Good morning, all. I would like to welcome you all to the VerticalScope Holdings, Inc., Q3 2023 Earnings Call. At this time, I'd like to introduce myself as Breaker, and I will be the moderator for your call today. All lines will be on mute for the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star, then 1 on your telephone keypad. Now I would like to pass the conference over to your host, Diane Yu, Chief Legal Officer of VerticalScope, to begin. Diane, please go ahead.
Thank you, operator. Good morning, everyone, and welcome to VerticalScope Holdings' third quarter 2023 earnings call. I'm joined by Rob Laidlaw, our Founder, Chair, and Chief Executive Officer, Vince Bellissimo, our Chief Financial Officer, and Chris Goodridge, our President and Chief Operating 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 three and nine month periods ended September 30, 2023, 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 Rob Laidlaw, Founder, Chair, and CEO of VerticalScope. Rob?
Thanks, Diane. Good morning, everyone, and thank you for joining us today. We were very pleased with how our business performed in the third quarter. Through disciplined financial management and improving top-line results, we delivered $6.8 million of Adjusted EBITDA in the quarter against a challenging macroeconomic backdrop. We are very optimistic about the future of our business, and particularly the Fora platform, as we continue to see improvements each month throughout the quarter. Speaking first to our advertising business, we are continuing to see sequential improvements in the business despite a tough ad market. Ad spends have been pulled back compared to prior years as advertisers continue to be very cautious. While we are optimistic about Q4, it's still early days and a bit difficult to say with any certainty where the very important holiday shopping CPMs will land.
Discussions of a potential recession continue to weigh on advertisers' minds, and I believe we won't see meaningful recovery in the macro for a few more quarters. Thankfully, with the changes we have made to our advertising layouts, the introduction of video advertising, and with improving MAU trends, we are seeing stability transitioning into growth in the coming quarters. While our headline MAU number of -8% in the quarter continued to be negative, we are cautiously encouraged by the trend within the quarter, particularly with our forum communities. Users are increasingly discovering the authentic perspectives shared by enthusiasts on our forum platform, and this authenticity is proving valuable and sought after as the internet becomes inundated with mass-produced, AI-generated content.
The result is that our forum community MAUs have turned positive in September at +5.6% and ramped up in October to +19.7%. We remain bullish on the long-term value of the content and data held within our community forums and expect to see continued strength from the Fora platform, which makes up about 70%-75% of overall MAUs. We were also very excited in the quarter to fully launch our Fora Communities mobile app. The app brings together over 1,000 forum communities from the convenience of one mobile app. It's now downloadable from the Google Play Store and Apple App Store. Importantly, it has allowed us to discontinue access to our platform and our data by third-party mobile apps while giving our users the ability to discover new Fora communities. We continue to work on the app.
It's still early days, both fixing bugs and adding new features. User engagement, retention, and monetization have been strong, and we're confident in its long-term future as an integral part of our platform success. Next, our Adjusted EBITDA, $6.8 million in the quarter, was down 3% year-over-year. However, when excluding the Streamable.com, our Adjusted EBITDA was up 61% versus last year. We have previously commented on the challenges we face on the Streamable and do not see that resolving until the broader economy recovers. But the positive EBITDA growth in the rest of our business gives us confidence in our balance sheet and ability to grow VerticalScope as a whole. Lastly, through our disciplined financial management, we were able to achieve 44% Adjusted EBITDA margin within the third quarter.
As previously mentioned, we believe 40%+ margins are sustainable through the back half of 2023, before we enter the seasonally low Q1. We are continuing to cautiously ramp up investment in our Fora platform and mobile app, while making strides in reinventing our commerce business. The commerce business will become less of a headwind in 2024, and we believe we're putting the right pieces in place as we reimagine how this business looks in a post-pandemic world. With that, I'll turn it over to Chris and Vince to go into more detail on the financial results.
