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spk00: Hello all and welcome to the Vertical Scope Holdings fourth quarter and full year 2023 earnings call. My name is Lydia and I'll be your operator today. If you'd like to ask a question during the Q&A you can do so by pressing star followed by the number one on your telephone keypad. I'll now hand you over to your host Diane Yu, Chief Legal Officer to begin.
spk07: Thank you, operator. Good morning, everyone, and welcome to Vertical Scope Holdings' fourth quarter and full year 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 corridor 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 12-month period, ended December 31st, 2023, which is available under the company's profile on CEDAR Plus, 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 Vertical Scope. Rob?
spk06: Thanks, Diane. Good morning, everyone, and thank you for joining us today. I was very pleased with the performance of the business in Q4. We continued on the momentum that we've been building throughout the year and saw some nice gains on both fora MAUs and on digital advertising revenue. These positive trends have accelerated in Q1 2024. Our business has recovered well since a challenging start to 2023. Digital advertising, which now accounts for 85% of our revenue, grew by 6.5% in the quarter. Our new video advertising platform was a key driver of this growth and we have been impressed with the advertiser demand for video in Q1. Our advertising business typically experiences its strongest quarter of the year in Q4 and the weakest in Q1. We are seeing video revenue actually sequentially grow between these two quarters. It's impressive and there's real excitement around this new platform addition from direct advertisers and programmatic partners alike. Commerce continues to remain challenging, but now that it's about 15% of our business, there is much less of a growth headwind for us and more of a future opportunity. Despite lower revenue, we have recently seen an uptick in streaming conversions and are introducing some new engagement tools and user subscription packages to these websites. We're continuing to put in the scrappy work required to build a bright, long-term future for these properties. Our product initiatives for 2024 are largely focused on three key areas on our forum communities. First, we are continuing to invest in the Flora mobile app. We are adding new user functionality based on feedback on a weekly basis and focused on delivering a high-quality user experience as we continue to observe that users who are on the app are more engaged in contributing more content than those on mobile web. We are very long-term focused on the mobile app and believe we have plenty more work to do, yet at the same time, happy to build momentum with our user base. Second, we are investing in our core forms experience on Fora and making it easy for our members to contribute valuable content. We have over 2 billion posts on our platform, And we think we can grow this number even faster, which in turn will drive further growth on MAUs. Third, we can continue to believe we have a unique characteristic in our online forums. We have authentic enthusiast audiences discussing products that they own and use and are very passionate about. By utilizing AI to improve the organization of post feeds, we believe there is immediate potential for increased engagement and time on site and on app. This is just one area where we think AI will help grow our communities. Next, I would like to highlight the impressive traffic growth on our forums, which grew by 18% in Q4, from 61 million to 72 million MAUs. Overall, Vertical Scope clocked in at 108 million MAUs in the quarter, which if you exclude the paid traffic, primarily driven last year by our commerce business from the year-over-year results, overall MAUs were up 5.4% versus 2023. We are seeing continued momentum and growth in Q1, and this should be further enhanced as Google increased its crackdown on low-quality AI-written content with its announced March algorithm updates. It is clear now that users are seeking authentic, real enthusiast opinions on products and services and they are finding them on forums like our own and those of reddit we are winning the minds of users versus the low quality ai content that is flooding the internet in the past few weeks we've had a number of questions around reddit with their upcoming ipo and in particular their deals with various ai llms we believe that we share similarly attractive characteristics as reddit in the value of our posts and content for AI training data. We also believe we are differentiated by the enthusiast audiences that are primarily posting about products they own and love on our communities. This unique data is highly valuable in an AI world, and we have to be extremely careful about how we treat it. We are in the early stages of this highly confidential process, but we are confident that AI will help us further unlock our platform's value. Before I turn it over to Vince and Chris to walk you through the quarter financials, I wanted to spend some time on capital allocation. Since last January, we have reduced our debt by over $17 million and today sit with a net debt position of less than $50 million with high confidence in our business prospects. We will continue to consider voluntary prepayments against our credit facility. However, we have strong conviction that there are attractive opportunities to put our free cash flow to work in other ways as well. As mentioned in our press release, we will be focusing on two key areas dependent on which is most accretive to our shareholders. First, we believe that the business we know best, have a high degree of confidence in, is our own. We believe there is an attractive opportunity and perhaps a very time-limited one with Reddit's upcoming IPO resetting our comparable set to repurchase our own shares through our approved NCIB program. We will be aggressively buying back shares if we can do so at attractive prices. Second, we believe that AI has welcomed a material improvement in our long-term revenue and traffic opportunity for our forum communities, and this makes tuck-in acquisitions very attractive. We will look to add more high-quality, product-focused forum communities to our platform at accretive multiples. Most sellers are seeing the same opportunities that we are and may be reluctant to sell to us at an accretive multiple. But we will remain disciplined in adding scale if multiples are not accretive. With that covered, I will turn it over to Vince and Chris to go into the numbers on Q4 and full year 2023. Chris?
