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spk03: Hello, everyone, and welcome to the Vertical Scope Holdings Inc. Q1 2022 earnings call. My name is Nadia, and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star, followed by the number one on your telephone keypad. I will now hand over to your host, Diane Yu, Chief Legal Officer to begin. Diane, please go ahead.
spk00: Thank you, Nadia. Good morning, everyone, and welcome to Vertical Scope Holdings' first quarter 2022 earnings call. I'm joined by Rob Laidlaw, our Founder and Chief Executive Officer, Vince Bellissimo, our Chief Financial Officer, and Chris Goodrich, 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 analysis for the three-month period ended March 31, 2022, which are available under the company's profile on CDAR 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 and free cash flow, 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 and CEO of Vertical Scope.
spk04: Rob? Thanks, Diane. Good morning, everyone, and thank you for joining us today. The first quarter of 2022 was an impressive one for our business, led by revenue growth of 26% versus the prior year. The advertising business is performing incredibly well for us, growing by 49% versus last year, and led by the strength of the Fora platform. When we built Fora, we wanted it to be the fastest platform out there and deliver a great user experience. To achieve that, we had to reduce the number of ads loading on each page. With fewer ads and faster pages, we are able to attract higher paying advertisers who value performance and engagement. We are delivering a better experience for our users and our advertisers. and that drove a 76% increase in programmatic advertising and an 11% increase in direct advertising. The direct advertising business still has a lot of room for growth and it's facing heavy headwinds from chip shortage and supply chains in the automotive and power sports industries. In fact, automotive OEM spending is down nearly 70% when compared to 2019 activity. We are confident that we'll get back there But in the meantime, our programmatic business is proving out the resiliency of our model. We were also very proud of our e-commerce business, which declined by only 3% in the quarter versus a very tough comparable in last year's pandemic-influenced quarter. Impressively, and just to show the effect of lapping that tough January-February comparable, we were up 38% in the month of March. In our press release, we highlighted some of the challenges of the fitness category. on our e-commerce business, where we saw a year-over-year decrease in revenue of $3.2 million in the quarter, which was largely offset by e-commerce growth from acquisitions, including the streamable, and our organic growth. The pandemic brought forward significant demand in the fitness space, and while we have now lapped the impressive Q1 2021, the lack of commerce activity and consumer spending in the fitness category will still be a headwind on our growth numbers in future quarters, But with Q2 2021 fitness revenue being something in the neighborhood of 0.8 million, we will see much less of a drag on our results, and we are confident that we will post year-over-year growth in e-commerce moving forward. Our acquisitions are performing well, and we continue to believe that the two large acquisitions we did in Q4 of HomeTalk and The Stringable will deliver between 10 and 14 million of incremental EBITDA in 2022. With their strong performance, we have increased our expectations around contingent considerations as we expect the threshold for achievement of the earn out in 2022 to become more likely to occur. Adjusted EBITDA was down slightly in the quarter by 5% or 391,000. But if you adjust for 478K of public company costs that didn't exist in Q1 last year, we are back to positive and then have that really fitness category decline of $3.2 million and the $383,000 loss from Threadloon. As I mentioned, we're through the tough comparables on fitness. We lapped the IPO in June on the public company costs, and we continue to believe that Threadloon can break even by the end of 2022. So putting all this together, we think we're in pretty good shape on adjusted EBITDA going forward in light of the revenue growth we're seeing in the business. Touching on MAUs, they came in at 113 for the quarter, up 13% versus the prior year, and a new record. That's inclusive of a 4.6% organic decline due to increased competition for users' attention from the war in Ukraine and an impressive pandemic-induced quarter in 2021. We expect to see similar MAU trends in Q2 as we saw in Q1, as the headwinds from the war in Ukraine and reduced levels of online shopping activity affect the number of users visiting our communities for product reviews. Bottom line, people are out and about. They have their freedoms back, and this is creating an MAU headwind. Finally, I wanted to mention how excited we are to have Paul Lee as our new Chief Product Officer. Paul has worked on world-class products for Google and was an entrepreneur at Threadloom. He brings a depth of experience in building scaled products and teams, and we think he will be a game changer for the Flora platform. We're pleased to have him on board. With that, I will turn it over to Vince to walk you through the financials in more detail.