Thanks, Rob, and good morning, everyone. Our business continued to show sequential improvement in Q3, with revenue up 6% from Q2 to $15.5 million. Advertising revenue in Q3 was 6% better than Q2, and e-commerce was 4% better. Gains in advertising were driven by ad layout improvements and the introduction of video advertising, more so than improving macro conditions. On a year-over-year basis, total revenue is 21% lower than prior year, largely as a result of lower e-commerce revenue, primarily from The Streamable. Year-over-year trends continue to improve in Q3, and we expect the year-over-year gap to continue to narrow in the fourth quarter. Turning more specifically to advertising, advertising revenue is $12.8 million in Q3, which was 4% lower than prior year, an improvement compared to the 15% year-over-year decline experienced in Q2.
Programmatic revenue made up 64% of total ad revenue and was down 4%, primarily as a result of lower display CPMs and lower MAUs compared to prior year, which were partially offset by the addition of video impressions and the improved ad layouts. Programmatic trends improved throughout the quarter, and we expect this part of the business to show organic growth in Q4. Direct advertising continued to be resilient in the face of macro weakness and was down 5% in Q3 compared to prior year. We've seen relative stability with power sports OEMs, Canadian financial services, outdoors, and tourism advertisers, but lower spending from U.S. auto insurers and online marketplaces continue to impact our direct results as they have throughout 2023. Turning to e-commerce revenue.
E-commerce continues to weigh on our results, with total revenue of $2.7 million, a slight improvement compared to the $2.6 million generated in Q2, but was 57% lower than prior year. Revenue from The Streamable continues to be the main source of weakness for commerce as a result of lower traffic and lower commissions from streaming partners compared to the strong result recorded in Q3 last year. The Streamable accounted for $2.5 million of the $3.5 million year-over-year decline in commerce revenue. The site has shown slight gains recently in traffic and commission rates, but it will take time to show material improvement. E-commerce results continue to be challenging beyond The Streamable in Q3.
The impact of key-shifting consumer spending from goods to services has had a more concentrated impact on the category served by our platform and resulted in lower year-over-year transaction volumes that has impacted this part of our business since the post-pandemic reopening began. Despite these challenges, we continue to have strong conviction in the long-term potential for commerce on our platform that will be realized as we continue to retool this business. Our recurring revenue subscription business, including from the Fora platform, contributed 59% of total e-commerce revenue in Q3 and continues to provide a partial hedge against the more transactional elements of our commerce revenue. Turning to our outlook, we expect continued sequential improvement in both advertising and e-commerce revenue as we enter the seasonally strong Q4 season.
Improving MAU trends, alongside strengthening programmatic CPMs around the holidays and the availability of video advertising, are expected to drive organic growth year over year in advertising revenue, while e-commerce is likely a few quarters away from returning to organic growth. Our outlook for M&A has not changed. M&A activity continues to be subdued across our industry, and we don't expect that to change in the near term. Our focus will be continuing to drive organic revenue and EBITDA improvement and to use our free cash flow to reduce debt. Our leverage is already relatively low, but we believe our shareholders will be best served at this time by continuing to strengthen our balance sheet to give us greater flexibility for future investments. With that, I'll now turn it over to Vince to walk you through the rest of our financial results.
Thanks, Chris, and good morning, everyone, and thank you for taking the time to join our call. The strategic decisions made in the first half of the year have helped us successfully manage costs while continuing to invest in engagement and monetization initiatives that will drive organic growth. This operational leverage has led to improved results, including expanded margins and increased Free Cash Flow, positioning us well to maximize profitability in Q4. As a management team, our primary focus is on building a strong financial foundation supported by profitability and strengthen our resilience against future market challenges. As mentioned by Rob, our Adjusted EBITDA margin in Q3 expanded to 44%, an improvement from the 37% margin achieved in Q2 and the 36% margin generated in the prior year.
This is a noteworthy achievement, as it marks the first time we have seen margins at this level since the three months ending December 31, 2021, during which we recognized a then record $21.4 million in revenue. Looking ahead, we anticipate sustaining a margin of 40%+ in Q4, leveraging our optimized cost base to maximize our profitability against seasonal highs in revenue. In the quarter, we generated $6.8 million in Adjusted EBITDA, down only 3% or $207,000 compared to the prior year, despite a $4.1 million decline in revenue. And it's a notable 24% improvement to the $5.5 million Adjusted EBITDA generated in Q2, driven by our ongoing discipline towards cost management and contributions from monetization initiatives.
