VerticalScope Holdings Inc. (FORA) Earnings Call Transcript & Summary

Welcome, everyone, and thank you for joining the VerticalScope Holdings, Inc. Q2 2026 Earnings Call. My name is Gabrielle, and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host, Diane Yu, Chief Legal Officer at VerticalScope, Inc. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to VerticalScope Holdings' Second Quarter 2026 Earnings Call. I'm joined by Chris Goodridge, our Chief Executive Officer; and Vince Bellissimo, our Chief Financial Officer. We'll begin with commentary on the quarter before opening the floor to questions. Before we begin, I'd like to remind everyone that today's presentation contains forward-looking information that involves known and unknown risks and uncertainties and other factors that could cause actual events to differ materially from current expectations. These statements should not be read as assurances of future performance or results. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from those implied by such statements. A more complete discussion of the risks and uncertainties facing the company appears in the company's management discussion and analysis for the 3- and 6-month period ended June 30, 2026, which is available under the company's profile on SEDAR+ as well as on the company's website. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this presentation. The company disclaims any intention or obligation, except to the extent required by law, to update and revise any forward-looking statements as a result of new information, future events or for any other reason. Our discussion today will include references to adjusted financial measures, including adjusted EBITDA, free cash flow, free cash flow conversion and MAU, which are non-IFRS measures. All references to currency in this presentation shall refer to USD unless otherwise specified. Now I will turn the call over to Chris Goodridge, CEO of VerticalScope. Chris?