spk06: Thanks, Rob, and welcome to everyone who has joined. I'm pleased to walk you through our Q1 financial results. We had a great start to the year with record-setting revenue results. Q1 revenue was up 26% year-over-year, finishing at $20 million and capping off a $69.9 million trailing 12-month period, which is the highest on record. Growth in the quarter was driven by a 12.6% increase in overall NAU, a 32.5% increase in digital advertising ARPU, and contributions from acquisitions. Our digital advertising channel continues to generate impressive results and posted its fifth consecutive quarter of double-digit growth with the channel recognizing $13.3 million in the quarter, which is up 49%, and is led by growth contributions from both programmatic and direct advertising. Programmatic increased its share of the channel's revenue to 69% versus 42% in the prior year, led by increased performance from the 4S software platform in contributions from 2021 acquisitions, such as Home Talk, which is performing in line with expectations. Q1 programmatic revenue was up an impressive 76% compared to last year, finishing at $9.2 million. Direct advertising continues to generate stable growth results, despite the pullback in ad spend from automotive OEMs, as indicated by Rob earlier. Direct advertisers contributed $4.1 million in revenue to the quarter, which is up 11% compared to prior year, driven by advertiser demand in multiple product categories to get in front of our growing niche audience. E-commerce revenue experienced a modest year-over-year decline as it lapped a difficult comparable in 2021, driven by the COVID-induced surge in the fitness category. The channel was down 3% compared to the prior year, recognizing $6.8 million in revenue in the quarter. The channel experienced improving high margin results as the quarter progressed, led by contributions from acquisitions and a return to growth in March for the first time in the trailing 12-month period. Now turning to cost. Roy Agloinga, M.D.: : Excluding share based compensation amortization and contingent considerations operating expenses in the quarter were 14.3 million up 70% or 5.8 million compared to last year, but the variance made up of the following items. Roy Agloinga, M.D.: : 1.6 million wages and consulting costs related to seven retention market based market based bonuses and consultants on border from the 2021 acquisitions. $721,000 in professional fees tied to operating as a public company and filing of a base shelf prospectus in the quarter that allows us to raise up to $500 million Canadian in capital over a 25-month period and a $526,000 increase in platform and technology costs relative to our growth in MAU and digital advertising revenue. The remaining variance is driven by a 27% increase in headcount compared to last year, with our global workforce growing to 303 employees including 52 employees added from Q4 acquisitions versus a total of 238 employees in the prior year. Adjusted EBITDA finished at 7.3 million, down 5% compared to last year, generating an adjusted EBITDA margin of 36% versus 41% in the prior year. As mentioned by Rob earlier, factors driving the year-over-year decline include incremental public company costs, negative contributions from the thread room acquisition, and the unwinding of the prior year COVID-induced surge in the fitness category. The quarter's margins are aligned with seasonal expectations, with Q1 historically being our lowest revenue quarter of the year, as advertisers refresh budgets and consumers pull back spend from Q4 high. Adjusted EBITDA also experienced an improving trend in the quarter, aligned with improving e-commerce results, with a 44% adjusted EBITDA margin recorded in the month of March, in line with prior year trends. Free cash flow, which is defined as adjusted EBITDA, less capital expenditures and income taxes paid, was $5.6 million in the period, resulting in a healthy free cash flow conversion of 77% versus 84% in the prior year. The year-over-year variance is due to a higher margin contribution from the $3.2 million surge in the fitness category and a lower amount of capital expenditures in the prior year. This free cash flow will continue to be reinvested in M&A using our disciplined approach of adding accretive acquisitions to our platform. Total comprehensive loss for the year was $11.9 million, less favorable by $11 million compared to last year. The loss was primarily driven by $11.8 million in incremental costs relating to acquisitions, including amortization, contingent considerations, and retention, and a $2.4 million in incremental share-based compensation. Turning to the balance sheet, We had a $2.5 million in intangible assets in the quarter, $1.5 million arising from our ongoing development for our software platform, and $995 million from community acquisitions across multiple product categories, all of which were treated as asset deals. These investments were funded using cash from operations, leaving the undrawn portion of our revolving credit facility unchanged at $45 million. We ended the quarter with $22.4 million in available cash, And combined with our credit facility, we have a total of 67.4 million in available capital that can be redeployed immediately towards M&A. Net debt at the end of the period was 75 million, including 19 million in contingent considerations relating to the 2021 acquisition of the streamable, 12.6 million of which relates to year one payment due in Q4 of this year. Based on current trends, we anticipate that this contingent liability will continue to increase in subsequent quarters, as the probability of max payout increases. And now I'll pass you over to Chris for an update on M&A. Chris?