In addition to improved margin and Adjusted EBITDA performance in the quarter, we generated strong free cash flow as defined in our MD&A of $6 million, and achieved an all-time high free cash flow conversion of 88%. This compares to $4.6 million or 66% conversion generated in the prior year, with year-over-year increase driven by a reduction in both cash taxes and capital expenditures. These results are a testament to our ongoing commitment to driving financial efficiency and strengthening our financial position. Year to date, we generated cash from operations, less net additions to capital expenditures, and net lease payments of $8.7 million, and made $9 million in voluntary payments towards our credit facility, highlighting our commitment to using all available free cash flow to pay down our debt and strengthen our balance sheet.
As of Q3, we had $54.9 million in net debt, and a Net Leverage Ratio of 2.21x based on LTM pro forma Adjusted EBITDA as defined by our credit agreement. As of Q3, we maintained a total liquidity of $64.4 million, comprised of $6.4 million unrestricted cash and an additional $58 million available to draw on our revolver. Our financial performance continues to improve over the prior year and exceed market expectations. In Q3, we generated $566,000 in operating income, an improvement of $6.8 million when compared to the $6.2 million operating loss in the prior year. The improvement year-over-year is driven by a reduction in operating expenses, including savings realized from cost optimizations and a lower rate of amortization related to acquired intangibles.
This improved operating performance has driven a more favorable net loss of $516,000 in Q3, compared to a net loss of $6 million in the prior year. Looking ahead, we are excited by recent MAU trends across our Fora communities and the positive long-term impact this will have on user engagement and community health. It is important to note that from a financial performance perspective, these gains are muted by softness in CPMs, driven by continued weakness in overall advertiser demand, which we believe will still take a few more quarters to recover. We remain optimistic that as advertiser demand recovers, we will see a corresponding improvement in CPMs and a stronger financial impact from the growing user base across our Fora communities.
The team is encouraged by these trends and remains committed to delivering on our, our organic growth objectives and driving long-term value for both our employees and shareholders. Now I will pass it back to Rob to wrap things up. Rob?
Great. Thanks, Vince. We will now open it up for questions.
Thank you. If you would like to ask a question at this time, I remind you to please press star then one on your telephone keypad now. If you change your mind at any time, please press star then two. We will pause for a moment whilst questions queue. We have first question on the phone line from Sid Dilawari of Cormark Securities.
Oh, hey, guys. Good morning. Nice to see that. Just the first one for, I guess, Rob. Nice to see the ad revenue decline soften during the quarter and advertising ARPU growth turn. Just wanted to get your thoughts on the overall ad market recovery and some of the conversations you're having with advertisers. Maybe if you can provide some color in terms of which verticals are coming back sooner than others for advertising.
Great. Thanks, Sid. Look, I think as we mentioned, the advertising market, the macro today is still not great. I think there's advertisers, you know, whether it be due to, you know, high interest rates, you know, kind of the media cycle around potential recession, or just overall, you know, kind of consumer spending in some of our categories is definitely still keeping advertisers on the sidelines or at least being very cautious. So the conversations we have are certainly, you know, a little more muted than they have been in past years. And I think, you know, our core advertisers continue to be consistent with us, especially around categories like power sports, outdoors, tourism.
But some of those categories, like auto insurance, continue to be really weak, and in some cases, you know, have taken a pretty substantial step back. Automotive advertising, I would say, is still overall kind of yet to significantly recover from some of the supply chain challenges and pullback we saw. So I think there's still opportunities there as we move forward and as you know, kind of dealer supplies increase. So I think what I would say is a lot of the improvement in our advertising numbers and our ad results really comes from you know, kind of self-inflicted changes that we've made, things like improving our ad layouts, introducing video advertising.
A ll of this really bodes well, whereas that ad market starts to recover, we're gonna have not only more inventory available with our positive MAU trends, b ut also higher value inventory with respect to video advertising and some of our improved ad layouts. So, you know, we're really looking forward to the ad market getting better. I don't think that's gonna be in Q4 just yet. I think we're definitely still a few quarters away from that. But I think the changes that we made earlier in the year have really benefited us, and we see advertising moving to the positive in Q4.