spk01: Thanks, Rob, and good morning, everyone. The momentum we built throughout 2023 continued in Q4 with some notable gains in advertising, which benefited from improving MAU trends, ad experience improvements, and the introduction of video advertising in Q2. Total revenue in Q4 was $17.9 million, which was 6% lower than prior year. However, our advertising business, which represents 85% of overall revenue, delivered 6.5% organic growth in the quarter. E-commerce, now 15% of total revenue, continued to be challenged and was down 45% compared to prior year, a slight improvement to the trend we experienced in the first three quarters of the year. For the full year, total revenue was 60.9 million, 24% lower than prior year, with advertising down 9%, and e-commerce down 57%, mainly as a result of performance on the streamable.com. Turning more specifically to advertising, advertising revenue is $15.2 million in Q4, up 6.5% compared to prior year. Programmatic revenue was the highlight of the quarter. It was up 20% compared to prior year versus the 3% decline experienced in Q3. And it made up approximately 65% of total ad revenue in Q4. As our MAU trends continue to strengthen and advertising budgets improved, Our programmatic business is well positioned to capitalize. The investment we've made in our ad tech is driving better yield per page, and video has added an incremental source of valuable monetization. Q1 has started out strong on programmatic, with year-over-year growth trends continuing. Direct advertising was down 12% in Q4 and 9% for the full year, and accounted for 35% of our total ad revenue. The direct channel continued to see some softness in Q4 from U.S. auto insurance, and online marketplaces, as well as retail advertisers. Year-over-year trending to start the year, however, has improved, and we expect the direct channel to show growth in Q1. Turning to e-commerce revenue, e-commerce was challenged throughout 2023, and we experienced only modest improvements in trend in Q4. In the quarter, e-commerce revenue was $2.7 million compared to $4.9 million in the prior year, and flat to Q3 of this year. The Streamable.com accounted for approximately 40% of the year-over-year decline in Q4, with the balance coming across commerce-focused properties, including fitness sites. Subscription-based revenue accounted for 56% of total e-commerce revenue in Q4. And as I mentioned earlier, overall e-commerce revenue accounted for 15% of our total revenue in Q4. Turning to our outlook, advertising is off to a good start in 2024, and we expect to deliver another quarter of organic growth in Q1. As Rob mentioned, we're seeing really strong growth in MAUs in our forum communities, and this is resulting in double-digit impression gains that we're better able to monetize with improved ad experiences and our video platform. In our direct channel, the US insurance business has been slow to return, but overall sentiment with our direct customers is improving. We're also encouraged by the 2024 return of some auto and power sports customers who pulled back to advertising in 2023. I also wanted to comment briefly on Vertical Scope's unique positioning in the advertising landscape as the industry begins to grapple with the loss of third-party cookies in the Chrome browser. That change is expected to happen over the next several quarters, although Google has, on a few occasions, kicked the can down the road. Our data will prove increasingly valuable as cookies go away. This will provide tailwinds to our advertising business and represent a growth opportunity for Vertical Scope. As data signals become increasingly scarce on the open web, vertical scoped community data, which has the combined power of contextual relevance with product niches, high addressability with over 60 million registered users, and high purchase intent. We expect this will support stronger CPMs for both programmatic and direct channels, and will give advertisers an even stronger incentive to work directly with our sales team to target custom audiences and grow campaign performance. With that, I'll turn it over to Vince to walk you through the rest of our financial results.
