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spk05: 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.
spk04: 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?
spk07: 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.
spk06: Thanks, Rob, and good morning, everyone. As Rob mentioned in his opening remarks and we discussed in our last quarterly update, both advertising and e-commerce revenue face a challenging operating environment in Q1, with macroeconomic weakness contributing to lower commerce activity, weaker programmatic CPMs, and reduced demand from certain direct advertising partners. Advertising revenue was $9.9 million, which was 25% lower than prior year, and programmatic revenue was down 32% as the weaker CPM trending we experienced midway through Q4 last year persisted into Q1 of this year. Lower search-based traffic in the quarter also weighed on our programmatic revenue. Direct advertising fared a little better in the quarter, down 11% compared to prior year, and we saw some modest improvement with automotive OEMs, stability with larger retail customers, Canadian financial services, outdoors, and tourism advertisers. But lower spending from U.S. auto insurers and online marketplaces weighed on our direct results in Q1. From a split perspective, Programmatic made up 63% of total advertising revenue in the quarter, and Direct contributed 37%. Turning to e-commerce revenue, it was a particularly challenging quarter for this part of our business, with total revenue of $3 million, 56% lower than prior year. Rob commented on the performance of the streamable acquisition and the dual challenges it's faced with lower search traffic and commission cuts from streaming partners as they pulled back on customer acquisition spending. This has resulted in much lower contribution from streamable in the quarter, and we expect these dynamics to persist throughout the year. The streamable is a great resource for people to navigate a very fragmented streaming landscape, but it will take time to build positive momentum again. E-commerce challenges were not isolated to the streamable in Q1, however. The rest of the commerce business experienced lower year-over-year transaction volume in consumer categories that have struggled since the post-pandemic reopening began, categories like fitness. Longer term, we have strong conviction in the commerce potential of our platform that will be realized as more product-focused experiences roll out across fora. These initiatives will support commerce revenue growth as consumer spending patterns continue to normalize. Our recurring revenue subscription business contributed 53% of total e-commerce revenue in Q1 and is providing partial hedge against the more transactional parts of the business. As Rob mentioned, in Q2, we are launching new subscription packages for our members, which will support continued growth of this recurring revenue stream and benefit from the scale of the four platform. Turning to our outlook, we're expecting sequential improvement in both direct and programmatic advertising in Q2, and we expect that to continue as the year progresses. E-commerce will continue to be negatively impacted from a year-over-year perspective by the streamable. But as Rob mentioned, we are confident that Q1 is the trough in revenue for our business. Our confidence stems from the improvement in direct bookings we've seen in Q2 and from the double-digit improvement in programmatic revenue generated to date in Q2 compared to the equivalent period in Q1. The rollout of video formats across fora and improvements we've made to our advertising technology will drive further gains. Video is in high demand from our customers and we're excited to be able to provide them with a new and more engaging way to access our intent-driven and contextually relevant audiences. I'll touch on M&A briefly before passing it over to Vince. As we noted on our last call, our main focus at the moment is continuing to drive revenue and EBITDA improvement and use our free cash flow to lower our debt. Our pipeline is strong and we continue to look at several opportunities. However, there are simply not many deals happening at the moment across the industry owing to uncertainty in the macro environment and suppressed public valuations, including our own. The deal arises that's clearly a creative will act, but in the meantime, we'll continue to use our cash flow to improve our financial position. And with that, I'll turn it over to Vince to walk you through the rest of our financial results.
