VerticalScope Holdings Inc. (7E9.F) Earnings Call Transcript & Summary

Hello, everyone, and a warm welcome to the VerticalScope Holdings Q2 2025 Earnings Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions] I would now like to hand the call over to Diane Yu, Chief Legal Officer, to begin. Please go ahead, Diane.

Thank you, operator. Good morning, everyone, and welcome to VerticalScope Holdings Second Quarter 2025 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, 2025. 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 thanks, everyone, for joining us bright and early this morning. I'm excited to be here for my first call as CEO of VerticalScope. After 5 years as COO, I'm grateful for the trust that Rob and the Board have placed in me at such a pivotal time. Rob has been an incredible leader through many chapters of this company's journey, and I'm thrilled he'll continue to be deeply involved as Chair of the Board. We've also strengthened our leadership bench with Ezra Menaged stepping into the COO role and Meir Welcher becoming our CTO. Both joined through our Hometalk acquisition in 2021 and both have a track record of innovation and strong execution. Their leadership, along with our experienced senior team, positions us very well for the road ahead. Now there's no question the broader Internet is going through a period of rapid change, especially in content discovery. Google's AI overviews and evolving search algorithms have shifted traffic patterns across the Open Web. Over the past couple of years, forms like ours and Reddit benefited from Google Rewarding authentic human content. More recently, Zero-Click search has become a bigger factor, reducing the number of visitors referred from search results to the broader web. Traffic patterns are changing, and while it creates short-term pressure on total MAUs, it also opens a significant long-term opportunity. In an AI-first discovery world, platforms with authentic voices, deep expertise and strong user connections will stand out. We believe forms like ours, along with Reddit and YouTube will increasingly become a key step before consumers make decisions, creating higher-value user interactions and stronger monetization potential. So with this backdrop, our strategy is simple: build stronger direct relationships with our users, make their experience richer and more useful with AI and turn that engagement into diversified revenue streams. On the user side, we're putting greater emphasis on higher-quality direct connections, things like scaling out our logged-in users and our mobile app. Our log-in users are far more engaged and valuable, and we're putting a much stronger emphasis on growing them. With more than 50 million registered users, we already have a huge base to work with. And the more directly we connect with them, the less they need to rely on intermediaries to discover new form content. We're seeing solid direct traffic growth, and we'll have a lot more to share on this initiative in the coming quarters. On the engagement side, AI is opening up some powerful new opportunities. We're translating our content into multiple languages to reach entirely new audiences, and AI-generated summaries are making us to dive into long detailed threads. We're particularly excited about our new AI-powered community assistant that we call ForaFrank. It's Fora's proprietary AI that's trend on our data set of over 2.3 billion posts. ForaFrank was initially rolled out to our communities to encourage posting and help users ask better questions. Now users can tag ForaFrank, much like the way people use Grok on the X platform and it opens up a whole new avenue of engagement and content discovery. We're just scratching the surface with ForaFrank's potential, and there are many more applications that we're exploring. It's a really powerful example of how AI can reshape the community experience and improve the value that we can add to our users. And finally, when you have an audience that's both engaged and loyal and a platform where we own the data, the monetization opportunities expand. Beyond advertising, we're building out branded content offerings, commerce and data-driven products that leverage the trust and expertise inside our forms. We believe that combination, more direct traffic, richer engagement and broader monetization creates a growth flywheel that will get stronger, the more that we invest in it. I'll offer a few comments on Q2 before passing to Vince for a deeper dive. Q2 performance was in line with our expectations and prior guidance. MAUs were $90 million, down from record levels last year due to shifting search patterns. Revenue was $14.5 million, down 13% year-over-year, largely from lower programmatic advertising from both display and video. Despite the recent challenges we've experienced with video ads, we've made some product changes that strengthened performance in June, and we expect video trends to be much stronger in the back half of the year. Direct advertising was around $400,000 lower than last year, largely due to campaign timing, but we're seeing an encouraging pickup in Q3 that bodes well for the coming quarters. We're starting to use AI to provide insight reports, leveraging our form data to some of our major brand clients, and it's opening up new lines of discussion. We think there's an opportunity to turn AI insights into a subscription product and are confident that new revenue opportunities will be surfacing soon from our data. E-commerce revenue was up 41% in Q2 with most of the growth coming from our Ritual acquisition, which closed in April, while our core commerce business was relatively stable. Overall, I'm pleased with how quickly Ritual has fit into our operations and the growth potential it's showing. With Ritual in the fold and as additional product initiatives pick up, we expect e-commerce will continue to grow by double digits in the second half of the year. The profitability of our business continues to be a real strength. Adjusted EBITDA was $4.3 million with 87% conversion to free cash flow. Our balance sheet is strong. We've got low leverage, and we've got ample liquidity to fund growth. Turning quickly to M&A. We only closed one deal in the quarter with the Ritual acquisition in early April, but we have seen a notable pickup in inbound opportunities. I think this is largely because of the broader traffic trends in the open web. If you're an independent community owner without the benefit of a tech platform, AI road map and an engineering team to execute, it's going to be tough to compete. We're keeping our eyes open, but our near-term focus is on reigniting organic growth. This will put us in an even stronger position to execute on the best M&A opportunities down the road. In closing, our team is energized for this next phase. The value of our communities, their expertise, authenticity and engagement is only going to grow as the digital landscape evolves. AI disruption is here, but we see it as a catalyst for a consumer shift that makes forms more valuable than ever. We have the team, the platform and the strategy to navigate this change and emerge stronger. And with that, I'll turn it over to Vince to walk through the numbers and comment on our outlook.