spk02: Thanks, Chris, and good morning, everyone. And thank you for taking the time to join our call today. Our Q4 results highlight a successful turnaround and our exciting entry into a period of growth. Our strategic initiatives focused on improving profitability have yielded impressive results, including expanded margins and robust free cash flow conversion. The ability to generate a continuous cycle of profitability gives us a powerful advantage, not only in allowing us to invest, our free cash flows towards strengthening our financial position, but also allows us to continue to invest in high growth areas that will drive long-term value for our users, employees, and shareholders. Our commitment to optimizing cash flow has yielded impressive results. Free cash flow conversion rates increased in both the quarter and year, resulting in a 98% conversion rate in Q4. This translates to $8.1 million in free cash flow for the quarter. a substantial increase from the 59 percent conversion and the 4.2 million generated in the prior year. For the full year, our free cash flow converted at 87 percent, generating a total of 20.5 million, which is also an improvement from the 70 percent conversion rate in the prior year. The key drivers behind these improved conversions were a reduction in capital expenditures, particularly in capitalized software development, and a decrease in income taxes paid due to revenue declines and an optimized tax strategy. The majority of the cash flow generated period was reinvested towards reducing our debt position and improving our leverage profile. In Q4, we generated $4.6 million in cash flow from operations, bringing the year-to-date total to $15.5 million. In Q4, we made $4.4 million in principal payments on our credit facility with $3.8 million of those being voluntary. Year-to-date, we made a total of $15.3 million in principal payments with $12.8 million being voluntary. Our net leverage ratio in the quarter, as defined by our credit agreement, was 2.1 times, and we expect the ratio to drop below two times in 2024. Our cultural profitability has fueled positive results, not only in our robust free cash flow generation, but also in our adjusted EBITDA margins that expanded throughout the year. Adjusted EBITDA returned to growth in the quarter, up 14% compared to the prior year, as a result of first-half cost reduction and growth in digital advertising revenue. For the year, adjusted EBITDA decreased 23.9% to $23.5 million, a key driver being a significant drop in e-commerce revenue from our streaming property, TheStreamable.com. In the year, TheStreamable's revenue decreased by 80% from $12 million to $2.5 million, and the property's adjusted EBITDA decreased by 88% from $10.1 million to $1.2 million as a result of traffic declines and significant cuts in commissions from streaming partners. Despite these challenges, our core business continued to perform well. Excluding the streamover from our full-year results, adjusted EBITDA would have increased by 7% compared to the 23.9% decrease recognized over the prior period. And free cash flow would have increased by 67% compared to the 5% decrease over the prior year that we recognized, underscoring the strength and resilience of our core platform. Adjusting with the margins for both the quarter and the year expanded compared to prior year. The year-over-year declines in revenue offset by an optimized cost base. Our Q4 and year-date margins were 46% and 39% respectively, compared to 38% margins in both periods in the prior year. Given our stable cost base, margin performance in 2024 will continue to be aligned with top line revenue growth and our ongoing investment in the FORA platform. Our focus on operational efficiencies and cost reduction, driven by first-half initiatives and reduction in amortization from acquired intangibles, resulted in a 115% increase in operating income to $2.8 million, compared to $1.3 million in the prior year. This strong operating performance translated directly to the bottom line, with net income increasing to $2.1 million, representing a $1.9 million improvement compared to the prior year. Earnings per share also climbed to 10 cents, from one cent in the prior year and surpassed market expectations. For the full year, our net loss narrowed to $19.8 million, primarily driven by a $21 million reduction in operating losses. Improvement in both periods underscores the effectiveness of cost optimizations and positions us well for continued profitability. We've navigated a successful turnaround and are encouraged by our positive financial MAU trends leading into 2024. Our profitable business model gives us a competitive advantage and allows us to make strategic investments that will drive sustainable long-term growth on our platform. This is a pivotal moment for forums and user-generated content. We are positioned well to capitalize on this opportunity and deliver significant long-term value for our shareholders. And with that, I'll pass it back to Rob for closing remarks. Rob?