spk08: Thanks, Chris, and thank you to everyone for joining our call this morning. To start, I want to address the difficult first quarter we faced this year. the quarter presented us with a unique set of challenges, including negative impacts on advertiser demand, a decrease in organic traffic due to search algorithm updates, and a reduction in e-commerce commissions and demand within key product and service categories. These headwinds put our track record of profitability to the test and required us to react quickly with organizational changes and cost-cutting measures to protect our margins. Our ability to quickly make these changes and launch counter-monetization initiatives has given us reason to believe that we have weathered the worst of the storm and expect a sequential improvement in our results. We remain committed to delivering on our long-term objectives and confident in our ability to navigate through any future challenges. Turning to our results. To address the top-line revenue pressures discussed by Chris earlier, we have taken decisive action to reduce our operating expenses and improve our financial performance. As previously announced on February 1st, we made organizational changes that resulted in a 22% reduction in our global workforce. These changes are expected to generate approximately $6 million in annualized savings, while still allowing us to focus on core areas of investment and long-term strategic initiatives. Our headcount reductions were focused on areas that were hardest hit by current market conditions, including a 58% reduction to our e-commerce team as the channel experienced a pullback in attribution in key categories from pandemic-induced highs. The poor performance of the streamable was also the main driver of the complete reversal of contingent considerations of the quarter, with the property not expected to achieve its minimum earn-out target. As a result of these actions, our operating expenses in the quarter were down $14.5 million, or 45%, compared to last year. This reduction was largely driven by a $6.7 million decrease in adjustment to contingent considerations relating to the reversal of the year two earn-out for the streamable, and a $3.2 million decrease in amortization expense relating to acquired intangibles that have now completed their amortization period. We also recognize partial quarter savings in wages and consulting of $1.4 million compared to last year, driven by a lower average headcount of 125 employees in the quarter compared to 305 employees in the prior year. Despite implementing cost-cutting measures to reduce expenses, our profitability was impacted by the year-over-year decline in revenue. Our adjusted EBITDA decreased by 60% or $2.9 million, resulting in an adjusted EBITDA margin of 23% compared to 36% in the prior year. This decrease was due to an elevated cost base at the beginning of the quarter and a 36% decrease in revenue. As a management team, we recognize the significance of protecting our margins and profitability. while typically exceeding 40% in a normal advertising environment. As the quarter progressed, we observed an improvement in margins and we anticipate a further sequential improvement as our core initiatives materialize. Our focus remains on prioritizing optimizations and core monetization initiatives to enhance margins, generate free cash flow, and safeguard our long-term objectives. Our focus on operational efficiency has enabled us to consistently generate strong free cash flow, even in challenging economic conditions. This has allowed us to strengthen our financial position by investing in long-term growth opportunities and paying down our debt. In the quarter, we generated $4.1 million in cash from operations, inclusive of an incremental $500,000 in interest paid compared to last year due to higher interest rates relating to our credit facility. Furthermore, our free cash flow conversion was an impressive 80%. resulting in $2.3 million in free cash flow generated in the quarter as defined in our MD&A. While this is lower than the $5.5 million generated in the prior year, it is important to note that the decline is primarily due to a decrease in adjusted EBITDA offset by a decrease in capital expenditures. This reduced rate of capitalization is largely due to an increased rate of testing new product areas on the floor platform compared to last year, which resulted in fewer upfront development costs that can be capitalized. We have also made progress towards reducing our debt, paying down $7.5 million so far this year, with $3.6 million in payments made in Q1. This brings our current balance outstanding on our facilities to $65 million, with $65 million available to draw on our revolver. We ended the quarter with $8.5 million in unrestricted cash and $60 million in net debt, resulting in a pro forma net leverage ratio of approximately 1.9 times when taking into account the savings generated from the February 1st reorg. Overall, we're pleased with our ability to consistently generate strong free cash flow, which has allowed us to strengthen our financial position and maintain our commitment to long-term growth. Our earnings improved considerably from last year, despite the difficult quarter. Our net loss in the quarter was $4.5 million, which was $7.4 million more favorable when compared to the prior year. The change year-over-year is largely driven by a decrease in operating loss led by lower amortization and the reversal of the contingent considerations. Excluding amortization of intangibles, the quarter would have generated $2 million of earnings and an earnings per share of $0.09. And finally, earlier we discussed the challenges faced by the streamable. As you look ahead to Q2, the property will be up against a tough comparable as it lapsed a record quarter last year. where it contributed $4.1 million to our consolidated results. While this will make for another quarter of challenging year-over-year comparables, we are encouraged by improving consolidated results thanks to our optimization efforts and the rollout of core initiatives. As a team, we have not been deterred by this difficult quarter and are focused on executing our long-term growth strategy and delivering value for our employees and shareholders. And now I'll pass it back to Rob to wrap things up. Rob?