spk01: Thanks, Vince, and good morning, everyone. After a really strong finish to 2021, we saw lighter acquisition activity in Q1 with eight signed deals for total cash consideration of around $1 million. The communities we require continue to span increasingly diverse interest categories, including photography, music, pets, cooking, and we added a fantastic community focused on Tesla drivers with teslaownersonline.com. We also recently signed a purchase agreement in the home category for $2.2 million that will be a really good complement to our HomeTalk acquisition. Including this acquisition, we've done 30 deals since our IPO last June and deployed over $100 million of capital, excluding earnouts. And these acquisitions are performing very well and proving it the impact that the four-platform can make. And it isn't just revenue and traffic gains. We make major improvements to the experience we offer our communities to position them for long-term growth. We see this in quantitative metrics like page speed, performance, but also in the qualitative feedback we receive from members of the communities we acquire. Our two largest acquisitions made towards the end of 2021, Home Talk and the Stream Bowl, have started out 2022 on a very strong note and are exceeding our expectations. These properties are contributing to the increased momentum we experienced as Q1 progressed, and expect to see as we work our way through the year. Turning to our current pipeline, as Vince alluded to in his remarks, we have the financial capacity to execute our M&A playbook. With current market conditions, we are focused right now on being patient but opportunistic. We believe high-quality assets will continue to become available at increasingly attractive valuations in the coming quarters. We'll move very quickly for the right opportunities that will add the most value for our shareholders. We offer sellers a speedy transaction with high certainty of closing thanks to our strong balance sheet, which is very valuable in what is becoming a buyer's market. We expect that the capital deployed in M&A will increase in Q2 compared to Q1, but we expect our overall acquisition activity to be more heavily weighted towards the second half of the year. 2022 will present some great opportunities for Vertical Scope to add more high-quality assets to our portfolio. And with that, I'll pass it back to Rob to wrap up our remarks.
spk04: Thanks, Chris. Just to reiterate what you said there, we're going to be very opportunistic here with M&A. We have an experienced team that has been through the good times and the tough times, and we know how to execute an M&A playbook through market cycles. We believe we will see higher quality assets at more reasonable valuations and find more places to put our capital to work. We have the balance sheet and the patience to find the best opportunities to deploy our capital, and when we find them, we will move quickly. We think the next few quarters will be very fruitful for VerticalSkill, and thank you for the trust and support. And with that, operator, we'll open it up to questions.
spk03: Thank you. If you would like to ask a question, please press star, followed by the number one on your telephone keypad. If you choose to withdraw your question, please press star, followed by the number two. While preparing to ask your question, please ensure your phone is unmuted locally. And our first question today comes from Adam Shine of National Bank Financial. Adam, please go ahead. Your line is open.
spk05: Thanks a lot. Good morning. Good solid quarter. Maybe Rob or Chris, just something you didn't touch on during your remarks in terms of new products. Can you maybe talk about any further traction or developments in the context of marketplaces, anything else sort of brewing as we speak in terms of beta launches and anything else related to the new product pipeline?
spk04: Great. Yeah, thanks for the question. So certainly continue to be very excited about marketplaces. It's something that we've launched now across over 900 of our communities. It's performing very well. And we're really in kind of what I would call just early stages. We're learning more about that one and thinking through what the business model could be longer term to look at monetizing our marketplaces and all of the activity that we're seeing there. really exciting on Marketplace. And then obviously I think one that everybody's getting excited about here is the mobile app. And that's now really in an alpha stage. We've got it in the hands of some of our users and power users. We're getting really good feedback, continuing to kind of identify and evaluate what additional features they want before we go into a larger kind of beta launch. But we should see more on the app this quarter and have some additional news for you then.
spk05: Okay. And just, you know, obviously in terms of the reference to the organic decline in MAU, not entirely a surprise. I think you had largely telegraphed that during the Q1. But any sort of additional color? Obviously, you know, with some of the acquisitions you've done, you've talked about, you know, how to work on better engagement by members, better loading with members. Can you maybe speak about that in terms of, you know, what might be happening in Q2 and maybe, you know, the improvement in the organic profile of MAU going forward?
spk04: Yes, thanks. The organic MAU is definitely, you know, I think here in Q1, we had a tough comparable and I think just Q2, Really, we're facing some headwinds. I think there's kind of three things that I would kind of point out. One, the war. It really is taking a lot of people's time and attention. Two, pent-up demand for in-store shopping is really leading to fewer product searches that end up and are directed to our communities. And then three, just overall, some of the lack of product availability across some of our key categories in particular, like automotive and power sports due to supply chains. So I think, you know, right now we're just suffering a bit of a post COVID, you know, people are out and about, they've got their freedoms, they're, they're doing all sorts of stuff, but they're not spending as much time online. And I think we're seeing that across really most or all of our competitors set. So I don't think we're losing ground or losing market share. It's just, I think there's this kind of temporary, you know, people are out and about even more so than they would have been pre-pandemic with some of that pent-up demand.