spk06: Thanks, Vince, and very much agreed. It's a pivotal moment here for forms and user-generated content. So with that, operator, we'll open it up for questions.
spk00: Thank you. Please press star followed by the number one if you'd like to ask a question and ensure your device is unmuted locally when it's your turn to speak. If you change your mind or your question has already been answered, simply press star followed by the number two. Our first question today comes from Drew McReynolds of RBC. Your line is open. Please go ahead.
spk09: Yeah, thanks very much. Good morning and great to see everything kind of building momentum-wise here. I'll kind of limit my questions to two or three here. I guess first, Rob, on the AI side, it's amazing how that narrative has evolved as it pertains to vertical scope, you know, you've talked about kind of AI on the content side, on the cost structure side, and now on the training side, can you just kind of flush out, you know, what we should be looking for here in 2024 with respect to, you know, your use and adoption of it?
spk06: Yeah, thanks, Drew. I mean, AI has, been and is proving to be a huge help for our members and engagement. And we're really working through, you know, kind of putting it almost everywhere we can within our product to make it better. It's also making us more efficient operationally. If you think about our staffing levels year over year, our staff are just, you know, they're using AI in their day-to-day work. They're using it in their workflows. It's making us more efficient operationally. And we're trying to weave it into literally everything we do. And I think it's really incredible how productive we can be and how AI can help us. But I think there's also a really important point around how much it's being used online to just flood the internet with oftentimes poor quality, unchecked, unreviewed content And, you know, that has really kind of raised the, you know, I think the eye of Google and I think users alike. And users, I think, are now, you know, really noticing when content is written by AI. It's becoming hard to trust a lot of this stuff. And users are turning to forums like our own and those of Reddit with increasing frequency and getting more and more comfortable with these user-generated content platforms to find the authenticity that they're looking for, especially when it comes to a purchasing decision. And I think that's what really makes our forums so wonderful is that they're very much tied to products. And while it's hurt us a little bit on the professional-generated commerce side of our business, the user-generated content side of our business, which is more than 85% now, is absolutely a beneficiary here. So we're really excited about these trends from both an operational efficiency standpoint, but also user engagement and platform growth.
spk09: That's great. And then just two follow-ups on that. Obviously, on the margin side, with all of the efficiency you've talked about and rationalization last year, we saw very good margins this quarter. As we look into 2024, how should we expect you to kind of balance continuation of that kind of profitability curve with reinvestment? And secondly, just on the M&A playbook, great to see you guys back on your front foot with respect to looking at targets. Just how has the criteria of M&A changed or evolved for you guys relative to you know, either pre-advertising slowdown or pre-Gen AI? You know, is everything you're looking at kind of pretty much what you looked at before, or is it evolving in different ways? Thank you.
spk06: Drew, maybe I'll take the M&A question first, and then I'll turn it to Vince on the margin side. You know, on the M&A side, I think, you know, we are definitely seeing, you know, some benefits again of our scale against the independent operators. So when you think about things like the opportunity behind training data, when you think about the opportunity to implement GenAI into a platform and also to get the benefits of kind of that operational efficiency, those mostly qualify to a scaled operator like ourselves And from that perspective, I think it can make these potential acquisitions more creative. It kind of rewrites the playbook for us, again, giving us advantages of scale that smaller operators won't be able to unlock themselves. So that's pretty exciting for us. On the actual targets themselves, I would say we're very much in a bit of a funny story, but I got an email the other day from somebody reaching out that I had contacted in 2009 saying he was finally re-interested in transacting. So some of these are very, very old contacts. Some of them are new contacts, but we are very much focused, really 100% focused on tuck-in form acquisitions that can be highly accretive. So I don't think you're going to see a crazy amount of spending, but we definitely will be disciplined about keeping these acquisitions accretive, and we think there's great targets with really a freshened playbook on how we can make them even more accretive and grow faster once they're on our platform. With that, I'll turn it to Vince on the margins.
