All right, let's keep rolling here. Get the webcast going, so in case there's people waiting, stay on schedule. Our last but certainly not least, in my mind, presenter of the day is VerticalScope. And we're thrilled to have Chris Goodridge, the President and COO with us, and Vince Bellissimo, the CFO. So, Chris, Vince, thanks very much for joining us here today. If in case people are not aware, it's not even close, if I look at all the names at our conference this year as to who's got the best share price performance, year to date, as you guys have basically doubled.
So certainly seems like there's good momentum and well justified, in my view, what the share price is doing, given the improving traction you're seeing in your revenue line, especially on the digital advertising side, and hopefully some excitement at some point in the future on doing deals to monetize your first-party data with LLM providers, as we've seen for Reddit and many others. So, lots that we can talk about here, and I certainly strongly encourage people to pay attention to this name. It may not be the biggest market cap, but I think it's a very exciting, nice little growth story in Canada that's kind of fallen off the radar for some people. So, Chris, let me start with you.
The revenue growth really stems from, you know, two things. You've got to have users on your sites, and you have to have, you know, CPM and being able to monetize those users. I'm really pleased to see the MAU growth come back up 12% in the first quarter for anybody who didn't notice, and I think you've guided that you'll be able to do even better than 12% growth in the second quarter on that metric.
I mean, it was only a year ago, I think some of us were scratching our heads if ChatGPT and GenAI in general was going to destroy the category of people being able to just type in any query they have and get their answer, and not need to go to, you know, well-respected, authentic community sites and forums like, like you guys have. So maybe I'll let you just talk a little bit about what are the key drivers of that MAU growth and what's going to keep it going?
Yeah. Thanks, Vince, and thanks again for having us, today. We're thrilled to be here. Yeah, we've seen a lot of traction on the user growth front, and it's really happened over the last several months. So, as you mentioned, 12% growth organically in the first quarter, up to 113 million MAUs across our platform. And, you know, I just paused there for a second. Like, our platform reaches 113 million people in a month, which is obviously a pretty significant scale. And you're right, we did indicate that we're going to continue to grow in the coming quarter, and we're hoping to exceed that amount. There's a few things that are driving that growth.
Really, if I can, I just step back quickly to the pandemic, surge in e-commerce, you know, a lot happening in the space. You're seeing a lot of publishers publishing more and more commerce-type content, product review content. The internet really became littered with it, talking through the 2001, 2002, or 2022 timeframe. And, you know, you'd see every publisher. So it could be a personal finance site doing mattress reviews. It could be a tech site doing mattress reviews. It could be a news site doing mattress reviews. It was crazy, right? And you probably noticed this in your Google searches when you're trying to search for a product, all this content. ChatGPT came along in November 2022, and poured gasoline on that fire. So it...
You know, if a publisher could create 2 or 3 of these pieces in a day, now they could do 200 or 300. And so the quality of the content, it was really quantity over quality, and so you saw this happening. At the same time, what users were doing is they were stumbling upon these search results, and they weren't happy with what they were seeing. And so they started to append their search results more and more, you know, "mattress review forum" or "mattress review Reddit," right? And as a consequence, 'cause people were really seeking out real people with real information that have real experiences, we started to see our traffic shift.
Google as well, with, you know, we've noticed some structural change in the way the search engine is operating, things like filter-specific filters for forum content. It's really, I think, a virtuous circle right now between what Google's favoring and what users are doing. And that's really fueling that, that MAU growth that we're seeing.
Are you able to quantify it and see it in your data? Is this a lot of people who may have gone away after the pandemic, and now they're coming back 'cause they're back to normal routines in life? Or are these search engines and the better authentic content now bringing in brand-new users that you never would've had two or three years ago?
Yeah, I think it's a combination of both. Like, we have a pretty sticky base of users, right? Of contributors. We have 65 million registered users on the platform, right? So those are people that are authenticated and logged in. So and a good portion of those, you know, drive a lot of that content that we see on the community. But we definitely think the interest and the people who are finding our forums is broadening. Reddit also being out there and in just the public sphere, I think is helping validate, you know, for a lot of people, that communities like Reddit or like the sites that we offer offer, you know, really great content.