spk07: Thanks, Vince. Operator, we'll now open it up for questions.
spk05: Thank you. Of course, if you'd like to ask a question via the telephone lines, you can do so by pressing star followed by one on your telephone keypad now. If you'd like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure you're unmuted locally. Our first question comes from Aravinda Gallipafig of Canaccord Genuity. Aravinda, your line is open. Please go ahead.
spk02: Good morning. Thanks for taking my question. Questions. I wanted to start on the video advertising initiative. Maybe Rob, can you sort of describe how broadly that's being rolled out across your properties? I mean, I understand that's not every property may be conducive to a lot of video content and there would have to be a certain degree of video content for you to leverage advertising on. But I wanted to understand that product a little bit better.
spk07: Yeah, thanks for the question, Aravinda. Video is being rolled out pretty broadly. I would say that right now we're expecting to have it probably rolled out across about, I would call it on a weighted basis, about 70% of our properties.
spk02: Okay. And then on the mobile app, I know you talked about rolling that out as well. Can you maybe just sort of develop on how that can sort of assist sort of the traffic trends and obviously monetization down the road? What is sort of your initial thoughts? What do you see there?
spk07: Yeah, great question. I think on the mobile app, one, in our kind of testing right now and as we've kind of rolled it out, a little bit here and there, it's been pretty much revenue neutral. And what that's resulting from is generally higher engagement. Users are spending more time on the app than they would on mobile web. And they're also contributing more content, which is very positive for the long-term flywheel of the business. As you see in mobile, you'll get slightly lower, sorry, mobile app, you'll get slightly lower CPMs, but those lower CPMs are offset or even more than offset by the higher engagement rates. So that's what's got us excited. And as we were able to really bring up those retention rates and, you know, get through some of the bugs and feature requests, we're in a position now where we feel pretty comfortable that this is a really good thing for our business and are ready to roll it out more broadly.
spk02: Thanks, Rob. And the last question for Vince. Vince, can you develop a little bit on the margins? I know that historically you've talked about sort of that middle 30s obviously gets a little bit harder as the macro environment continues to be light. But then on the other hand, you have these cost savings. How should we think of the cadence of margins? I know you talked about sequential improvement in Q2, but maybe kind of on a fuller year basis, how should we think about it at this point?
spk08: Yeah, thanks for the question. Yeah, so definitely in the quarter, we saw our margins under considerable pressure. Most of that's all driven from top line, as we noted. We have seen sequential improvement in the quarter, but it's sort of difficult to tell how that will pan out. for the rest of the year. Obviously, our goal as a team is to continue to optimize where possible and get back to the, you know, low to mid 30s like we were last year. But at the moment, you know, it's somewhat difficult to predict based on, you know, macro and sort of waiting on these initiatives to roll out. But, you know, our goal is to get back to sort of the levels that we were.
spk02: Okay. Thank you. I'll toss the line.
spk05: Thank you. Our next question comes from Juro McReynolds of RBC. Drew, your line is open. Please proceed.
spk11: Yeah, thanks very much. Good morning. First, a follow-up just on the question on margin. Just asked differently, in terms of the cost efficiencies you put through, when you think about the operating leverage effect in the business, should we get a firmer top line whether this year, hopefully next year, how has that operating leverage effect changed, if at all? And then secondly, bigger picture, and maybe one for you, Rob, you know, we haven't really seen the business go through a downturn, certainly not as a public company. A little surprise on the extent of the top-line pressure, to be honest. It does look like the perfect storm between rates, traffic, and some of the M&A you did, but just curious as to how you look at the revenue resilience of the overall business and how would that compare to what you would have experienced through the financial crisis a little over a decade ago? Thank you.
spk08: Yeah, I'll take the first question. So with regard to operating leverage, we don't expect our expense to grow. Actually, you know, we're still sort of going through cost-cutting initiatives, and we expect even some additional improvements there. So as top line continues to grow, that's where you'll continue to see more operating leverage in the business, and therefore, you know, drive our margins upwards as the year progresses.
