VerticalScope Holdings Inc.

Hello and welcome to today's Vertical Scope Holdings Inc. Q2 2023 earnings call. My name is Bailey and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass you over to Diane Yu, Chief Legal Officer. Diane, please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to Vertical Scope Holding's second 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 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 the actual results, performance, or achievements to be materially different from those implied by such statements. A more complete discussion of the risks and uncertainties facing the company appears in the company's management discussion and analysis for the three- and six-month period ended June 30, 2023, which is 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, free cash flow, free cash flow conversion, and MAU, which are non-IFRS measures. All references to currency in this presentation shall refer to USD, unless otherwise specified. Now I will turn the call over to Rob Laidlaw, founder, chair, and CEO of VerticalScope Holdings. Rob?

Thanks, Diane. Good morning, everyone, and thank you for joining us today. In the second quarter, we delivered on our expectation that Q1 would be a trough for our business. We made great progress throughout the quarter as we introduced new advertising layouts, new subscription programs with higher MRR and higher conversion rates, in-housed much of our programmatic stack, and introduced video advertising onto our 4L platform. We are confident, given our progress within the second quarter, that we will see sequential growth of our top and bottom line in Q3 and Q4 of this year. Speaking about the macroeconomic situation, online advertising remains challenging across the board. CPMs are lower, demand is lower, and overall advertisers are still taking a very cautious approach. In better markets, we will see a significant increase in CPM and demand versus what we are seeing today. We are starting to see some green shoots and some increased activity, but it's very early and I'm very reluctant to say that things are normalizing or recovering just yet. There remains risk to the ad market in the Q4 holiday shopping season if the economy does in fact enter a recession later this year, but we are confident that we are at or near the bottom for advertising. One area where we are starting to see some recovery is on traffic. While MAUs continue to be down for the quarter on a year-over-year basis, June was a much better month, and we did experience two positive algorithm updates. The first was in late May and appears to be correlated to the timing of Google's rollout of some of its AI search enhancements that were first announced at Google's I.O. conference in early May. We've widely heard that forums which offer particularly deep and credible perspectives on products, would benefit from Google's rollout of some of these new algorithms around topics and perspectives. And while still only a high single digits improvement on forms, it was good to see that most of this traffic was from US sources where the algorithm was implemented first. We believe that we are well aligned with Google in wanting to bring credible user perspectives forward in a world where AI content is starting to flood the internet with questionable information and at times hallucinations. The second positive algorithm was in late July, and given the timing of this call, it is still too early to talk about impacts and reasoning, but we are certainly feeling some improving momentum with respect to MAUs and are excited about our platform's future potential. We may not be able to get back to positive year-over-year traffic just yet, but we're confident that we're on the right track as the unique perspectives offered on our communities become increasingly valuable. In the third quarter, we will continue to roll out our 4UP mobile app to more communities. While we've had a fairly limited rollout to date, we have learned a lot and received very positive and helpful feedback from our users. We have about 10 communities onboarded as of today, including some of our larger communities, such as AVSForum.com, WatchYouSeek.com, and MTBR.com. And we're looking to have 1,000 plus by the end of this month. The mobile app is boosting engagement with our users who are spending more time on our communities and creating more content. Importantly, the app creates a direct one-to-one navigational relationship with our users that doesn't involve a search engine as the entry point. Next, I want to touch quickly on margins. We have improved margins in the second quarter to 37%, and we are focused on keeping those at 40% or better. In June, they were at 43%. We have rationalized the underperforming areas of our business and have worked towards being more efficient across the board. We continue to invest in fora and our advertising platform while taking a more cautious approach on commerce, where there continues to be strong headwinds in most of our categories, and in particular, streaming. We do believe 40% margins are sustainable throughout the back half of 2023. And lastly, we continue to field a number of inbound inquiries about potential strategic transactions with Vertical Scope. We are dutifully responding to these inquiries and are having ongoing discussions. I believe that providing better quarterly performance to our shareholders is the most important thing that we can do to build confidence in our business model and financial outlook. And I believe our Q2 results were the first step in delivering on this goal. I'm excited about the future and a large owner of the shares of the company, and I am confident that our improving results will continue.