Thanks, Chris, and good morning, everyone. We appreciate you all joining the call today. We have made a number of organizational moves aimed at better aligning our business in a world of AI-supported content discovery. Our profitable and highly cash generative business model continues to be the cornerstone of our financial strength and provides us with the flexibility to invest in long-term initiatives aimed at driving ARPU, engagement and audience growth across our platform. Turning to our results. Revenue for the quarter was $14.5 million, down 13% year-over-year due to lower overall MAUs and partially offset by improving ARPU across Digital Advertising and e-commerce channels. Digital Advertising revenue totaled $11.5 million, down 21% from the prior year, primarily driven by a 26% decline in Programmatic revenue to $7.3 million. This decline was largely due to lower impression volumes and softer performance from our video advertising unit, which faced headwinds from browser level policy changes implemented in the second half of 2024. As we lap these changes, we expect to see growth contributions from the video advertising unit in the second half of the year. Our Direct Advertising channel has held up well despite a noisy macro backdrop, declining 9% or [ $400,000 ] in the period. This decline was mainly due to the timing of campaigns rather than a drop in bookings. Looking ahead, we're encouraged by rising demand for customized content for major brands and OEMs, a trend that underscores the critical role of authentic audience connection in an AI-driven landscape. These high ARPU campaigns often featuring video content are designed to precisely target our niche and highly valuable audience. Additionally, as Chris noted earlier, there is a strong interest in data-driven products. designed to help brands better understand consumer sentiment and feedback. Once fully developed, we expect these offerings will provide actual insights for brands, aiming to enhance existing products and innovate new ones. Our communities are uniquely positioned to connect brands with right audiences and support the generation of future advertising growth. Turning to E-commerce. E-commerce revenue grew by 41% or $887,000 in the quarter. This growth was largely driven by April 2025 acquisition of Ritual Technologies, including their well-known food pickup app, which serves markets in Canada, the U.S. and Australia. While the acquisition has provided a solid boost to E-commerce revenue, it also brings added value through its dedicated team with expertise in mobile products and marketplace experiences. Excluding contributions from Ritual, the channel was flat year-over-year with about half of the channel's activity driven by subscriptions, this performance highlights our loyal subscriber base and the resilience they provide against traffic volatility. E-commerce continues to be a growth lever for our business going forward, including new commerce-driven experiences and using AI solutions such as ForaFrank to serve relevant discussions to our users and keep them engaged on our platform. Adjusted EBITDA for the quarter was $4.3 million, reflecting a margin of 30% compared to $7.1 million and a margin of 42% in the prior year. Margin compression during the quarter reflects our continued investment in strategic areas, including AI, audience growth, engagement and data products, all aim in building a foundation for long-term growth across our sites and communities. We also made significant progress in adopting an AI-first approach, encouraging employees to integrate AI-driven tools into their daily workflows. These tools have enabled us to streamline internal resources forming smaller, more and agile teams focused on execution. Operating expenses for the quarter increased by 12% or $1.8 million, reaching $16.4 million. This increase was largely driven by a $1.6 million in onetime costs related to acquisitions and restructuring in the quarter. As a business we pride ourselves on our ability to generate healthy and sustainable free cash flow and this quarter was no different. We converted adjusted EBITDA to cash at a rate of 87% compared to 93% in the prior year. Free cash flow for the period was $3.7 million and cash from operations was $6.4 million, up 4% year-over-year, inclusive of nonrecurring working capital impacts from the acquisition of Ritual Technologies. In the current environment, cash remains a critical asset, and our focus going forward is to maximize our liquidity and be ready to move quickly on M&A if the right opportunity arises. As of the end of the quarter, we had $64.1 million in liquidity, comprising of $8.1 million in unrestricted cash and $56 million available to draw from our revolving credit facility at very favorable rates compared to the current market for a business of our size. Our net leverage is a comfortable 1.22x based on a net debt of $36 million as defined by our credit agreement, which includes pro forma impacts from recent cost-cutting initiatives. In line with the trends we are seeing in adjusted EBITDA and free cash flow, we reported a net loss of $1.8 million in the quarter compared to net income of $400,000 in the prior year. This loss was primarily driven by a $2.1 million decline in revenue and $1.6 million in onetime related operating expenses. Excluding these onetime costs, our net loss would have been $200,000, underscoring the resilience of our core business model while we continue to invest in growth initiatives across our platform. Looking ahead, there is no change in the full year guidance we shared in April. We're confident in our ability to grow and strengthen our communities, bringing together passion and like-minded enthusiasts to talk about the things they love. Our strong balance sheet and solid free cash flow provides us with the financial flexibility to navigate the rapidly changing landscape of AI content discovery. These strengths position us to execute on our priorities and work towards delivering sustained long-term value for our shareholders and employees. With that, I'll pass it back to Chris to close things out. Chris?