spk07: Thanks, Vince, and thanks for the questions, Drew. On the big picture, Look, I think you're right. I think it's been a bit of the perfect storm. And I think there's a mix of things that you've correctly identified. So traffic was a lot tougher in Q1 than we would have expected. And that seems to be a pretty broad trend across most people that I've spoken with and any early kind of public reporting that I've seen. The streamable has just been a really you know, like I mentioned, a roller coaster ride and ad rates, which, you know, I would say that ad rates have been kind of the toughest that I've seen in a lot of years. I mean, this is definitely one of the more challenging programmatic environments. One of the things we usually see is like at the end of March, you get kind of, you know, an end of quarter spike. You know, people start to I would call it dump some of the money that they failed to spend earlier in the quarter and kind of drive up. And there was just no, no bump at the end of March. And then, you know, things really started to, I would call it a little bit into April and early May where you're starting to see, you know, towards the back half of April, like things started to pick up. So I think it was a situation where, you know, with a backdrop of a lot of layoffs in tech in general, a lot of kind of indecision, companies not being able to decide if they want to spend on marketing and advertising. It was a really slow start to the year. I'm starting to feel increasingly confident that that's, you know, people are starting to be able to make decisions. There's still discomfort with what the macro is, but I think advertisers are realizing that they need to have a plan in place. And that's coming together really kind of in the last couple of weeks. So in terms of revenue resiliency, I would say, look, this business has always been a free cash flow machine. It's been very resilient through cycles. And I'm very confident that this was the worst of the worst. As a management team and frankly, as the entire company, have taken this one pretty hard and felt it really affect kind of us and the business. And we're ready to kind of fight back here and get things really to the level where we expect them. And I would say our team has done just a fantastic job pulling together through tough times and working on these monetization initiatives. and getting them launched in really record time. I think they've done a fantastic job of getting these things out to our users and being able to turn on the revenue taps in a time like this. So what I would say is we've gone through the perfect storm. The team is motivated. They've launched a lot. And we're excited as a company to kind of get back on track and get back to growth.
spk11: I appreciate all of that context, Rob. If I could squeeze one last one in on the generative AI piece, when you think about the authenticity, and I couldn't agree with you more on that one, maybe it's too early to kind of make this public or think through it, but just in terms of the content on your community sites, how do you think that needs to evolve just to make sure that you're staying ahead of where you think you should be in light of this technology coming into the picture?
spk07: Yeah, thanks, Drew. It is a rapidly evolving space, but I think, you know, if you kind of look at some of the stuff that Google announced earlier this week, and it really correlates well with a lot of what we're thinking and doing, which is really around, you know, really amplifying these authentic perspectives. We think, you know, again, like forums and BBSs have been around since the beginning of the internet and are a trusted place. for people to share their authentic perspectives and then to have the communities, these communities of experts really dig into them. So I think it's going to be this great search online for like, where can you get these authentic perspectives? And I think forums are actually going to be a winner. And it's something that I think the search engines are already kind of announcing that they're trying to find ways to surface more of these authentic perspectives because they see the kind of onslaught of ai spam coming as well so from our perspective i think what we need to do is just you know continue to improve that user experience and and as we get um you know kind of these expert users how do we showcase them how do we bring them to the forefront how do we build um that that authenticity and trust around um these kind of influential users so i think some of that is the the user interface and i think some of that is you know really just kind of working with um you know what what is a modern ux and and what does a new visitor to a forum community expect and and look for so We're going to continue to work around that and bring those forward. But again, we think this is an opportunity for us that we actually have some really unique and important content for this kind of next phase.
spk11: Great. Appreciate the context. Thank you.
spk05: Thank you. Our next question comes from Vince Valentini of TD Cowen. Vince, your line is open. Please proceed.
spk09: Yeah, thanks very much. First off, thanks very much for the transparency and honesty with regards to Streamable and the Google algorithm changes. It's not good news, but it's refreshing to hear somebody be so open about it. The first question I have is just on that Streamable comp in the second quarter. $4.1 million of EBITDA. Any chance you can give us the revenue number or ballpark revenue just for modeling?
spk08: Yeah. So from a modeling perspective, streamable was very high margin. So assume like 80% margins on that number.
