from Kunal Madhukar from UBS.

Unidentified Analyst, Analyst

This is Jason representing Kunal from UBS. I have a couple of questions. First, regarding capital allocation, you've been consistently buying back stock this year. What are your current capital allocation priorities, especially since you seem to be engaged in potential M&A opportunities as well? How do you plan to allocate your capital in the next six to nine months? Additionally, in terms of your long-term outlook, I understand you're focused on turning the business around for growth. What do you see as the main drivers that could enable you to grow more than mid-single digits organically? Which verticals do you identify as having the most attractive opportunities beyond M&A?

Bret Richter, CFO

Thank you for your question, Jason. I'm glad you're on the call. Our message regarding capital allocation has remained consistent. We focus on four key areas: maintaining a strong balance sheet is our top priority, which we continue to uphold. Our balance sheet provides us with significant flexibility and liquidity, and our capital allocation strategies rely on this health. We invest in three main areas: the business, mergers and acquisitions, and returns to shareholders. We believe we are providing the business with the necessary capital to explore its opportunities, and we approach this allocation thoughtfully. Inside our organization, there are discussions about how best to deploy that capital, but we strive to be prudent and strategic in supporting our businesses’ growth initiatives. We've shared how some of this capital was utilized this year. Moving on to M&A and shareholder returns, mainly through stock buybacks, we have also bought back certain debt securities over the past two years. We are currently prioritizing M&A, even though it has been challenging to finalize transactions in this market. However, we are complementing that effort with capital returns, especially through stock buybacks, and we have repurchased nearly 1.6 million shares this year. As we proceed, I expect these dynamics to remain, although the mix may evolve. Our goal is to deploy more capital through M&A, and I see that as a key expectation rather than just an ambition. We have been patient, and we possess the necessary capital and pipeline for potential transactions. The disparity between what buyers and sellers expect will narrow, leading to deal announcements, supplemented by stock buybacks as deemed appropriate for our overall strategy.

Operator, Operator

The next question is coming from Rishi Jaluria from RBC.

Rishi Jaluria, Analyst

I'll keep myself to one. I wanted to dig a little bit deeper into MozCon. One of the answers you brought up, kind of the data and usage there. Can you talk a little bit about momentum you're seeing within Moz because I got to say when I was recently at MozCon, was really impressed with some of the enterprise traction that you're getting there? And the opportunity both to continue to move Moz upmarket as well as the opportunity with Gen AI and Moz because I think there is a little bit of a misunderstanding that generative AI is going to completely replace SEO, and you and I know that's absolutely not true. But maybe expand a little bit on kind of your opportunity there with Gen AI.

Vivek Shah, CEO

Thank you, Rishi, and I'm glad. I appreciate the time and energy you've dedicated to attending MozCon. It's valuable to see our brands live, as it highlights their strengths, and we have many across various events. If anyone is interested in experiencing them firsthand, they should reach out, and we can assist. The attention generative AI has received actually positions Moz in a unique spot, as change and questions present opportunities. Moz and others in this field, along with a few strong competitors, will all benefit, leading to a rising tide effect. Additionally, Moz's broader martech portfolio and our email marketing assets represent a powerful combination, which we're very excited about. SEO and email marketing fundamentally revolve around using software tools and content to drive traffic, which differs from paid media. For small and medium-sized businesses, as well as enterprises, it's essential to focus on earned media before transitioning to paid media. The Moz Group is well-positioned to leverage earned media. Moreover, Moz serves as both a business and an internal resource for our company, consistently aiming to enhance earned media through various channels like search, social, and email. This makes Moz a strategic asset for us, aligning with our initial acquisition thesis that having the Moz scientists in-house would be beneficial.

Operator, Operator

And the next question is coming from Jon Tanwanteng from CJS Securities.

Jonathan Tanwanteng, Analyst

I wanted to clarify one issue quickly and then ask a follow-up. Vivek, were you surprised by the 20% AI-enabled search ratio being so low? Does this suggest that there’s potential for improvement as the AI feature expands to more search terms and the capacity is enhanced? Or does it mean that AI is already selecting the terms that will yield better results from the outset?

Vivek Shah, CEO

I think, Jon, not all queries produce AI-generated results. In my experience, I expected to see more of them, but that hasn't been the case. However, when AI is involved, it typically results in a higher click-through rate. I'm not saying one is good and another is bad; it’s simply a fact that the occurrence of AI in queries is less than I anticipated, while the click-through rate for AI is higher than for queries without it. We have our theories about why this is, and we're actively using our scientific method to explore causation and correlation. It's still early in this process. I believe the search operators are cautious about incorporating AI unless it enhances productivity and quality. In our analysis, it appears that the rate of AI injection is actually decreasing compared to earlier observations. I'm sure they are looking at where AI-driven queries lead to better click-through rates and considering the right success metrics. They likely spend a lot of time analyzing these factors. Our goal is to present data from our properties to provide a sense of scale and context.

Jonathan Tanwanteng, Analyst

Okay. Great. That's great color. And then just second, I wanted to ask about your pharma businesses. I was wondering how much of the momentum you're seeing there is related to these new weight-loss GLP-1 drugs? And second, is there a risk for other drugs to be disintermediated by that over time? And is that a net positive or net negative in your view? Or is it too early to tell?

Vivek Shah, CEO

Yes. I believe the GLP-1 category presents an exciting opportunity for us in two main ways. Firstly, it is likely to generate significant spending as competition for customers increases, which will benefit us. Secondly, I think it will boost our Lose It! business. Nutrition plays a crucial role alongside GLP-1s, and we want to avoid weight loss resulting from poor nutrition, which can lead to various other issues. There seems to be growing interest in using apps like Lose It! in conjunction with GLP-1 prescriptions to maintain proper nutrition and weight management. If someone stops taking GLP-1, they could quickly experience a rebound in weight. Changing behavior can lead to positive outcomes, and adherence to nutritional guidance is essential. So, it may appear counterintuitive to ask if Lose It! is necessary when using GLP-1, but the answer is yes. I believe the pharmaceutical industry also recognizes this, and there are interesting prospects for us to benefit from these new therapies, especially with a recent FDA approval. Overall, I see this as a positive opportunity for us.

Operator, Operator

There were no other questions in queue at this time. I would now like to hand the call back to Bret Richter for closing remarks.

Bret Richter, CFO

Great. Thank you very much, Paul. And of course, we appreciate all of you joining us today for our Q3 2023 earnings call. We'll continue to participate in conferences. We announced some upcoming ones are on our website. And as we work through the next couple of months and the winter, we'll continue to inform you of our participation. Thanks for joining us, and have a great day.

Operator, Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.