Excellent. And I assume, again, in the data, you will be able to see that there's certain sites that are getting more growth and traction than others. I'm just wondering if you were simply able to get the sort of the low-end sites that haven't recovered as much back to the average amount of usage, I mean, do you have line of sight to, like, 150 million MAUs at some point without having to make a bunch of acquisitions?
... Yeah. So, I mean, if you just take our growth rate in the most recent quarter, and we ran that out for 2.5 years, I think we get to pretty close to $150 million, right? So it's definitely within line of sight. And I wouldn't say it's necessarily about taking bottom performers and making them better. Like, the strength we've seen has been pretty broadly based across interest categories. And, you know, we're constantly making changes and improvements to the platform to drive benefits to all communities. We're up to, I think, over 1,300 now. So we are launching new ones organically. We made our first acquisition in a while last month.
And so our M&A will feed into that, but we think most of that growth will come organically.
Do you want to top up on M&A? And maybe Vince wants to jump in on this one, too. Is it—you're—when you went public, there was a sort of an expectation to be a fair amount of money spent on acquisitions and maybe even some larger ones, as opposed to just tuck-in sites that you can fold in very quickly. Are you getting back to that, or is this just sort of nibbling at M&A at this point?
Yeah. So I think, I think we're gonna get back into that, but the difference between now and the IPO is we're really gonna focus on those tuck-in acquisitions. So down the fairway, forums that are running on XenForo, easy lift from sellers platform to ours, and we can start realizing, you know, those, the accretive nature of it, the, the revenue lift, et cetera. And, and we're really gonna fund that, you know, with our strong free cash flow. So kind of go at our own speed limit. You know, we talked about the deal that we did, shortly after Q1. It's under $1 million. So things of that nature, funding it with our own free cash flow and really seeing the benefit of, of putting those sites on the Fora platform.
Okay. And the Fora platform, if people aren't familiar with, I mean, it was an in-house developed, back end to, you know, aggregate all of the content in the sites. It's more efficient. It creates a better user experience. And I think the expectation, again, at the time of the IPO, I thought was all your sites would be on there, except maybe the odd one that didn't fit, like a RedFlagDeals or something. And they, they haven't been all converted yet. Why? Is it that still coming? And I assume you see much better traction once you do migrate them over.
Yeah. So, definitely over the last year, we've been focused more on just general platform improvements, things like launching our mobile app. And so resources have really been allocated more to that than migrations. I think as acquisitions start to, start to pick up again, it makes sense for us to allocate resource to migration. And, you know, you'll see some of those sites that have been laggards, move over in, in the coming quarters.
Monetization and the app you talked about. So what are the key success factors of what you've achieved recently and looking forward to be able to harvest better monetization of these increasing amount of users? Is it mostly the app, or is it the video ads, or is it just across the board?
Yeah, there's a few things. So the app, it's still relatively new, right? And it's serving our power users, for the most part. It's growing, it's growing organically, but as a percentage of our overall traffic, it's, it's relatively small. The monetization improvements and the, the growth in advertising, so we were 6% growth in Q4 and, and 26% growth in our most recent quarter, and that continues to be really strong. It's really threefold. One, it's video ads. So we introduced video to the platform towards the end of Q2 last year and have continued to scale that up, continue to add demand sources. It's mostly monetized programmatically, so there's some direct sales flowing through, but it's mostly, you know, it's similar, monetized the way we do display with, with programmatic.
The other thing is, you know, we have also allocated resource to improving programmatic itself. So, you know, that's auction dynamics, that's flooring algorithms. It's all the technology and the guts of a... that makes a programmatic auction really efficient. We've also been adding new partners, so we announced one recently with The Trade Desk, providing a direct connection to our inventory. It's great validation for us. Trade Desk is one of the biggest buyers of online media. And so we're excited about that. That's on the come, so that'll start to hit results in the coming quarters. And then lastly, direct sales. So direct sales showed 7% growth in Q1.
We don't expect it to grow at the same rate as programmatic, and there's definitely a bit of a lag there, but we expect, you know, 7%-10% in that range, or, you know, organic growth at a direct.