Thanks, Diane, and good morning, everyone, and thanks for joining us today. Q2 is the quarter where the work of the past year started to show up in the numbers. Revenue trends are improving, adjusted EBITDA is growing and margins are expanding. And we're producing these results while stepping up investment in the AI initiatives that will be foundational to the future of our growth. Our strategy is unchanged and still anchored in 4 areas: Growing direct connections with our users and our advertisers, diversifying our revenue sources, AI-driven product growth and using our liquidity and cash generation to make disciplined investments that accelerate growth. Let me start with audience. MAU averaged 103 million in the quarter, up 14% year-over-year. That's our first year-over-year growth since the search landscape shifted last year. Most of that growth came from AudienceEngine, a paid traffic source we're still early on in developing, plus a smaller increase from direct users. Google search traffic has been stable for us in recent months but is still down significantly from prior year. We've been encouraged by recent product changes Google has made to attempt to surface more links to authentic firsthand discussions like those found in our communities, but these aren't yet contributing to growth. On the acquired audience side, this audience is profitable and right now is the main driver of MAU growth. But so far, it monetizes at a lower rate than organic search, which is the explanation for lower year-over-year ARPU. We're in the early stages of building a new marketing capability for the business to open up new user channels and new revenue sources as the landscape for content discovery on the Internet continues to change. Turning to revenue. We came in at $13.8 million, up 20% sequentially and down 5% year-over-year. Programmatic revenue has been the pressure point for several quarters. And in Q2, the year-over-year decline narrowed to 8% from down 34% in Q1. Getting that gap into single digits is the single most important trend line in the quarter and reflects both improving CPM and impression trends and the ramp in AudienceEngine. Direct advertising was flat in the quarter and is up 3% in the first half. Q2 results were influenced by timing of campaigns launching. And as of the end of July, direct bookings for the year were pacing 7% ahead of prior year. In July, we also onboarded 2 new insurance customers as that category continues to show year-over-year improvements. Turning to commerce. Although commerce revenue was down 5% overall due to lower marketplace revenue from Ritual, affiliate commerce revenue on FORA grew 13% year-over-year, driven by our AI initiatives, which is now approaching $1 million annual run rate, 2x higher than when we last reported. And our product road map has several paths to continue to scale this source up. Adjusted EBITDA was $4.5 million, up 4% year-over-year, and margin expanded 270 basis points to 32%. As I mentioned at the top, we're benefiting from improved revenue trends and our strong cost discipline while we fund our AI initiatives. I'll turn to those initiatives now. We said at the start of the year that our goal is to become an AI-native company. And while we're still very early in this transformation, this mindset is driving change across our teams as we redefine how our business is run. Our work with AltaML is a key accelerant to this change. AltaML's forward deployed engineers are helping us unlock new automated workflows across community, content and sales operations, but this work has also catalyzed a new wave of AI-focused activity across our broader business. AI is making our community stronger by improving content moderation and member engagement, increasing the speed with which we can route questions from users to the best-positioned members to respond, resulting in more engaging threads and faster answers and by powering new multi-community experiences to unlock broader network effects across our communities and provide more opportunity for member engagement. AI is also driving revenue improvements, including programmatic and commerce. It's helping make our advertising operations more efficient and effective by improving quality and speed of proposals and streamlining campaign management, leading to better outcomes for our ad partners. And it's making our business more efficient across every department. Taken together, these efforts are making us faster, leaner and more valuable to our members and our partners, and we're just getting started. Turning to AI licensing. As I mentioned previously, we're taking a patient approach to developing this line of business, but that also we're prepared to take necessary legal steps to protect our content and intellectual property against unauthorized use. These are complementary paths, where we can reach fair commercial terms, we will. Where we cannot, we will protect our intellectual property. We're making real progress down both paths. First, we're in advanced discussions with a major technology company on a new deal that will compensate us for contribution to AI-generated responses. That deal isn't done yet, but we're getting close, and we'll provide more information once it's signed. Down the litigation path, in May, we filed a statement of claim in Ontario Superior Court against OpenAI. And as that's now a matter before the courts, I'm not in a position to offer more information. As that case develops, we'll provide periodic updates. Beyond these, we continue to have productive discussions with other potential partners and other avenues like TollBit and the FORA API are sourcing smaller incremental opportunities. Overall, the market is taking shape. A quick word on capital allocation. We repaid $12 million on our revolving credit facility in the quarter, bringing gross debt to $32 million, and we ended the quarter with $75.3 million in total liquidity. In early July, we made a $6.1 million secured debt investment in AltaML to fund the continued growth. The investment is interest-bearing and matures in 18 months with an option for AltaML to extend that to 30 months. We also have the option for equity participation in AltaML's next funding round, providing us with exposure to a growing AI business. But overall, our capital priorities have not changed: Fund our highest conviction AI investments, keep reducing debt and maintain optionality to act on opportunities that meaningfully accelerate our strategy. With that, I'll pass it over to Vince to walk through the numbers in more detail. Vince?