spk02: Thanks, Rob, and thanks, Drew, for the question. Yeah, so Drew, with regards to margins, right now what we're saying for 2024 is that the levels are pretty much in line with what we saw in 2023. And there's really two reasons for that. One that you touched on, we're still investing in the platform. So this investment is in the form of bodies and people and tech that will help us drive initiatives like AI, mobile app, etc., And we'll realize the growth from these initiatives in older years, so in 2025 and beyond, very confident of that. And then two, it's really the timing of a return in CPMs from sort of the depressed macro conditions. You know, we're seeing some great movement on traffic across our four platform, and we're seeing positive trends there. But those trends aren't necessarily transpiring into a one-to-one relationship to top-line revenue growth because CPMs. are lagging behind. Once those do start to uptick and we see that return in macro, that's when we'll start sort of modeling in some lift and the operational leverage that will come from that. But as of now, you know, we're saying that we feel that margins will stay in line with, you know, what we saw this year.
spk09: Okay, that's great. Thanks very much.
spk00: Our next question comes from Vince Valentini of TD Newcrest. Please go ahead. Your line is open.
spk11: Hey, thanks very much. Maybe first I can try to tie a loose end on the M&A question. Would you envision using more cash or stock to pay for deals?
spk06: Just on M&A, we're a cash buyer.
spk11: That's pretty clear. Thank you. In terms of the outlook... I think what I'm hearing is you'd be expecting to be packed back to positive consolidated revenue growth in full year 2024, but even, even in the first quarter, given the video advertising trend and given that the headwind from streamable is now so small, but is that, am I reading that right?
spk01: Hey Vince, it's Chris here. Yeah, you're, you're reading that right. We're, um, we're expecting to turn the corner there on overall revenue.
spk11: And is the streamable, that $2.5 million, do you think that goes to zero or have you reached a floor there?
spk01: No, we don't think it goes to zero. I mean, it may bounce around a little bit, but it's obviously a relatively small part of the overall business now, so it doesn't really have that swing factor on the overall number. You know, The team's doing a really good job in finding its place, and as Rob mentioned, we've started to see improving conversions for streaming clients, so it's early days there, but we think the property definitely has long-term value in our portfolio.
spk11: Okay. Sorry, maybe two more. The full-year revenue growth in 24, just to be clear, that should be achievable with or without... some sort of deal to monetize your data with LLMs?
spk01: Yeah, that's correct.
spk11: And if you can, I know you said highly confidential, Rob, but if you can get something done, is realistic timeframe in the next couple of months, or should we be thinking more at six to 12 months?
spk06: Yeah, Vince, I don't want to compromise our position too much here, so I'll probably say no comment on timing for now.
spk11: No problem. And then I will sneak in – no, sorry. I don't know how many more people are on the line, so I want to make sure these things get covered. The free cash flow conversion almost seems too high, Vince. It just begs the question, is there anything – timing issue-wise related to taxes or any other items that you think would flush back in 24 to make the conversion a little bit less?
spk02: Yeah, so, hey Vince, that's exactly right. For Q4, the elevated levels were related to timing of a refund that pertained to a prior period filing. I think all of those have flushed out now. We have right now, in terms of full-year cash taxes, we're estimating approximately a million dollars next year and that's effectively reduced because of pullback and like properties like streamable and just we've overall scrubbed our our tax and our tax framework here and it's really optimized now so we're thinking it's about a million dollars next year from a cash perspective excellent and last but potentially not least if my memory is correct back in your IPO
spk11: process, you had some metrics to compare Vertical Scope to Reddit in terms of engagement and monetization and maybe other stuff. Is there any refresh on any of those stats you can help us with? Because obviously we all think Reddit will be in focus over the next month.
