August 13, 2024

Two Trends We Saw In This Earnings Season

Thank you to everyone who shared their congrats on AMO hitting five years. Hearing from so many readers is always incredible, so thank you. Before we jump in, don’t forget that we’re hosting a webinar on Wednesday to chat about how Christian Science Monitor has boosted reader engagement through smart content recommendations along with a number of various tactics.

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Quarterly season is here

For the past couple of weeks, we’ve been covering various public companies’ quarterly financials, both from a financial perspective, but also to see if there are any trends worth exploring. There have been a couple of very interesting things that have come from these earnings calls.

Is bid-ask spread narrowing in M&A?

In many of the conversations I have with operators, there is a spread between what buyers are willing to pay and what sellers are willing to sell for. However, as Vivek Shah, CEO of Ziff Davis, said on the earnings call, that’s starting to close.

I think the key point is that the bid-ask spread has narrowed and it’s come closer to where we were. And so I think that’s a key thing to understand. These are deals we are very excited to do at these particular valuations.

And so to me, I believe it’s a valuation statement more than a sort of sourcing and volume of deal statement. Because the sourcing has always been there, right? It’s not like we were not having conversations. It just felt like, wow, there’s a football field between where we are and they are, and that’s going to be hard and not a productive dialogue.

This comes on the news that Ziff Davis had acquired CNET for over $100 million after Red Ventures had paid $500 million only four years ago. For Red Ventures to take what is likely a loss on this is an indication that the spread is closing. It’s also an indication that debt—especially variable debt—can be problematic. Red is reported to have made the CNET acquisition using debt, which in 2020 was rather cheap, but is now obviously much higher.

And look, that big-ask spread has been a problem for quite some time now. When I spoke with a few bankers about this a couple of months ago, an anonymous one said:

Demand outstripped supply (of high-quality businesses) over the last 12-18 months, and so competition increased. This has driven up valuations for those high-quality businesses, but middle-of-the-road assets simply didn’t trade. Thus seller expectations have risen as a result of seeing fewer (yet higher priced) deals plus also those PE backed who were invested in 2020/2021 have intrinsically higher expectations baked in due to entry multiples.

Only the crème de la crème can sell. CNET is one of the best in its niche, so it can sell. But are we about to see the floodgates open? Shah had thoughts there too:

The second thing we’re seeing, and this has been widely, I think, reported, is there’s a good degree of LP pressure on private equity firms to return capital. And I think as that return of capital pressure mounts, I think we’re going to start to see, and we are seeing, really interesting opportunities that emerge from that.

In looking at the AMO Private Equity database, there are 24 media and events companies that were acquired by private equity prior to 2020. If we understand private equity fund cycles, at what point do the limited partners start demanding a return from PE?

The farther we get from the very high valuation days of 2021/2022, the more likely these private equity owners are going to soften their expectations. And when that happens, other buyers will appear. Ziff Davis is waiting for more opportunities to deploy its capital. We’ve seen Informa acquire aggressively where it makes sense. WTWH hasn’t slowed down its M&A moves the last year. At some point, the market will regulate.

Speaking of M&A and media…

A key panel at the AMO Summit this year is the State of Media M&A. The goal here is to bring together a leading media operator, a private equity investor, and a banker to share what they’re seeing and hearing. And we’ve got a great panel for you this year.

Paul Miller is the CEO of Questex and recently went through an M&A process earlier this year and has thoughts on the process, what he learned, etc. Second, now that he and his private equity owner, MidOcean, have agreed to double down, they’re in the market to buy. But what are they seeing?

Robert Gray is an operating partner at EagleTree, the owner of ALM, Arc, and The Channel Company. He brings insights into what private equity is looking for right now, where funds like EagleTree want to play, and more.

Daniel Pitchford is the CEO of Collingwood, an independent advisor that helps media companies scale and, when the time comes, sell. As a banker, he has first-hand info into what the buy side and sell side are thinking since he talks to them all day every day.

These three gentlemen will give us a clear understanding of the state of media M&A right now and heading into 2025. Founders and executives that are looking at either acquiring or selling, you won’t want to miss this discussion.