Come back to direct in a second, but I want to make sure I just understand the mechanics of when you—I mean, Trade Desk is a pretty huge provider in the ad tech world. When you plug into a new entity like that, do you have a ton of unsold inventory, and this is just a better way to sell more impressions, or is this more about you get a better, a better cost per thousand, better revenue per impression?
Yeah, so it's more the latter, Vince. So we tend to sell most of our inventory, although, you know, in certain categories, we'll have floor pricing, so we won't allow our inventory to be bought below a certain amount. But, you know, it's certainly more of optimizing and improving performance. Trade Desk is more a buy-side platform as opposed to a sell-side platform, but by having them plug in directly to our inventory, it bypasses the intermediaries, right? So if $1 of advertising is spent, there's less, you know, that's being taken from platforms along the way and more of it, in theory, going to us.
The end user, media buyer isn't necessarily paying more, there's just more flowing back to you?
You got it.
Okay, which is, seems like a win-win. And there's... Are there more of these? I mean, Trade Desk is the biggest, aren't they, the biggest independent?
The Trade Desk is the biggest. You know, Amazon, we work with already as a supply-side platform. They're doing a lot of great innovative work there. And, you know, it's platforms like Trade Desk and Amazon that are really kind of pushing the market forward.
... And then the direct sales. I don't wanna say disappointing, 'cause it's been okay, but it's, it's disappointing only relative to how great your numbers have been in programmatic the past couple of quarters. Is that simply a lag effect, that it takes a while to get the, the sales cycle done in those direct channels versus the programmatic that comes back much more quickly? Or is this a more structural shift, that you'll be more programmatic going forward?
No, I don't think it's a structural shift. Like, we've definitely put the investment on the technology side to drive programmatic, and the thing that you know, why you see the immediate results there is because every impression's bought in real time in an auction, right? So as demand comes in, you know, you start to see the value right away, whereas there is a sales cycle with direct. You know, we do have some customers that book on an annual basis, some on a quarterly basis, some on a monthly basis. So programmatic is a leading indicator. So if you see the market improving overall, we see it in our programmatic numbers first, and then direct follows.
Not suggesting that you're gonna see 36% growth out of direct or anything like that, but we do think, you know, it points to a, you know, a solid kind of organic backdrop for direct for the rest of the year.
Remind me, and anybody listening, that it's still a pretty big gap, isn't it, on CPM for direct sales versus programmatic, where you get, like, with something like $8-$8 versus $3 or something?
Yeah, it's in that ballpark. Kind of think of it as, you know, 3 or 4 to 1.
Right. So if the direct even improves to mid-double digits, it may not get up to 39% growth like you're doing in programmatic, but if you do see some more traction there, it's for- disproportionate.
For sure. And on video, it's even a little bit more pronounced. So, you know, if we can get more traction selling our video inventory direct, there's more leverage there.
This all sounds pretty good. I always get scared as an analyst, don't wanna get too far ahead of our skis on expectations. I mean, I don't think the macro environment is fantastic. I mean, people are struggling with inflation, and higher interest rates are still there. There's some ad categories that don't seem to be fully back to normal pre-pandemic spending. So it seems like what you're achieving is more structural than any sort of just cyclical tailwinds. Does that give you some confidence that these type of sort of 20%+ advertising revenue growth rates are sustainable year-on-year, or is this just a blip, and then when we get to the first two quarters of next year, we've gotta be careful that you're comping against these big gains, and we may see flattish revenue?
Yeah, so, so I, I, yeah, I think you're right in saying a lot of that lift we're seeing right now is as a result of, you know, our core initiatives and the work that we've done, with ad tech, ad placements, adding video to the platform, et cetera. So if you look back to 2023, we really started off the year very weak, right? So, the channel was seeing, you know, macro pressures, pressures in CPM, traffic pressures was also impacting the channel's performance. So we did switch our focus to these initiatives, and we launched them in the first half of last year, and those really started to add some really good performance to the platform in the second half of 2023.