spk06: Yeah, Vince, we're thinking about how we can kind of put something together and maybe at a future kind of investor or analyst day. But certainly um you know maus um is is one and and the two billion posts um is another and probably pertains also to some of the lom thinking um so again we think we compare very very favorably um we're still seeing in a number of areas where our communities are you know in some cases growing faster than reddits or just receiving a lot more posts We definitely think, look, people are coming to, you know, they're using Reddit, absolutely. Reddit and ourselves have both grown very, very nicely since the kind of proliferation of AI. And our view here is that, you know, users will use Reddit and that will benefit our platform as well as they look to go deeper on topics that they're, you know, very, very passionate about. Reddit is still, you know, hugely successful on a kind of, everything from what you know and interesting content and memes and news. But when you really want to go deep on mountain biking or snowboarding or watches, I think that's where our platform shines. And I think as much as they're a competitor of ours, I think the two platforms exist very well together and we're you know, kind of differentiated based on our product focus here. So we're excited about their IPO. And, you know, I think our platform and their platform have both benefited quite a lot from this kind of proliferation of AI and how it affects both of our businesses.
spk10: Excellent. Thanks.
spk00: The next question is from David McFadgen of Cormac Securities. Please go ahead.
spk03: Hi, great. Yeah, a couple of questions. So first of all, on AI, do you think it's reasonable that you would announce some revenue from licensing your database to AI this year?
spk06: Thanks for the question, David. Look, we're in pretty confidential discussions, and I think Look, one way or another, there's going to be some revenue. What forms that comes in, I want to be careful about what we say here because we're obviously covered by confidentiality and we're also in a negotiating process. So I think that's probably all I'll say on that one.
spk03: Okay. And then for the quarter, you know, you talked about video ad revenue and also how it's looking getting Q1 that's increased sequentially from Q4 to Q1. Can you give us an idea on the magnitude of video ad revenue as a percentage of your total ad revenue?
spk01: Yeah, David. It's Chris here. So, you know, video overall, it's in the zip code of around 10% of total revenue right now. It's... It continues to grow, though. And, you know, we think there's great potential for it this year.
spk03: When you say 10%, you're talking just ad revenue or total revenue, including income? Total revenue. Okay.
spk06: And that's very much just on a runway looking forward.
spk03: Okay. And then just on MAUs, you know, obviously we saw a sequential improvement, obviously a good sign. And you talked about, at least in the MDA, you talked about it was driven by an increase in search engine traffic. But can you get a little more detail on that? Like what is driving that increase in search engine traffic?
spk06: Yeah, I think what's driving it is the change in how Google has viewed and, frankly, what users are viewing as credible product reviews and really thinking through. And I think we've all seen it, right? I mean, through COVID, everybody built a commerce business. Every old media company built a commerce business. Then they decided some of the COVID trends started to wear off. Let's supercharge it with, you know, let's go from 10 product review articles to a thousand product review articles. And then it became a thousand per day. And the internet just became flooded with this stuff where nobody had touched the product. It was just, you know, machine written in many cases, not reviewed by humans and it proliferated. And I think what happened was, you know, users, started doing things like typing in you know snowboard review reddit snowboard review snowboarding form they started seeking out you know reddit and forum based reviews because they understood that all the other stuff they were getting was really a shill for a product it was you know looking for commission or affiliate revenue, and it wasn't authentic. So as users kind of changed their behaviors, Google updated their algorithms to really ensure that their users were getting the right results they were looking for. And I think that's worked to the benefit of Reddit and ourselves. So we see this uptick as being kind of a fundamental shift in how consumers and algorithms think about user generated content versus professional content. And particularly when I say professional content, I really lean towards the professionals now primarily using AI and not actually touching and feeling these products compared to our users who not only own them and are passionate about them, but tear them apart, rebuild them and give you know sometimes multiple page long product reviews with detailed pictures and everything else so I think it's just a market shift and and it's it's one that you know you could kind of see it coming in the past few years but in some ways like our business the commerce business was just doing so well it was like you know it was kind of hard to see when it might happen and I think AI was probably the thing that, you know, pushed it back towards our favor.
spk03: Okay. So, so you talked about Google coming up with an algorithm update this month. Sometimes these algorithm updates are hard to predict what's going to happen. Cause you don't really know what they're going to do, but I guess you're, view is that this algorithm update is definitely going to be positive for your search traffic? Is that accurate?