Thanks, Chris, and good morning, everyone. I appreciate you joining the call today. Last quarter, I noted that Q1 represented both the seasonal and structural low for the year and that as comparables cleaned up, improved performance would flow directly to our bottom line. Q2 played out the way we described it. Revenue improved sharply on a sequential basis. Adjusted EBITDA returned to year-over-year growth, margins expanded, and we did all of that while continuing to fund the AI initiatives Chris just walked you through. Q1 was the trough we said it would be. We believe Q2 is the turn, and most importantly, we turned it using drivers that we manage. Before I get into the details, I want to reiterate the framework we are managing to through this transition because it provides the context for everything that follows. This business has consistently generated strong free cash flow, including through this transition. We have reinvested the cash into initiatives we control, and those investments will now help carry us back to growth. The cash engine itself is not new. It's the most consistent part of our business, the part with the longest track record. What is new is where that capital is being deployed. We are investing directly in controlling our own distribution, primarily through AudienceEngine. And through strategic investments, we are growing an AI capability that will allow us to drive growth and efficiency throughout the business. Q2 is what the strategy looks like in motion. With that, let me take you through the results. Revenue was $13.8 million, down 5% year-over-year and up 20% sequentially, well ahead of our typical first to second quarter seasonal step-up. Digital advertising revenue was $10.9 million, down 5%. Chris covered the revenue drivers, so I'll add the piece that matters most from my seat. The narrowing of the programmatic decline marks the completion of our lapping of pre-algorithmic traffic volumes and programmatic remains a meaningful and highly profitable part of our business. E-commerce revenue was $2.9 million in the quarter and grew 7% through the first half, reflecting the full 6 months of Ritual against a partial period last year. The affiliate commerce line Chris referenced grew 13% and total e-commerce, excluding Ritual, grew 3% year-over-year in the quarter. AI-driven in-thread commerce experiences continue to scale and the anticipated declines at Ritual were absorbed, while the property continued to contribute positively to adjusted EBITDA. Turning to monetization. Total ARPU in the quarter was $0.045, down 16% year-over-year. Chris gave you the mix reason: Acquired traffic monetizes at a lower reported rate. There is also a presentation reason, and it's that one I want to spend a moment on because the optics and economics tell different stories. Visitors acquired through AudienceEngine are included in our reported MAU at full headcount, while the associated revenue is recognized net of traffic acquisition costs. So as the program scales, MAU grows on a gross basis, while revenue arrives on a net basis and reported ARPU compresses mechanically. That mix and presentation dynamic is the substance of the ARPU decline, but our core audience monetizes the way it always has. We manage this program for contribution, not for the MAU headline, with every campaign managed against the return threshold, and the program contributed incremental revenue, adjusted EBITDA and free cash flow in the quarter. One more point on AudienceEngine because it frames how we think about every MAU we report. Whatever the composition of our traffic, organic, direct or acquired, the platform's job is the same: Convert visitors into engaged users and monetize that engagement better over time. AudienceEngine today is optimized for yield. The next phase is engagement. That is where the compounding lives. Turning to our operating performance. Net loss narrowed to $800,000 from $1.8 million in the prior year. The improvement was driven by ongoing reductions in our cost base, with total operating expenses declining 13% year-over-year, including an 18% decline in wages and consulting and a 14% decline in platform and technology. The savings in these numbers come from the proactive actions we took towards headcount, SaaS and hosting and the $1.5 million in annualized savings we announced last quarter is now fully in the run rate, and we are redeploying those savings into AI CapEx. The AltaML-driven efficiencies are not yet in these results. With the first phase of applied AI workflows just being deployed into production, we believe the efficiency gains are ahead of us. Consistent with the approximate $2 million in AI-focused capital investments we outlined last quarter, $400,000 of that was invested in Q2, and we remain on track for the full year program. And there's a cultural layer here that does not show up as a line item. The reason we can continue to optimize our cost base is because our teams continue to embrace these tools. Off-the-shelf chatbots, agents, coding systems have helped teams cut the time spent on busy work, automating reports, building connectors and managing inboxes, to name a few. And we are using AI to interrogate our own cost base, eliminating duplicate software and optimizing pricing for renewals. Our proactive actions deliver the savings to fund our AI initiatives. The growing adoption of AI across the company is what makes them stick. As Chris noted, adjusted EBITDA was $4.5 million at a 33% adjusted EBITDA margin, our first quarter of year-over-year growth since Q4 of 2024. For the first half, adjusted EBITDA was $6.8 million at a 27% adjusted EBITDA margin. Consistent with the seasonal pattern we have described on prior calls, margins build from the Q1 low through the year towards the Q4 peak. Our expectations on margins have not changed. We continue to target 30%-plus margins on a full year basis. In the quarter, we converted adjusted EBITDA to free cash flow at a rate of 81%, which included the $400,000 step-up in AI-related capital spending. Through the first half, our free cash flow conversion was 83%, maintaining these conversion mechanics while funding an AI investment program speaks to the durability of our model. Operating cash flow was approximately $400,000 in the quarter against $6.4 million in the prior year. And I want to take a moment to walk through the headline comparison carefully. There are 2 key factors at play here. First, as AudienceEngine scaled through the quarter, trade receivables grew from $20 million to about $13 million -- grew to $20 million from about $13 million at the end of Q1, with a meaningful offset in payables for traffic acquisition costs. Those receivables sit with large, well-established platform partners that settle on a short, consistent payment cycle, and our collection experience has not changed. That growth in timing is what drove the net investment in working capital for the period. Second, the prior year quarter included a onetime working capital benefit relating to the Ritual acquisition, driven by assumed short-term liabilities related to the platform's loyalty program. As we lap this initial quarter of scale from AudienceEngine, we expect the swings in working capital to normalize. Chris covered the capital allocation actions, so I'll add the financial frame. We exited the quarter with a total net leverage ratio of 1.24x as defined by our credit agreement and $68 million of undrawn capacity on the revolver. In July, we drew $6 million on the revolver to fund the AltaML investment at a return spread that is above our borrowing cost, bringing the total outstanding balance on our revolver to $38 million and moving our net leverage position a quarter turn to approximately 1.5x as defined by our credit agreement. Our focus has not changed. Free cash flow will continue to be directed towards strategic AI investments and strengthening our balance sheet. We expect to work off this incremental turn quickly and continue on a path toward low 1x leverage by year-end. As we move into the second half of the year, the difficult comparables are behind us, and the building blocks are in place. Our traffic initiatives, our direct sales relationships and an AI program that is fully funded by our cost discipline. Each of those is a lever we manage, and we expect results to continue to improve as the year progresses, complemented by work with AltaML driving further operating leverage and long-term value for our shareholders and employees. We are now making the transition from lapping to leveraging. And with that, I'll pass it back to Chris for some closing remarks.