Coupled with the increase in MAU, that's what led to, you know, the Q4 result of being up. It was really a turnaround, 6.5% year-over-year for digital ads. That's continued into the first half of 2024. So what you're seeing right now in these aggressive growth rates is effectively the incremental benefit of all that work that we did last year. But as we come out of the first half of 2024 and start to lap those initiatives in the second half of 2024 into 2025, you'll start to see things, you know, normalize and go back to, you know, likely a single-digit range in terms of organic growth. But obviously, we're always looking at new initiatives and looking to optimize things and drive growth levers where we can.
And Vince, is there anything notable in the geographic split of where you're seeing this recovery in advertising revenue? Is it just as strong in Canada as it is in the U.S., or one better than the other?
Yeah. The interesting thing about our platform is that, you know, two-thirds of revenue and traffic comes from U.S. sources. So, what we're starting to see now is a rebound in that economy, obviously, you know, translates to rebound in ad spend and CPMs, et cetera. So as that economy continues to improve, we'll continue to see that benefit. From a Canadian perspective, you know, it is lagging behind from an economic perspective, but it's such a small part of our platform. It's actually under 10%, so we're somewhat insulated from, you know, weaker results there.
So what was the third? Under 10%.
Under 10%, yeah.
Under 10% is revenue. You, you said a third earlier, but that was, that's a different metric, I guess.
Two-thirds is from U.S. sources.
Oh, I see.
Yeah.
The rest is outside of Canada or the U.S.
Correct.
Yeah, of course. There is other parts of the world, aren't there, Vince? Let's switch to the LLM theme. Pretty exciting, but at the same time, tough to negotiate in public and tough to quantify ahead of time. But any updated thoughts you can give our investors listening as to what you may be trying to accomplish or what some sort of realistic timeframes are to be able to do some of the deals like we've seen from other news providers and, you know, and sites like Reddit?
Sure, Vince. So there's not a ton that's changed since we spoke about it last week on our call. But, you know, I'll just reiterate maybe the way we're thinking about it, right? So, you know, we believe we're sitting on a significant pile of very valuable data in our platform. So just to give it a little sense of scale, we have over 2 billion posts on our communities. Reddit's about 16 billion. Not suggesting that we're gonna get to 1/8 of what Reddit suggests is their opportunity. I think they put 200 million out there as their opportunity. But we do think there's significant value in what we have.
We're speaking to all the major players, and trying to create the right type of deal for VerticalScope. You know, Rob indicated on our call last week, we're not rushing to do it. We wanna make sure we understand all the different dynamics. This is brand-new space, and we're not gonna just rush out there to put out a press release. We're gonna make sure we can derive real economic value from partnerships.
You understand the dynamics behind this situation dramatically better than I do, I'm sure. But maybe you can just help me. I just worry a little bit that if you wait, that some of these, you know, LLM behemoths are gonna say, "You know what? I got enough data now. My system's trained, now it's self-learning. I don't really need to buy anybody else's data." So you've missed the boat. Or am I totally off on that, or are these machines always gonna need more data to learn from?
Our understanding is that there isn't enough data on the internet to satisfy the LLMs right now, and so there's a real premium being placed on quality content and quality information. And so it doesn't feel like it's gonna be one of those situations where you know, the window closes quickly. At the same time, you know, you wanna make something happen, and you wanna take advantage of the situation, and we intend to do that. But I don't feel like we're at anywhere near the point of LLMs being you know, saturated with data.
Do you think they wanna buy sell-side analyst reports to help feed the-
They might. It could be a good revenue stream.
E-commerce, you know, has not been as positive as the recovery in your, in your advertising revenue, and I think you're articulating it's gonna stay as a, a smaller component, going forward, but you're still optimistic that, it can get better than what we've seen, the past, the past couple of quarters. So just a general question on that. Give us your, your thoughts on where we are in the, the e-commerce recovery path, and what initiatives do you have to improve that?
For sure. Yeah, it's 15% of the business today. And, you know, definitely feels like we're nearing that point where, you know, it'll return to growth. We had, as you know, Vince, a fairly significant acquisition impact our results in 2022, which created some pretty difficult comparables for us in 2023 when that performance didn't repeat. That's all lapped. Where the growth is going to come from going forward is really from the forum properties, right? Our people come to our sites to share the things that they own, to get advice from other users, to show off the projects. Like, go to a site like AVS Forum, where people are showing off their home theaters they built in their basement, right? So we think it's really, really unique content.