Thanks, Vince. Let's turn it right over to questions.

[Operator Instructions] Our first question today comes from Aravinda Galappatthige with Canaccord Genuity.

I just wanted to go back to some of the earlier comments that Chris made about logged-in users. Chris, can you just remind us of some of the initiatives there? And I may have missed whether you disclosed the proportion of your MAUs that are kind of direct traffic or already logged-in users if there was an updated number that you provided?

Yes. Yes. Arvinda, thanks. We're not providing that updated number today. I expect that you'll start to see more metrics like that coming from us in the coming quarters as some of these initiatives really take hold. But what I would say is a significant portion of our engagement on our platform is coming from logged-in direct connections. The logged-in user is a lot more valuable to us. We can communicate with them more directly. We can send them push notifications. They can subscribe to newsletter updates, all those types of things to really push that continued usage of the platform, but also the time they spend, the contributions they make to the community as far as post, all those things make those users a lot more valuable and really underpin kind of the foundation of the community. So it's a real strength. It is that kind of nerve center of the business, and we see opportunity to grow it. In various communities within our platform, we see very, very high levels of registered users or logged-in users. So as high, in some cases, as 80%. And so -- and some of the capabilities with the team that we've kind of brought together, particularly that Hometalk leadership I mentioned, are real specialists in growing those direct connections and the direct user base. So we're pretty excited with the initiatives they're working on. We're seeing results already, and we're seeing the gains show up on a month-to-month basis. So it is a lot more kind of block and tackling from a marketing perspective. It's a lot more getting more out of your your user base and being more proactive with the content that you're pushing out to those users as opposed to being passive and waiting for them to arrive through a search result. The mobile app is also part of the mix. It's -- to this point, it's really been our power users that have leaned in the mobile app. We haven't marketed in a big way, but we think we've got the app to a point where it provides a really solid community experience. And so we're going to be ramping up the marketing of the app as well. The good news about marketing is we already have a huge audience that we can market it against. So initially, a lot of our marketing efforts will be focused on on converting our existing user base into mobile app users before we look to any sort of external marketing initiatives. So those are the primary things that I think we're focused on with respect to direct audience.

That's great. And then just switching gears. Any update on your content licensing plans? Anything in terms of how you're looking at it? I know you've been in discussions for a while. I wanted to touch on that as well.

Yes. Thanks for that, Aravinda. It's a space that we've seen evolve quite a bit, right, since this became a popular topic. And I really believe that our patience is going to pay off for a few reasons. First off, of course, we saw a handful of deals right away. We saw some of the major platforms cut deals. We haven't seen a lot sense. And in some cases, even a couple of the major platforms or one major platform, in particular, is turned to litigation to kind of defend their interests. So we think that's quite interesting. We think the relationship between the LLMs and content owners, we think the dynamics will shift more and more toward favorable for platforms and content owners for a couple of reasons. The first is the tools that are available. These are the main one. The tools that are available to actually spot, block and then now monetize, that traffic are becoming more sophisticated. And we're looking really closely at a lot of those. So you see Cloudflare making a lot of noise about their offering. Fastly's at other offerings. So at the CDN level, you're actually able to spot the bot traffic and then create a toll around it so that if they want to access your content, they're paying each time they do that. We think that's a pretty interesting model that we're looking at, and it could lead to some incremental revenue for us. The other side of it as well, though, is we think from a data licensing perspective, and both Vince and I touched on this in our remarks, we see it more as just providing data to train LLMs, right? Like I think that's a pretty simplified view of the opportunity for our data. And we touched on it with respect to how we're engaging with clients. So we're using AI today to provide really interesting insights to those clients. So information and kind of nuance that it's able to pull out of our data sets that you wouldn't be able to really do without the power of AI. It's it's really kind of impressing a lot of customers we work with and kind of leading to some new business for us. And in some cases, we have some major brands that are interested in looking at ways to subscribe to a regular feet of that data to help with things like marketing decisions or even product development, within the OEMs. So we think it's really cool. Like I mentioned as well, we're also using our form data to train our own AI. And we think that, that eventually could be a much bigger part of our story.

