VerticalScope Holdings Inc.

Hello everyone and welcome to the VertiSchool Scope Holdings Inc Q1 2023 Earnings Call. My name is Charlie and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypads. I'll now hand over to our host, Diane Yu, Chief Legal Officer and Corporate Secretary to begin. Diane, please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Vertical Scope Holdings' first 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 involve 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-month period ended March 31, 2023, which is available under the company's profile on CDAR, as well as on the company's website. We're 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 conversions, and MAU, which are non-IFR measures. All references to currency in this presentation shall refer to USD and was otherwise specified. Now, I will turn the call over to Rob Laidlaw, founder, chair, and CEO of Vertical Scope. Rob?

Thanks, Anne. Good morning, everyone, and thank you for joining us today. Let me start off by saying Q1 was a very difficult quarter for Vertical Scope. We expected this, and on our Q4 call, we let investors know that this would be a trough quarter. and a low point for our business. On February 1st, we announced a significant restructuring and laid off approximately 20% of our team and subsequently adjusted our priorities to focus increasingly on our highest conviction product ideas and improving monetization. The good news is we have very strong confidence that Q1 was the trough quarter and is the worst it will get. Q2 and onwards, we believe, will look much better than Q1. While this year will be challenging for everyone in the digital media and technology space, we believe we have positioned the business well to face these headwinds and we are already seeing improvements in our results. Throughout Q1, we felt some pressures easing, but it wasn't really until about mid-April that we saw programmatic and direct advertising start to make some recovery. Some of the recovery was macro and some of it was due to our own initiatives. Either way, it gives us the confidence to say that we expect better results here on out. What are we working on to make sure of this? First, we have made significant progress on our mobile app and are very pleased with its progress. It's another tool in our toolbox to build direct relationships with our users, increase content contribution, and grow MAUs. We are seeing positive data with our retention rates now improving to industry standard or above levels, and we are ready to launch across more Flora communities. We expect we could see the app on all of our Flora communities by the end of Q2 or into early Q3. This isn't a game changer, but it is exciting for our users and our platform to have this in place and to grow our foothold on users' home screens. Second, we launched video ads last week across hundreds of our communities, and the early numbers are supporting our hypothesis that this could add a few million dollars per year to our programmatic and direct advertising revenue. Third, we are working on our subscription programs. While these will take longer to ramp up as they require user adoption, we think that after launching in early June that we will see progressive uptake and growth in our subscription MRR line item. This is a valuable recurring revenue and helps us become less dependent on advertising in recessionary type environments. Before turning to the next item, I will reiterate, our confidence going forward comes from our internal business initiatives and not a macro turnaround. We are basing our opinions and forecasting on a tough macro environment with a recession baked in. While we are seeing some macro improvements, we're not betting on it just yet. Next, I'd like to spend a few minutes on our acquisition of the Streamable. This acquisition has been a roller coaster for us. To date, we have paid $40 million for this property, inclusive of $25 million at the time of acquisition and a $15 million earn out payment made in early 2023. The acquisition started out incredibly strong and had a banner year in 2022. Incredible results, producing at one point LTM EBITDA of approximately US $10 million. This was on the back of a very strong market for streaming and high demand for new streaming customers, along with strong traffic patterns as people signed up at a record pace for new streaming packages and resulted in the early 2023 payment of their year one earn of $15 million. Beginning in late 2022, this environment changed very quickly on us. Interest rates and increased focus on the bottom line versus subscriber growth at streaming companies resulted in our streaming customers significantly slashing their user acquisition and marketing budgets. Against this major step back in revenue, we also faced Google algorithm changes aimed at product review sites that significantly hurt site traffic. We continue to work on remediation efforts, but the traffic growth has not yet turned positive. With approximately $40 million paid out and roughly $10 million of free cash flow received, we're looking at this as about $30 million, or roughly half of our overall debt today. Against this, we are currently thinking the property will do about $2 to $3 million of EBITDA this year. On a run rate basis, call it 10 to 12 times EBITDA multiple. Not great in 2021. We wouldn't have been happy