It goes really, really deep, and so the commerce that we see from the platform going forward will come from those experiences. So it's about providing opportunities for users to show off their ownership more, to make it more intuitive for people who come to our sites for the first time, and they see the information to make it easier for them to consume. All again, geared around products, and we think the e-commerce from there just naturally, naturally evolves. It's a longer-term play for sure. Like, the growth in our business is gonna come over the next several quarters from from advertising and the continued MAU growth. But again, given the commercial nature of the communities, there's a long-term play with commerce.
We've had it higher than 30% in the business before, right, as a percentage of total revenue, so we think there's opportunities there, for sure long term.
So Chris, as you were dealing with that challenged acquisition, and you were dealing with the bigger priority of getting MAUs and digital advertising revenue back on track, would you say maybe the e-commerce initiative lost a little bit of your management attention and R&D focus, so it just needs you guys to turn back to it a bit more? Or is it the things you tried haven't worked as well as you wanted, and you gotta find out and find new ways?
Yeah. So I'd say it's more the former, really, Vince. Like, so we, we certainly reacted to what we saw as sort of softer e-commerce results and, and reoriented resources towards forums and growth in the forums, and also advertising, right? Ad tech, video, those types of things. Yeah, so I think it's, it's more resource allocation. Again, we see a lot of opportunity continuing to drive user growth and continuing to drive the advertising business forward. So, you know, I wouldn't expect a huge reallocation of resource towards commerce, but, you know, there will be... We do have some allocation, so it's not like we've abandoned it. We definitely think there's opportunity there. It's just, you know, the near-term opportunities exist within the ad platform.
If things work out well with those initiatives, do you think e-commerce is greater than 15% of your revenue in two or three years, or is that the right level?
Yeah. It's definitely got potential to be. Like, it's been higher in the past. Now, so COVID influences some of that, for sure, and, but there's no reason why, just again, given the nature of our properties, why it can't be more than 15%.
Let's talk a little bit about Reddit. Very exciting in my mind to have them trading publicly now and trading a bit higher than I probably would've expected they'd be trading at this point. And maybe we can figure out a way to make you guys a meme stock, but it'd be a double-edged sword, unfortunately. But let's maybe not wish for that. But you know, what is it that you see that can explain, you know, you guys trading at under 3x revenue and they're at over 7x revenue? Is there some real structural difference in the business, or is it just lack of liquidity and market cap for you guys, or do you think you're fairly valued and they're overvalued?
I was gonna say they're undervalued and-
Way
... way undervalued. So, I mean, there's scale for sure, right? So Reddit has scale. Reddit does have more liquidity, given the nature of, of what it is. Reddit also has just only recently turned profitable, you know, and so, and, and I think that was well-received. Their long-term target adjusted EBITDA margin's 40%. We're at 40% now at the scale we have, so we've built an incredibly cash-generative business model at the scale we do have, and so as we continue to grow, we'll throw off even more cash. So, I think that's sometimes lost on our name and our business, like, is, is people remembering how profitable we are. You know, we have the margins. We have really high free cash flow conversion, and I think, you know, that would support...
You'd think that would support a better multiple. Reddit's also only traded for, what, a couple of months? So I don't know if people have fully wrapped their head around them as comparable for us, and hopefully they do because they'll see a lot of similarities around, you know, this approach to community, the way content moderation happens. Look, it's a net positive 'cause what Reddit's done, it's validated that this community model, you know, is a really strong, strong model, and overall, it's a net positive for us.
Can you remind us the sort of core principle of these targeted audiences you have that are engaged on certain topics, how valuable that is to advertisers, but also how protected that makes you against any sort of change in the internet structure of cookies or any other way of, you know, digital identifiers?