Thanks for that, Chris. And then just lastly, Vince, I know you've maintained guidance, but sort of looking at sort of the quarterly cadence, how should we think of margins? Obviously, Q4 is seasonally high, but are you still sort of thinking sort of low 30s more in that zone for Q3 and that kind of a pickup in Q4? Is that the shape we should be thinking of?

Yes. Arvinda, thanks for the question. Yes, I think that's correct, right, in terms of sort of the trajectory from a margin perspective. We've done quite a bit of work in the quarter, sort of optimize costs around many key areas we talked about the AI-first approach internally that's really helped us consolidate team sizes in key areas like engineering. We're harnessing AI tools, helps people not only save cost, but helps our team work that much faster to deploy use initiatives for our platform, so we can start realizing the results. So in the quarter alone, based on initiatives that we -- that took place, equates to about $5 million a year in annualized run rate savings, mostly around headcount. We're also looking at areas like SaaS and consultants as well as optimizing our hosting environment. So that will continue to support margin expansion. And if you were to look at our quarter, you would see that as the quarter progressed on a month-over-month basis. You would see much favorable margins approaching close to 40%. That said, we're still investing in our platform, right? There's still a long way to go in a lot of these initiatives. They all come with the cost, computing costs, people costs, strategic costs with consultants, et cetera. So from a margin perspective, staying within sort of the 30% range for the year is still our target.

Our next question comes from David McFadgen with Cormark Securities.

Just a couple of questions. So when you look at the MAUs, obviously, they're down in the quarter. You highlighted changes to search algorithms. So when you talk about these changes to the search algorithm, is it primarily the addition of AI now and how AI is impacting search? Or are there other factors?

Yes. Thanks, David. I think what we saw in March, when we talked about this previously. The biggest shift was AI added to the search result. I think you'll see a lot of written about this. That was a relatively big change at that time. I think our expectation is at this stage that it's more tweaks from here, but we'll see. We know Google is in a pretty heated competition with some of the other large language model providers. So we'll see how that evolves. Again, I'll just reiterate that the search traffic is great for an overall MAU number and you do monetize it, but you just don't monetize it to the same extent that you do kind of that core audience. And you see that with even platforms like Reddit, right? The logged-in user is a lot more valuable. So that's that's where we see a great opportunity going forward.

Okay. And then just on the new advertising when you read through the MD&A, you called out the unit by default playback have an impact on the impressions for the value. Are there other factors at play here besides got main items?

That was the main item that caused the change that we kind of had to navigate. What we've done is made product improvements to actually improve the performance of the unit on mobile devices. And so we started to see that improve fairly nicely towards the end of June when it went through testing and rolled out. In July, now into August, we're seeing much stronger performance compared to what we were seeing previously. So again, it's another example of kind of getting more out of that core user base and how valuable they are. And the video advertising that we provide them is very relevant. And and we see video as a source of growth from here.

Okay. And then just on the potential for acquisitions. I mean, when it makes sense to kind of put that on hold until the business starts growing again as opposed to acquiring -- you're not sure when it can actually turn around?

David, I think if you read into my comments a little bit more, I think that's effectively what I'm saying as far as keeping an open mind, if we see opportunities that could accelerate our direct connections with users that could accelerate our AI initiatives, that could improve commerce or monetization. I think we'd look at those things. So anything that could actually be an accelerant -- buying an individual community business, right now, it would have to be really special and have some unique characteristics for us to to really look at that. So I think Vince reiterated this, we see building up our cash position here creates some really great optionality for us. And so absent one of those types of acquisitions that really accelerates us along that strategic path, we'll continue to build up our cash.

Our next question comes from Drew McReynolds with RBC.