spk09: Thanks, Vince. And does that all go in the e-commerce segment or is there a mix of revenue between advertising and e-commerce for streamable?
spk08: Predominantly. Yeah, predominant e-commerce then.
spk09: So then if I look at e-commerce revenue in the first quarter, minus 56%, but excluding streamable, do you have that figure or roughly what that figure is?
spk08: In the first quarter of this year? Yes. Oh, yeah, excluding streamable, you're probably excluding like about $700,000 there.
spk09: And last, Rob, or Chris, this generative AI and chat GPT thing is clearly not going to go away as a concern factor for investors in the short term. I'm sure you're aware of some nasty movements for for some stocks in somewhat unrelated sectors over the past couple of weeks. People are going to ask, and I'm wondering if there's anything you have in terms of stats that can help refute it. Not so much the attraction of new MAUs, as much as that could be impacted if people use chat GPT instead and don't find their way to one of your sites. Is there anything you have in terms of existing and long-time sort of users, stats in terms of their usage or churn rates. Is there anything to give us conviction that those aren't increasing as people may be defecting to use some sort of generative AI instead of coming to your site for chat and authentic solutions and ideas?
spk07: Yeah, thanks Vince. I can take that one. What I would say is that our direct traffic, which is typically members, this is like in the old days, we called it type in traffic, people that have just typed in toyotanation.com. That's actually up. Direct traffic, I believe, in the first quarter was up about 10% year over year. So I think in terms of member engagement, people are, in fact, actually the ones that know about us. And part of the reason we want to continue to push that for our brand is because we want more people to know and trust us. But the people that know us, the members that know us, they're continuing to come back to the communities. And, you know, certainly they're already of the perspective of, you know, there's kind of early conversations with our moderators and administrators of like, how do we make sure we keep that AI spam bot out of our communities? Because we want to keep this as a great and authentic place And again, I think just pointing back to, you know, some of what Google's doing around their new perspective tab and, you know, kind of thinking through the authentic perspectives that we have on our communities, we feel pretty confident in this kind of next phase that, you know, our users are certainly not the types that are going to trust an AI-generated answer. you know, just our own internal tests, and I think you can do these too, is we just take some of our kind of long tail queries and, you know, kind of check what ChatGPT produces versus what our community produces. And there's just no way that somebody can kind of base a purchase or, you know, try and fix their vehicle or their snowmobile or ATV based on the information that AI is giving today. A lot of it is is just it all sounds good. It's written in wonderful English, which sometimes is a little better than our community's use of the English language. But quite frankly, the information isn't always correct. And I think that's going to be a big trust factor for a long time here. And it's why people come to our communities. And we think we'll do so increasingly. And it's a big reason why we think the mobile app is so important, even if it is revenue neutral. Because of that engagement and just having that place on your phone that you trust to go to when you need to, you know, kind of get an answer that's a little more nuanced. So I think, look, we're excited about embracing AI here, both for the operational efficiencies, but also because we think it places even more value on forum community content.
spk00: Excellent.
spk09: And one last one I was thinking is just your comments on fielding calls with regards to strategic options, given how low the share price is. I just want to make sure we don't read too much into that. Are you trying to give any kind of signal that something could happen at some point during this calendar year, or this is just very, you're just saying you're open, you're not going to close any doors, but you have no idea if or when something could be put on the table that's attractive?
spk07: Thanks, Vince. Yeah, we're fielding calls, you know, quite a quantity of them. Our phone lines are open. And, you know, we think our shareholders have had a rough ride here and, you know, certainly open to looking at transactions that might help them out.
spk09: That's as clear as I expected. Thanks very much. Thanks.
spk05: Thank you. Our next question comes from Adir Kaveh of Eight Capital. Adir, your line is open. Please go ahead.
spk01: Hey, good morning, guys. Thanks for taking my questions. I just had a question on some of the comments you made around the search algorithm changes and some of the mitigating factors you guys are kind of working on. How long do you think those factors would kind of take to kind of work themselves through your tech stack? And when would we kind of expect that to kind of maybe turn around a little bit?
spk07: Thanks, Sudhir. Google algorithms are always, it's always hard to tell when they'll work their way through, but generally we see, you know, kind of remediation efforts will take three to six months. That, you know, includes kind of the time to make the changes and then time for kind of Google to re-index, recognize, and re-rank.