Okay, great. Thanks. And then on your Q4 call, you highlighted a few priorities for the year, specifically around the app rollout and the product discovery engine. And you touched on some of these in your prepared remarks today as well. So would appreciate any updates, if you can provide on that front. Last I checked, I think there were about a dozen communities on the app. So yeah, I just wondering if you can provide some more color on those two priorities that you mentioned earlier.
Sure, absolutely. On the app rollout, we are now rolled out to over 1,000 communities, so it's pretty broad, broadly rolled out. And, you know, we're just kind of in the early days now of starting to ramp up marketing, and, you know, push and encourage more of our users to download that app. So I think we went through a bit of a period there, where it was kind of like a quiet rollout, make sure everything, you know, kind of working and functioning as we would expect. And now we're able to start ramping up, and, you know, we're getting pretty excited about it. One, it did allow us to remove that third-party access to our data and to our communities from those third-party mobile apps.
So that's actually a very significant and important milestone for us, and it was done with great fanfare. I think, you know, we've seen competitors in the space have real challenges in you know, kind of turning some of those third-party mobile apps off. And from our perspective, we were able to do it, and a lot of our community members have been, you know, quite grateful and praising the switchover as being pretty smooth. So that was very important for us. And, you know, I think overall, just seeing the user retention, monetization, engagement metrics, all trending quite positively for us has been great to see.
So still early days there, but, you know, we're pretty optimistic about the app and certainly think it kind of cemented its place as a part of our platform's future. With respect to product discovery, you know, we did pull back on spending a little bit there to really focus on, you know, some of the core revenue initiatives. But we've got that back on track and, you know, continuing to experiment and develop around product discovery. We think products and the product discovery process are kind of an important part of our long-term future and our long-term growth. So you'll see more coming from that stream over the next couple of quarters.
Got it. And then any updates that you can provide on Streamable? Has outlook improved at all, personally for streaming partners?
Yeah. The streaming market is still very challenging. I don't see significant recovery coming until the broader economy recovers. You know, I think we went from an environment there where low interest rates, high growth tech market, streaming companies were, you know, significantly valued, and the real focus from investors was on subscriber adds. How many subscribers did they add in the quarter, in the month, in the year? That's really shifted towards, you know, managing costs and focusing really on their own bottom lines. So that's kind of changed the narrative in streaming, a fair bit. At the same time, you know, we've got new leadership in place. We've got an exciting roadmap. We're reinventing that business for a post-pandemic world.
So again, this one's gonna take a longer time, but, you know, we, we think that the Streamable is still a very exciting property for us. It's just going through, I'm gonna call it kind of more like it's going through its 2007, 2008 moment, you know, referring to the, the financial crisis and, and what some businesses went through during that time. So the Streamable is, you know, I think, very close here to being at its bottom or its trough.
I think, you know, we're getting close to kind of flipping that switch where, you know, the streaming companies are starting to ask a little bit more about, "Hey, you know, how can we get more subscribers and partner on some profitable initiatives?" So, you know, very, very small green shoots, but something that we think we can build upon.
Okay, great. Thanks for the color. And then just one last one from me before I pass the line for Vince, maybe. Just looking at your free cash flow for the quarter, obviously solid conversion here. Your CapEx was down significantly versus last year. I know last quarter you were still in the midst of onboarding some of your communities onto the mobile app, and you also talked about adding video capabilities through your community. So I would have expected CapEx to be slightly stable or slightly up. Just wondering if you can provide some color on that and how we should think about CapEx going forward.
Yeah. Hey, Sid, thanks for the question. Yeah, so just sort of reiterating on Rob's point, you know, the fact that we were focusing on fewer products, and the shift towards sort of an experiment stream style of product generation, that basically means a lot of the upfront dev work that we would have normally capitalized is no longer eligible under IFRS. So I would expect to see, you know, our run rate going forward from a CapEx perspective to stay in and around these levels. What you are seeing in the quarter is still some contributions with regards to the work we've done on ad tech and whatnot, but as that subsides, I think, you know, $500,000 a quarter is a good run rate if you're estimating CapEx on the business.
Okay, thanks. I'll pass the line.
Thank you. We have another question on the line from Valery Heckel of CIBC World Markets.