Thanks a lot, Vince. We'll open it up now to questions.

[Operator Instructions] Our first question today is from Drew McReynolds from RBC Capital Markets.

Just a couple for me. First on AudienceEngine. I think, Vince, in your remarks, you talked about what appears to be a learning curve here and you've focused on yield moving to engagement. Just obviously, a good boost to traffic overall. But from a managing the business and changes to the model going forward, what does that kind of yield to engagement transition look like?

Yes. Thanks, Drew. Thanks for the question. You're right. Right now, we are managing totally to yield. It is a different approach to SEO. These are paid sources of traffic that require a significant amount of capital to be cycled through the business. The good thing is that cycle happens with very large and proven partners. So really, from a working capital perspective, outside of that initial investment we made, it's really not much of an ongoing strain in the business. The solution right now basically funds itself. The transition goes from now building this infrastructure in an ROI-positive way to now pointing this audience towards products, initiatives, apps that live directly on our platform. That's where the strategy comes in, and that's where some initial investment is required, sort of aligning teams, aligning internal focus and CapEx from that perspective towards those builds. So you're transitioning from a world where you harness the solution and the solution's short-term returns to build the infrastructure. And now you're going to reinvest that yield into driving product and app-type initiatives on the platform -- on our existing platform.

Okay. Yes. No, that makes sense. I don't know if this is for you, Chris or Vince. Just big picture here, we're kind of 3 years plus or minus into just kind of consumer generative AI. I'm wondering across your major communities, again, at a 30,000-foot level, just how consumer behavior of the members are evolving or changing? What are their expectations with respect to AI embedded across the communities and the content that actually gets generated, how is that evolving? Just wondering if there's any kind of major changes there for the moment or still early days?

Sure. Thanks a lot for the question. It's a great one. It's one we think a lot about. For sure that you see with consumer behavior when people are looking for basic answers to basic questions, a lot of that is flowing to those AI experiences, right? There's no question about it. It started with ChatGPT, and then Google has evolved its products, its core search product significantly to do the exact same thing, right? And that really is the type of traffic that we had before that we really don't have now within -- from Google as a source. But what the core community users are really looking for are those -- and what isn't satisfied by the AI experience is tapping into those experiences of other users. When people come to our communities now, including for the first time, they're seeking out someone who's actually had the problem they have and is actually someone who they can engage with to solve that problem. AI can change how people get basic information, but it can't replace those types of personal connections. And so the way we see our job and the way we see the evolution of the forum experience is to provide all the tools possible for our users to unlock those connections, right? Because I think that's the enduring value that exists within platforms like ours. It's fostering those human connections, making those human experiences more available to others. And AI really within the experience is a complement to that. How do you make sure that the right person, the person who's best placed to answer a question, is the question is routed to that person. How do you reengage with community members? How do you create network effects more broadly across our communities? So AI in the background can help with all those things. But in my mind, it's an accelerant of human behavior. It's not a replacement. So that's how we think about it. All the other strategies we have to try to find audience, bring audience in, we're going to continue to explore those and work that. But the core asset and where we think the AI investments can really pay off is unlocking and continuing to support that kind of core community value proposition.