spk06: Yeah. I think one of the things that I would clarify there is I actually think Google has become pretty good at telling the market what these algorithm updates will do. And, you know, on this one, they've been pretty clear about what they've targeted. and that is the proliferation of low-quality AI content, people that are hijacking domain names, you know, old, old domain names with domain rank and then putting thousands of articles on them very, very quickly. So, you know, we know what they're getting at, and I think it's fairly clear that, you know, forums and Reddit fit again kind of benefit because of our authenticity and, you know, kind of the depth of our content.
spk03: Okay. All right. That's great. Thank you.
spk00: Our next question comes from Valerie Heckle. Please go ahead. Your line is open. Hi.
spk08: Good morning. This is Valerie. I'm for Todd Copeland. Thank you for taking my question. And congratulations on a good quarter. I wanted to circle back on the topic of AI and the LLM data licensing opportunity you mentioned previously. And I realize you're currently in confidential discussions on the topic and are limited on what you can say. So my questions are a bit more broad, but I would be curious to hear your general views on the topic. And so I was wondering, given that vertical scoped communities are a more disparate collection of properties compared to Reddit, who has a more centralized platform. Does this difference create any challenges for LLM providers who may want to train on your data? And I have a brief follow-up after this.
spk06: Thanks, Valerie. No, because we have the 4L platform, the 4L platform basically, while we continue from a user-facing perspective, certainly kind of have many different enthusiast brands which our users love and are very loyal to. From a backend perspective and from a training perspective, it's very centralized and much like Reddit, we operate a massive platform with, again, over two billion posts on the four platforms. So that's not a challenge.
spk08: Okay, that makes sense. And then just to realize that the LLM data licensing market is still in its early stages, but I'm also wondering if there's anything that might prevent LLMs from just simply scraping the data from your community?
spk06: Look, I think there's plenty of, you can see there's a lot of lawsuits out there. There's a lot of pushback. We do on all of our communities have kind of more recently announced kind of no training tags on our side, whether some of the LLMs will actually obey those or not. But I think there's a lot of pressure in the AI industry to kind of self-regulate so that they don't have to be regulated and I think a part of that is signing deals with some of these very large platforms like Reddit and our own. So I think that's why there are negotiations and there's I think a high degree of confidentiality around them because the data itself is extremely valuable and extremely important to our users and to our business
spk08: Wonderful. That makes sense and really appreciated that context. Thank you. That's all for me. Happy to pass the line.
spk00: Our next question comes from Aravinda Galapadiji from Canaccord Genuity. Please go ahead.
spk05: Good morning. Thanks for taking my question. Just a quick follow-up on the LLM opportunity. Rob, is there operationally some sort of preparation you need to do there? I mean, is there any kind of reorganization or restructuring of your platforms on the software side perhaps that's needed before you can kind of implement whatever deal that you're negotiating? I'll just maybe stop there.
spk06: Thanks, Harvinder. Actually, there was some tweaking to the platform and just how we make our kind of backend work, but that work was done last year. So there's nothing further from a platform perspective that's operationally required.
spk05: I see. Okay. Thank you. And just a couple of financial questions, perhaps for Vince. You know, I think you are pretty clear on your margin expectations. Is there anything that we should be aware of from a cadence standpoint? first half, second half, given sort of obviously the cost reductions are made in the middle of the year and it started to kind of play out more in the second half last year. How should we think of sort of that margin cadence through the year?
spk02: Yeah, so I think, you know, our margin cadence, and thanks for the question, I think our margin cadence will more align with sort of our historical trends and seasonality. You know, as Rob noted, Q1, you know, historically has been a low point of the year from a revenue perspective and margins follow suit, and Q4 being sort of a peak. And we saw that this year in our Q4 results with a 46% margin. So as you're sort of going through your model, I would sort of follow that similar cadence. So call it peak in Q4, 30% revenue at that point, 20% of revenue in Q1. then the quarters in between, you know, sequential growth between Q2 and Q3, you can split the difference, you know, whichever way you see fit. But that's pretty much the cadence that you should expect. Okay.