Hi. Good morning. Thanks for taking my question, and also for the added insight on how the app rollout is going. I did have a few follow-up questions, and first, I was wondering if you're starting to see the app replace a bit of the online traffic you usually receive from search engines, and if that's something you expect to continue to improve over the next couple of quarters?
Hi, Valery. I can take that one. Absolutely, we are seeing certainly some of our users starting to shift their behavior from mobile web over to mobile app. And one of the kind of promising signals that we're seeing is that when they do that, they're actually using our communities more often and posting more often. So that content contribution is really part of the flywheel of growth for Fora. So we're overall pretty excited about that, and I think that's just one of the many metrics that kinda give us confidence that this is a big part of our future.
Wonderful. That's great to hear. And just on those metrics that you mentioned, are there any KPIs that we should be looking to over the next few quarters that you expect to be providing us with?
Yeah, I think we're still early days on the app, and, you know, we'll kind of work through a bit of the marketing phase, and as we ramp up, kind of bring some of those KPIs forward on future calls. But nothing to report just yet, as it's still kind of early days, smaller numbers, but certainly I think just around those three kind of key pieces: engagement, retention, monetization, we're gonna look for, you know, being able to provide the market over the next couple quarters with some additional transparency there.
Okay. That's very helpful. Thank you so much.
Thanks, Valery.
Thanks.
Thank you. To ask any further questions today, please press Star then 1 on your telephone keypads now. Confirming we have had no questions registered, so I would like to hand it back to Rob Laidlaw for any closing remarks. Oh, I apologize. We do have a question from Tawaki Dujemia of TD Cowen.
Hi, guys. Thanks for taking the question. Subbing in for Vince here. Great numbers on the margins, and I think in the press release, you talked about focusing lowering the cost on the e-com operation as one of the reasons why the margin is so good. Just wondering, I know you talked about e-com recovery is still gonna be a couple quarters out, but how much OpEx or how much more do you need to invest once that e-com market starts up? Like, are we or is this run rate sustainable to support e-com growth in, call it a year, a year and a half? Or are there gonna have to be more investments down the line?
Thanks for the question, Tawaki. Yeah, so e-commerce, we've actually already kind of, within the third quarter, made some of those investments. So from a run rate perspective, we feel pretty comfortable here that, you know, any additional investment will be supported by additional revenue. And, you know, from the perspective of kind of do we need to layer on a lot of cost to ramp that business back up? We don't think so. We think from a margin perspective, that we're able to kinda sustain here, and that overall, you know, like we said, e-commerce is gonna take a few more quarters, for sure, but we do have a lot of confidence in that business.
We're starting to see a couple of green shoots, and we've got some new leadership in place there that we think is, you know, very scrappy and going to help us build that business for the long term and kind of reinvent it post-pandemic. So I think, you know, we've—like I mentioned earlier—I think we're either very close to or near the bottom and certainly provides, you know, much smaller headwinds in 2024. So I don't think we'll see commerce kind of weigh on VerticalScope's overall results the way it has in 2023. And, you know, as we look to 2024, you know, it's gonna be a year of kind of rebuilding, but not necessarily from a, you know, do we need to put a lot more money into the commerce business?
That's perfect. As a follow-up on that, I think you mentioned last quarter that you've now lapped all of The Streamable, and so Q4, the headwinds from The Streamable is gonna be much less on a year-over-year basis than the last three quarters. But just wanted to make sure that there isn't anything left over in Q4 2022 that might be a headwind for this year.
Yeah. Chris or Vince, d o you wanna t ake the lap?
I can take that. Yeah, it's Chris here. So it really, the lapping is happening within Q4. So, you know, in October, we still had a, you know, fairly tough comparable there, and you know, we start to see that roll over as we work through November.
Perfect. Great results, guys. Thanks.
Thank you. I would now like to turn it back to Rob Laidlaw for any closing remarks.
Great. Thank you. Thanks, everybody, for joining us today. As always, we appreciate your engagement, the trust, and support that you're showing us, and we look forward to closing out Q4 in 2023 on a very strong note. Thank you.
Thank you all for joining. I confirm this does conclude today's call. Please have a lovely rest of your day, and you may now disconnect your line.