Yes. Yes. Understood, Chris, that's well said. Maybe my last one, just on the e-commerce side. I know you walked through a couple of things in your prepared remarks. Just what should we kind of expect here in the back half of 2026 and into 2027? Are there other initiatives underneath the hood that kind of make a notable impact on revenue growth? I know ex-Ritual, I think it was up 3% in Q2. Just kind of level-setting expectations here in that line item.

Yes. On e-commerce, Drew, Chris highlighted the run rate on some of the AI initiatives on the forum that is driving a meaningful annual return right now. So it's at a run rate of $1 million. We expect that to continue to grow. The teams are working on other ways to help surface products within the communities that are relevant and drive additional transaction revenue. We also think what we've built with AudienceEngine could be an unlock for e-commerce. We've proven right now with the infrastructure that, from a yield perspective, we're able to target a user and bring a user to something that's relevant to them. So something that they're searching for. That's a pretty powerful skill, especially when you think of the amount of commerce and commerce-type conversations and transactions that are being discussed on our platform. So as that infrastructure starts to grow, as we start to work towards turning yield into engagement, we think e-commerce is going to be one of the benefactors of that for sure.

Our next question is from Aravinda Galappatthige from Canaccord.

Just to start off with a housekeeping question. I have some questions on AudienceEngine, but I just wanted to get this out of the way. Vince, on the AltaML arrangement, can you just walk us again through how that plays out through the financials over the next couple of quarters, the fees and the investment just for modeling purposes. I just wanted to confirm.

Are you referring to the sale or to the investment?

The investment.

I think -- okay. So the investment itself is just going to appear in our financials as a note -- a note receivable with an applied coupon rate. The warrant under IFRS will be valued at the time in July and then carry forward and revalue every quarter. TBD on what that fair market valuation is; we'll work with our auditors on that. With regards to the engagement, as we said, that's the ongoing work being done on the platform, the applied AI solutions that are being deployed. It's got a base fee of $1.5 million. And right now, that's being capitalized going through our IDS on a monthly basis at about $300,000 a month. That will carry through to mid-October. So between now and then, you'll see that $1.5 million materialize as an addition to CapEx. And then subsequent to that, there's a $300,000 approximately portion of that engagement that's based on performance that is going to be defined once the engagement is done. That's measured on a couple of factors, mostly efficiencies, and that's something that we'll work with the AltaML team on determining. So the $1.5 million base will flow through CapEx, and that $300,000 will as well once it's determined.

Okay. That's helpful. And then sort of coming to AudienceEngine, maybe just a couple of questions there. First of all, are you able to give us a sense of what the P&L is on that as it stands today? And then is there a prospect of sort of including this into your direct sales efforts as well? Not sure what the complications of that would be, but maybe just would be interested in your thoughts there.

I can take the second one, Aravinda, and then I'll let Vince comment on the P&L. So for sure, we think there's opportunity. I think it's finding the types of solutions that the direct clients want to feed into. And so you can see it complementing lead generation, for example, in certain categories, performance-type marketing initiatives where there can be some really nice overlap. So the teams are starting to think about those opportunities. We started with programmatic because it was the kind of the, I guess, the easiest path for us to monetize, and it's where we have had a lot of historical expertise. But we do think as we get better with this, we start to understand the value of the audiences better that we can certainly support direct sales as well.