spk05: Okay. Thanks for that, Rob. Appreciate it.
spk03: Thank you. And our next question comes from Stephen Lee of Raymond James. Stephen, please go ahead. Your line is open.
spk10: Hey, thank you. Your comment on automotive OEM down 70% versus pre-pandemic, so similar trend with power sports?
spk04: Power sports is not quite as bad as automotive, but definitely they're feeling supply chain issues as well. And really we see it across the power sports, whether it's motorcycles, ATVs, even snowmobiles, et cetera. it really comes down to chip shortages. I think the power sports, um, advertisers that have continued, uh, spending a little more so than auto and, you know, that may also just represent, you know, how, how strong we are in that power sports category. Um, but yeah, it's not quite as bad in power sports, but certainly auto has been, uh, pretty hard hit and they just don't have, you know, there's no dealership inventory. They're having trouble getting new models out and launched. What we're seeing, it's just, I mean, really in Q2, just really starting to begin to thaw and we're seeing some, you know, increased amount of activity with our sales team. I think our first client or two kind of returning to the platform. We're seeing some green shoots there, but I think with everything else going on in the world, it's hard to kind of say that we've turned the corner. I think we're just starting to see maybe they're returning to advertising at this point because they need to be in the market, at least to some degree. Got it. So you've seen improvement so far in April? Yeah, I would say there's a little bit of improvement here in Q2, at least activity-wise with the sales team, but it's kind of almost like relaunching the product. Got it.
spk10: And along the same lines, Rob, so much strength for e-commerce. Did that continue in April?
spk04: Yeah, we're seeing really good e-commerce trends in Q2. I think overall what I would say is I think we've crossed that tough comparable period. I spoke a little bit about fitness having a much lower Q2 headwind. So I think we're in pretty good shape there. And March certainly kind of sets us up for where we feel Q2 will come in. That's great.
spk10: And then last one to me, on MEU growth, I heard your comments. So are we expecting a similar decline in organic growth for MAU and Q2?
spk04: Yeah, we think right now at least Q2 looks a lot like Q1. So, you know, strong top line growth, but underlying it a little bit of an organic decline. I think maybe a little bit too early to say exactly what that number is, but what we're saying kind of similar to the Q1 trend is what we're experiencing here early in the quarter.
spk08: Thank you.
spk03: Thank you. And our next question comes from David McVagin of Cormark Securities. David, please, your headline is open.
spk11: Oh, great. Thank you. I was wondering if you could give us an idea on what you think the impact would be from the fitness category, you know, in Q2 and the balance of the year. I know you talked about the fact that you think e-commerce will be up in Q2, but I'm still wondering, you know, what what the impact would be from that category just going forward.
spk04: Yeah, thanks, David. So just in terms of fitness, I think we talked about Q2, I think our Q2 2021 number was about 800K. And I think we're still down significantly from that number, so call it a $400,000 or $500,000 headwind. As you probably saw with kind of some of the fitness players like Peloton, you know, sales are down significantly. I think a lot of that demand was just brought forward. And now people are out and want to get back to gyms and that sort of thing. So we think, you know, again, Q2 onwards, there's these lower comparables, less headwinds. So I think at this point, um, you know, the organic growth and some of the acquisitions that we've done will, will far as pace, um, any of the challenges we face in fitness, because it really was, you know, January, February, if you think about, you know, kind of the, after the holidays sales, um, in 2021, that, um, we're, we're still very, very substantial. Um, but you know, as you saw with March and, uh, you know, kind of onwards, um, we're in pretty good shape delivering that plus 38% year over year in March.
spk11: Okay. And, you know, the EBITDA margin was down quite a bit in Q1. Do you think you can get back to the high 40% range for the balance of the year?
spk04: Vince, do you want to take that one and just talk about the EBITDA margin and what we saw in March and kind of expect for the rest of the year?
spk06: yeah and and thanks for the question david um yeah so to rob's point um we did see improving margins you know as the quarter progressed and march posting that 44 um margin which is in line with the trends uh we saw in last year and that's that's basically due to you know an increase in top line revenue but also that contribution from commerce right high margin contribution which we think we know will return to growth uh in q2 of next year q2 of this year and going forward So we do expect to see margins normalize and be more in line, David, with the 44% range we saw last year. Okay.