with that. In 2023, it's awful. And as a team, we take full responsibility for it. It was a big one, and it hasn't worked out the way we wanted. We still hope we can get it back to $5 million of EBITDA, but we're going to need some time to see some market recovery and traffic recovery to get it there, and it's going to take some time. Turning to overall traffic and MAUs for our business, our MAU performance was not very good in the first quarter. It was down 11% year over year, and this was a combination of Google algorithm updates particularly in the product review space, that affected our properties and overall digital media traffic seemingly being down across the board. As I talk to colleagues across the industry, it seems to be a macro trend that is hitting mostly everyone. I haven't talked to many people that are reporting MAU gains, and most are reporting pretty disappointing MAU numbers. It's not an excuse, but I think we are being hit by some broader trends, and that we're going to have to work even harder to attract users from search engines and convert them into members and hopefully loyal users and soon for mobile app users. One question I'm hearing a lot about is the impact of AI. I don't think there's been a hype cycle like this one since the introduction of the iPhone. And with that excitement comes the great gap between reality and the fear of impact, which leads to plenty of armchair quarterbacks. Looking back on my 20 years running Vertical Scope, this is certainly one of the most exciting times, but with each cycle comes a new worry. First, it was the iPhone. Even without a mobile app for all of these years, we're still around. Then it was Facebook and social media, and we just kept growing. And now it's AI. Whether it's mobile, social, or AI, they have all helped Vertical Scope grow. They've introduced new challenges and opportunities but forums are core to the internet. And since the days of BBSs, they have been a trusted source of high quality information and authentic perspectives. The fearful narrative around Vertical Scope has been that ChatGPT will one day just suck up all the search queries that drive traffic to our communities and give them great answers. The facts are that today, AI isn't very good with answering form-like nuanced questions and giving personalized answers based on your car, snowmobile, or luxury watch. And without the vetting of our thousands of community experts, often the information and recommendations made by AI just isn't very good. It's hard to trust. It's our communities of experts that not only give the great answers, but then pick them apart, give the other side of the story, and refine with precision. There's a huge place in the future for authentic perspectives. That is what our communities deliver. They have touched these products, they own these products, and their responses and reputations are vetted at scale. In a world where content can now be cheaply produced at massive scale using AI, and believe me, the tidal wave of spam has already begun, it will be not just search engines, but also our users that are seeking our communities for authentic perspective to get away from all the AI-bought content. Like others, we will fiercely protect our content and our users' perspectives from being swallowed up en masse to be spit out by AI. Users have given us the right to use their posts, and neither we nor they have given AI the right to steal those perspectives. This will be a fight, but we have the whole industry alongside us in protecting what is right. Our company will also benefit from AI. In fact, this is right now one of the most tangible outputs of AI. It will help us speed up code development, reduce and automate QA costs, and help eliminate repetitive and administrative tasks. It will make our teams more efficient, more productive, and ultimately will require lower headcount. We think there is an efficiency opportunity in the neighborhood of 30 plus percent, and we are eager to pursue AI-driven efficiencies. Lastly, because I know I'll get this question, Yes, we are absolutely disappointed in the share price performance. We are big owners of the company shares, and it's been concerning and often has felt disconnected from our reality. Our business produced in this terrible quarter and really tough advertising environment. Cashflow from operations, less CapEx and less lease payments of US $3.4 million. That is roughly Canadian $4.55 million. Against our recent market cap of 60 million Canadian, that just didn't feel like it made sense. 4.55 million on 60 million is a 7.6% return in just one trough quarter. So let me reiterate, we will absolutely be focused on generating free cash flow as we go forward, paying down our debt, and being ready with a strong balance sheet to be opportunistic when accretive M&A presents itself. We are also fielding many calls about strategic transactions involving our company. We have a duty to our shareholders to take these calls, and given how disappointed we all are in our share price and how much we love Vertical Scope and its long-term prospects, like many others, we are carefully studying the costs and benefits of these overtures. We have a duty to assess all inbound inquiries that could bring some relief to our loyal shareholders. With that, I'll turn it over to Chris and Vince to take you through the Trough quarter in more detail.