Yeah, so I mean, that's one of the differences between, I mean, I guess to one extent, us and Reddit. Reddit, you know, covers every subject matter and really driven by the users as to what it's going to cover. You know, we've been deliberate with our strategy in that we've sought out and grown product-focused communities. So the people on our properties are talking about things they wanna buy, things they wanna fix, spending money. And so by the very nature of, you know, the communities we own have high commercial value. The content there is valuable. We also have 65 million registered users, right? So our audience is largely authenticated. So when third-party cookies go away in Chrome, which Google's kicked the can down the road again on that to sometime in 2025.
We've been talking about that since we were doing our IPO roadshow about cookies going away. Still hasn't happened, but, you know, we welcome it 'cause we've got high addressability with our audience, and we have amazing contextual relevance with the content that exists within our community. So we think it's a net positive for programmatic. It's a net positive for direct when that happens.
I asked this on your quarterly call, in a slightly different way, but, is there any intention or can you do some sort of... and maybe it doesn't have to be an investor day, but some, you know, different investor slides to try to go back to highlight some of the, Reddit versus VerticalScope dynamics? In your IPO documents, you had a bunch of tables sort of showing engagement on your sites versus theirs. Not trying to disparage them, but just sort of saying that you guys actually have some really engaged users and, in some ways, better audiences than they do on some of their sites.
But some of that's a little stale now, so maybe this is more a comment than a question, but I'd love to get your thoughts on it, if you think it makes sense to refresh some of those slides. And what I asked on the call was, you know, it's just difficult for us to say MAUs are, you know, 115 million, and Reddit's only giving us DAUs in daily and weekly, and you guys are giving monthly. It's just apples to oranges, so it's tough to, well, guess what the real comparison is. So, any thoughts, any additional thoughts on trying to update investors with some of those exciting stats?
Yeah. So it's in the works. You must have been a fly on the wall because those, that deck is gonna be out there soon. We'll have materials on our site in the coming weeks, and it'll be part of our any other presentation we give. You'll see some of those stats updated. Really, what they highlight, we're not saying we have anywhere the scale or the breadth of Reddit, but in given topics where we choose to play, our users go deeper, they post more, and we have larger communities within the areas where we play. So that's what that data shows.
That's gonna segue me to another question, is I think you've engaged a, an outside, IR firm, recently. So my further characterization is you needed to fix the business first. Things seem to be fixed, and you're doing better, and now you can lean in a bit more on getting investor attention back, which I think is, great if that's what's happening with the new, new slides, you know, a new firm to, push the story out there as there's a little more attention, from Rob Laidlaw and your board to say, "Hey, let's... Now let's get this thing back to where the IPO was.
Yeah, I mean, I don't know if I'd use the exact same words you're using, but, you know, I think we've got some really good fundamentals in the business. We've worked really hard. I think, as a management team, we've shown a commitment to the business model. We've shown a commitment to taking care of the balance sheet. You know, the way we've handled and brought leverage down. We've shown through a cycle or multiple cycles, how cash generative the business model is. So, you know, we'll come up on our third anniversary of being public. So I think we've got a lot of confidence in the outlook, for our business and the long-term prospects. We think there's been some structural change that supports what's happening and our decisions we've made with the business.
So yeah, it's not a coincidence that we're putting and going to be putting a lot more effort now into marketing, given that we've got some great fundamentals to talk about.
That's, that's exciting to hear. So maybe I'll use that to make the last question to Vince in terms of allocation of capital and share buybacks. Is part of the reason you're not going gung-ho at M&A because where your valuation is for your stock, and you're evaluating NCIB activity to the extent you keep trading it under 7x EBITDA and under 3x revenue?
Yeah, that, that's part of it. I think, I think our focus, and we've been pretty clear, is really strengthening our balance sheet. That's, that's the foundation, you know, for any organic growth and even M&A opportunities, right? So we, we continue to make debt repayments, you know, our number one priority. You know, debt's at a manageable level right now. We're at 1.8x leverage, you know, as of the last call. And so therefore, we'll continue to put that cash to work towards strengthening our position and then also looking for those tuck-in M&A opportunities as they arise. So, both of those equal, we think, you know, strong performance and results for our shareholders.
Excellent. Well, very exciting story, guys, and thanks very much for joining us here today. Chris, Vince, thank you very much, and that actually ends off our conference call. So thanks to everybody for attending as well. Thanks very much, guys.