spk01: Okay, excellent. And then just maybe, you know, last quarter you had mentioned on the direct side that, you know, conversations were getting significantly more positive, and that's what kind of drove your comments on seeing Q1 being a trough and then seeing a rebound post that. Are you finding that, I know we're only kind of two months post your Q4 call, but are you seeing those kind of conversations being incrementally more positive, which continues to kind of give you confidence in that Q2 rebound?
spk06: Hey Adir, it's Chris here. Yeah, we are. Not in every category. U.S. auto insurance, which has been a key contributor for us, consistent contributor for us over the years, has continued to be pretty soft. I think there's some macro factors in U.S. auto that's really driving that and not necessarily anything to do with our situation. But, you know, definitely, you know, with auto OEMs, we've seen some improvements. With some retail customers, we've seen improvements. You know, as Rob alluded to, there's a lot of uncertainty to start the year. You know, ending Q4 and to start the year with our customers. And I think as people start to get their head around the macro environment, you know, you can't just sit on your hands forever. You need to start to make decisions and and growth will become important again for a lot of these customers. So for sure, we're seeing a pickup in discussions and conversations. But frankly, on the Q2 number that we're commenting on sequential improvement bookings. And we expect as the year progresses and confidence is gained that we'll continue to see improvements. And frankly, as we evolve the product offering and have things like video, that'll support our direct advertising business.
spk07: Thanks, Chris. And Adir, I just wanted to add one extra point that maybe just, you know, overall in the call, maybe it hasn't come through just yet, but, you know, when we think about our direct advertisers, you know, even in the soft advertising market, you know, they might be slowing down their spend or temporarily pausing it. We haven't lost any of our direct advertisers. So for myself, long-term shareholder, long-term perspective, you know, we haven't lost any direct advertisers through this. And yes, U.S. auto insurance is soft, but they'll be back. And, you know, frankly, other categories, you know, U.S. autos is still, the OEM spending is a little bit weak. We know this will all come back. So that's part of what gives us a lot of confidence in our business for the long term is we have these good relationships. We're talking to these advertisers on a weekly basis. And while they are sorting through budgets and moving slower due to the overall environment and uncertainty, for the long term, they're great Vertical Scope partners, and we expect them to continue spending with us for the long term.
spk00: Excellent. Thanks, guys. I'll pass the line.
spk05: Thank you. Our next question comes from David McFadgen of Cormark Securities. David, your line is open. Please go ahead.
spk10: Oh, thank you. Just wanted to ask a question about your confidence that this is the trough or Q1 was the trough and things are getting better. So you said things have started to improve mid-April. So can you tell us, are you talking about MAUs are starting to get better or the ARPUs starting to get better? And is it getting better on e-commerce or is it getting better on advertising? If you could just share with us some metrics as to or what metrics actually are improving that gives you confidence that Q1 was a trough. Thanks.
spk07: Thanks, David. Good question. And yes, Q1 was the trough, and things will get better from here. And that's, I would say, just the advertising business is improving. like one thing i want to just reiterate that i mentioned um our view of this being the trough is not tied to the macro it's based on our internal business initiatives it's the things that we're doing to to make sure we're turning it around and um so maus and advertising are the areas and um that that's where we feel you know we've got a good handle on the business We see our post beginning to kind of thaw out and improve. Commerce is going to continue to be tough. And frankly, you know, just even taking the streamable out of the commerce, commerce is still tough. So commerce is going to be tough throughout the year. We've kind of budgeted that in. We know what that is feeling like. But yeah, the advertising business is big enough and strong enough for us to be very confident this is the trial. okay and i don't know what if you could share with us but what are your expectations uh for what the app could do to the business because i think some people wonder if that could really be a game changer for you thanks david yeah look i i just want to reiterate i i don't think it's a game changer i think it's a tool in the toolbox it helps us get our communities you know front and center on the home screen of people's phones where they're spending more and more of their time. So I think it leads to higher engagement, higher content contribution, and more video and media contribution. So more photos and videos, which of course is key these days. And ultimately, we think we can make our communities more loved and become a more regular, I'm gonna call it an improvement in DAUs. So people coming back to the communities even more often because it's there at their fingertips, regardless of where they are. And when we all get a bored moment, I'm sure we've all gone on our phones and looked for something to waste a little bit of time on. So I think from that perspective, it's gonna make the forums more sticky. It's going to help with people you know, experiencing participating in new communities that they might not have known that we owned. And we think overall it's going to just kind of improve user retention and, you know, ultimately it's one more tool for us to make sure that those MAUs start to go in the right direction.