spk09: All right. Okay. Thank you.
spk02: Thank you.
spk03: And as a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. If you choose to withdraw your question, please press star followed by the number two. When preparing to ask a question, please ensure your phone is unmuted locally. And our next question comes from Aravinda Galapatike of Canaccord. Aravinda, please go ahead. Your line is open.
spk07: Good morning. Thanks for taking my questions. Rob, maybe just on the e-commerce side of things, your comments about return to growth. I know that there are still headwinds, but on the other hand, you've talked about sponsored marketplaces as well as I suspect you're starting to do work in terms of the synergistic games and home talk and streamable and so forth. I was wondering if when you think about those tailwinds, there is a prospect of maybe returning to organic growth in the second half or pro forma growth, however you want to look at it. Um, I was wondering if you can sort of talk about it from that, uh, from that standpoint. And then, uh, secondly, on the MNA front, um, I know that these two acquisitions along with Threadloom were very key. Um, you know, they were sizable, they were quite meaningful. Um, when you look at the pipeline, when you talk about high quality assets, you know, are you thinking about sort of, um, you know, acquisitions in the magnitude of what you were able to do in November?
spk04: Thanks, Arvinda. So, yeah, just talking first through, you know, e-commerce and organic growth. And I think, you know, really that that's exactly where we're headed. It's what's got us excited. You know, we've got, you know, the fitness, you know, piece we've talked about that kind of starts to become much less of a headwind. And really everything else is performing quite nicely for us. The Forex communities and that sort of thing are all really from an e-commerce perspective doing nicely. I think marketplaces is something that is still really under or even unmonetized at this point. So that's not really necessarily driving that. That's a future growth opportunity. But what we're seeing is some of the integrations with Threadloom and the ability to turn that from kind of something we're calling out as an anomaly in a year-over-year difference into really more of the opportunity that we see it as and something that's going to be driving some of that organic growth by the end of the year. So what I would say here is we feel really good about organic growth in the e-commerce segment for the rest of the year now that we've kind of passed some of that fitness and even like you mentioned, pro forma organic growth as well. So that's looking good from here on out. And then kind of switching gears over to acquisition. So the streamable and home talk were the two large transactions we did in Q4. And really that's, you know, again, we're looking for high quality assets just like those. We think probably there's going to be some transactions of similar size as we head towards the back half of the year. And again, I think there's a lot of, you know, kind of investors that are, you know, perhaps, you know, looking to monetize some of those assets that they've had in this environment. We're a really attractive buyer. We offer that You know, fast transaction, we're able to be decisive when we believe in something and we're able to move quickly and have this strong balance sheet. So, yeah, I think adding another one or two deals similar to the streamable and home talk is really what we're thinking here. And really hoping to be in that kind of 50 to 80 million dollars of acquisitions for the full year. Just really kind of relaying that, you know, we think it might be a little more heavily weighted towards the back half. As we think that, you know, it's really turning into a buyer's market here and we want to be patient and make sure we get the absolute best opportunities and the best assets for our shareholders. Thanks, Rob.
spk07: And just a quick clarification, Vince. I think you mentioned some acquisition-driven revenues, what the acquisition component was with respect to the revenue growth. I was wondering if you can repeat that and if you are able to sort of disclose how much organic revenue growth was on the ad side as well. Thanks.
spk06: Thanks, everything, Vince. So, no, from an acquisition performance perspective, they are continuing to perform as expected at $10 to $14 million in annualized EBITDA contribution. We still think it's in line. From an organic versus inorganic growth perspective, that's something we're not disclosing at the moment. But again, we are seeing results that are in line with that $10 to $14 million contribution for the year.
spk04: Yeah, and Aravinda, on the acquisition, On the ad side specifically, I think, you know, just when you think about direct, that 11% growth is really entirely or almost entirely organic growth. And on the programmatic side, the 76%, obviously a big number. And the 4L platform is driving a lot of that. So you're looking at double-digit organic growth in programmatic as well.
spk02: Thank you. We currently have no further questions.
spk03: We'll hand the call back over to Rob for any closing remarks.
spk04: Right. Thank you, everybody, for joining us. Thank you for the support and the trust that you've placed in us as a management team and as a business.
spk09: So we'll see everybody next quarter. Thank you.
spk02: Thank you, ladies and gentlemen. This concludes today's call. Thank you all for joining. You may now disconnect your lines.
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