spk05: Okay. That's pretty helpful. And lastly, on CapEx, obviously, you know, you did see a material reduction in capital expenditure last year. You know, should we kind of, you know, think about you guys? I know there's still some investments to be made as you kind of look to exploit these opportunities. Should we sort of see, kind of lift off that low base in 23 on its way to where maybe you were prior or any kind of color on that?
spk02: Yeah, for sure. So prior levels were driven by migrations and work on the mobile platform. Now that migrations have been complete and the mobile platform has now been launched, the level of development work on either of those has come back. So we feel that $2 million a year baseline is going to hold for 2024. We also have, you know, under IFRS, we're limited to the amount of R&D or upfront R&D that we can capitalize anyway. So as a team goes through their experiment process and tries to find the next product or initiative they're working on, those costs are are hitting the P&L directly. So $2 million is how we think we'll sort of be from a 2020 perspective.
spk05: Great. Thank you, Vince. I'll pass the line.
spk00: Our next question comes from Adeer Kadve of 8 Capital. Please go ahead. Your line is open.
spk04: Hey guys, thanks for taking my questions. I wanted to actually ask on the mobile app, it's been launched, it's been out in the market for a couple of months now. I think last quarter, you know, you guys had mentioned it was early days, but I want to talk about how the monetization is actually trending on the mobile app. Anything to call out there?
spk06: Sure, Adir, I can take that one. Mobile app has been actually monetizing above our expectations. And the main reason for that is the increased engagement. So generally versus mobile web, we think of it as a kind of slightly lower CPMs, but we're getting more engagement. So the overall revenue per session is actually much higher than mobile web at this point. So it's looking very positive, and that's why we want to get it into more users' hands. So we're really looking to kind of grow and stabilize and reach critical mass, where it becomes a reasonably high percentage of our overall mobile traffic.
spk04: Any timeline to when that could potentially happen?
spk06: The sooner the better. Yeah, we're pushing it, certainly. I think for right now, it's a matter of just really trying to get those key features built that users are looking for. And obviously, we've got some very enthusiastic users. And some of them are even technical experts and tech support community members. So really building an absolutely amazing product for them is really our focus here. You know, as we accomplish that, I think we'll see the shift start to happen. And, you know, it's really just going to be building momentum, right? There's a lot of our users, you know, they've been on our platform for five, six, seven years. They're probably, you know, perfectly comfortable operating off our mobile web platform. And I think it's actually a higher uptake with some of the new users who are just very comfortable in an app environment. So part of this will be time. But I think the other part is just building a completely killer app.
spk04: Got it. Appreciate that. And then one thing I wanted to ask on is just the macro spending environment. You know, 2024 just being a political year, we are expected to see some more some growth in advertising revenue simply from the presidential election in the US. Historically, have you seen that kind of flow through to your platform in past election cycles? Or are you kind of, do your platforms stray away from that?
spk01: Hey, it's Chris here. So I wouldn't say we stray away from it. I think we benefit similarly to the way the market would benefit overall. So obviously our sites aren't politically focused. They're not news sites. You know, people are there to talk about products. However, you know, we do have tremendous reach and you would tend to see some spillover political advertising hit us predominantly through programmatic.
spk04: Got it. Thanks, guys. I'll pass the line.
spk00: And our final question comes from Andy Goyen or Raymond James. Please go ahead. Your line is open.
spk10: Thank you for taking my question. So just a quick follow-up on the mobile app. Do you have to spend, you know, money to get users to transition to the app? Was there any, you know, acquisition cost there? That's all my questions.
spk06: Thanks, Andy. No, right now, I mean, we've got a huge user base. So we've got plenty of low-hanging fruit to convert. In the future, I think we can certainly look at more of an acquisition model as we get to that point. But right now, I think we've got plenty of low-hanging fruit with our existing user base.
spk10: Gotcha. Thank you, and congrats on the quarter. Thanks, Andy.
spk00: We have no further questions in the queue, so I'll turn the call back over to Rob Laidlaw for any closing remarks.
spk06: Right. Thanks, everyone, for joining. Thanks for all the questions. We appreciate all the trust and support that you've shown, and we look forward to delivering a really strong Q1 in 2024.
spk00: This concludes today's call. Thank you for joining. You may now disconnect your line.
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