spk10: Okay. All right. Thank you.
spk05: Thank you. As a reminder, if you wish to submit a question by the telephone lines, you can do so by pressing star followed by one on your telephone keypad now. Our next question comes from Adam Shine of National Bank Financial. Adam, your line is open. Please go ahead.
spk03: Thanks a lot, good morning. Rob, can you just talk a little bit about any social media competitive implications, whether it's in particular a Facebook or anyone else out there that perhaps offers incremental competition that may or may not have been a factor in terms of performance in recent quarters?
spk07: Thanks, Adam. Yeah, we haven't seen any changes in the dynamics around social media. I mean, Facebook groups been around for ages now. And, you know, while we compete with Facebook groups, it's not that dynamic hasn't changed. Obviously, Twitter has, you know, kind of changed some of their thinking around, you know, content moderation, content policy, and, you know, has made a number of changes. But I don't think that's really changed our competitive dynamics. And, you know, we think overall Reddit is, you know, a net positive in terms of, you know, more people experiencing online forums. And once people get used to the, you know, the perspectives that are shared, oftentimes they do end up looking for a more specialized and active community around a topic that they really love, which is how they end up on some of the fora communities. So not seeing a lot of change in kind of competitive dynamics there, but definitely it does feel like everybody's, you know, kind of running into a bit of the same MAU challenge that we're facing.
spk03: Right. I appreciate that, Collin. And Rob, you know, obviously much of the focus has been around the streamable, but, you know, there's also home talk from, you know, or among some of the bigger acquisitions done over the prior 18 months. Can you or Chris maybe talk to home talk and sort of how that is evolving? And then also, finally, in as much as subscriptions offer some potential incremental boost to e-commerce going forward. Can you talk about any other initiatives? One of the efforts discussed in the past was around adding additional partnerships, expanding some of the various other connections in terms of bringing on just more work or more opportunities onto the e-commerce side of the platform. Thanks.
spk06: Sure. Hi. Hey, Adam. It's Chris. I'll touch on Home Talk. So, you know, a little bit, you know, completely different situation. So not a roller coaster at all, very much a steady, resilient business for us. It's performed in line with our expectations. The team that we've added has been exceptional, really, really high quality, tremendous work ethic, and they fit in great with our business. And we're finding all sorts of areas, of collaboration, whether it's around ad tech, whether it's around newsletter distribution, these types of things. Great fit within the business and the financial performance has been very stable and in line with our expectations at the time of making the deal. On the new products front. And as far as how the Flora platform will evolve, we think that there's going to be tremendous opportunity to continue to build product-focused experiences for our users, particularly new users that come to the platform when they discover the form for the first time, making those experiences a lot more intuitive, more visual, as Rob alluded to, more photos, more video. and really highlight the distinctiveness of our communities. People are there to talk about products ultimately. So we provide this incredibly targeted, incredibly contextually relevant environment for our users away from the noise of broader social media. And so a key part of our product strategy as the mobile app rolls out and we continue to evolve the community experience will be making those commerce experiences more tangible for our users. It's the long-term strategy, so you won't see that be a big catalyst of commerce revenue in the next quarter. But we certainly think long-term, it's the key differentiator of what Vertical Scope and the 4R platform has to offer.
spk03: Okay. Thanks for that. I appreciate it.
spk05: Thank you. At this stage, we have no further questions, so I'd like to turn the call back over to Rob Laidlaw for any final remarks.
spk07: Great. Thanks, everybody, for joining today. As always, we appreciate your engagement, trust, and support, and we look forward to delivering better results through the rest of this year.
spk05: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.
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