Buy your ticket today.

Now, let’s get back to it.

AI and traffic

With the rise of AI in search, there has been concern amongst publishers that we’d see fewer people coming to our sites. Why would someone click if they could get the answer right in the search experience?

It’s still early days, but the impact of Google’s AI Overview has, so far, been pretty limited.

First, we’ve got IAC, which is the owner of Dotdash Meredith. In its Q2 2024 shareholder letter, IAC wrote:

Google began to roll out AI Overviews in mid-May, the impact on our traffic has been negligible. Referrals from Google search queries produce less than half of our traffic, and based on our analysis, AI-generated answers are being served on roughly 15% of searches across our categories, with the highest frequency in Health, Technology, and Finance. Click-through rate differentials between pages with and without AI Overviews are minor so far, but it is still early and products change quickly, so the past isn’t prologue.

If we turn to Ziff Davis, which also reported its earnings recently, Vivek Shah, CEO, had a lot to say about this as well. On the earnings call, he said:

I know there continues to be investor interest in the impacts of AI on search. Google rolled out AI Overviews on May 14, 2024. Prior to that, it was referred to as the Search Generative Experience, SGE, which was only available in Google Labs. Now that the AI Overview experience is in full circulation, we wanted to revisit the analysis we did in Q3 of 2023 relating to the frequency of AI overviews being presented to users.

We analyzed thousands of queries across our key domains that generate the lion’s share of our organic search referrals and the percentage of times that an AI Overview appeared. It fell to 8%, meaning 92% of the time the search engine results page did not include an AI Overview for the queries that matter to us most. Analysis by other industry experts indicate a similar percentage of overall searches resulting in AI Overviews.

At this point, we don’t see it as a significant change to the search experience. And it’s also important to remember that we hypothesize, and Google recently confirmed, that links and AI Overviews get a higher click-through than traditional web listing links.

The two publishers don’t have much overlap in coverage areas, so it’s a good indication of the potential impact across a number of consumer categories.

The last sentence that I bolded in Shah’s quote is worth exploring in more depth. If it does result in a higher click-through rate, we’ll see publishers investing more in trying to get their site listed there. I do not know what AI-specific SEO looks like, but I suspect it is similar to a lot of the structured data schema work that publishers did when the smart snippets came out.

But it begs the question: does it really result in a higher click-through rate?

Back in May, analysis was conducted by Kevin Indig at Growth Memo. He found that there is a negative correlation between the appearance of an AI overview and clickthrough rate for a cited publication:

I found a strong negative correlation of -0.61 between cited URLs and traffic change, indicating that AIO citations send fewer clicks to cited URLs. In this case, the domain received -8.9% fewer clicks when cited in AIOs.

HOWEVER, results can vary by user intent. Most URLs that lost clicks, most likely due to AIOs, targeted questions like “how to get viagra without prescription”. AIOs seem comparable to Featured Snippets, which can send more or fewer clicks based on whether the keyword is shallow or complex.

It’s hard to say what’s going to happen as AI overviews become more prominent, but, at least so far, Dotdash Meredith and Ziff Davis are not seeing much impact from the roll out.

An interesting question that Shah poses is the impact of new entrants to the space. ChatGPT is rolling out its search product and Perplexity has been acting as a search engine summarizer for some time now.

I believe the more interesting aspect of AI’s impact on search is whether new AI-based search competitors can challenge Google’s dominance. Google owns 90% of the search market, and over 60% of referrals to the Open Web derive from Google searches. With the launch of Perplexity and the beta launch of SearchGPT, we have search engines that employ AI to generate results. The thousands of engineers once required to operate a search engine may be obviated with AI.

Will these cleave off some market share from Google? Could they become reliable traffic drivers or will they hoard the traffic? Only time will tell.

These are two of the many trends that have emerged in this earnings season. We’ve analyzed a number of these companies, all available for AMO Pro members.

This analysis is included in your AMO Pro subscription. Not signed up yet? Do so today.

Thanks so much for reading today’s AMO. If you have thoughts, hit reply. I’d love to hear from you. Have a great rest of your week!