March 14, 2024
VerticalScope Holdings Inc
Long-Awaited Reacceleration is Now Underway
Our view: Q4/23 results were solidly ahead of our expectations driven by renewed digital advertising strength and momentum. Following our estimate revisions, our price target increases from $13 to $14.
Key points:
• Turning the corner. VerticalScope earnings have not been immune to macro and digital advertising headwinds that emerged in 2023. We continue to believe the pullback in the shares this cycle more than reflects the earnings impacts with the ongoing sequential improvement in operating and financial performance again evident in Q4/23 driven mainly by company-specific initiatives. Although some patience may still be required pending a more notable improvement in macro visibility, we expect sequential improvement to gather steam through 2024 and believe current valuation levels represent one of the most attractive accumulation opportunities in our coverage given solid execution, new product traction and a highly profitable and FCF generative business model.
• Long-awaited reacceleration is now underway. Digital advertising (83% of 2024E revenues) returned to positive YoY growth in Q4/23 up +6.5% (versus -4.0% in Q3/23). For Q1/24, management indicated that: (i) YoY growth in digital advertising has accelerated driven in part by growth in video advertising (introduced in 2023 and now 10% of revenues on an annualized run-rate basis) that despite the weaker seasonality is tracking above the seasonally strongest Q4/23 level; (ii) MAU momentum continues with sequential improvement in YoY growth versus -5.2% in Q4/23 with community forum traffic benefiting from evolving Google algorithm impacts and increased user demand for authenticated content in response to GenAI-driven proliferation; and (iii) e-commerce revenues have bottomed, albeit with the recovery trajectory still unclear. For 2024, management expects: (i) consolidated revenues to return to growth (versus -6.5% in Q4/23 and -24.3% in 2023); (ii) adjusted EBITDA margins to be similar to ~39% reported in 2023 given increased investment, albeit with margin upside once a firmer CPM recovery takes hold; and (iii) strong EBITDA-to-FCF conversion given modest cash taxes ($1MM) and capex ($2MM).
• Other notables. (i) management confirmed that the company is in negotiations to license its data to LLM providers; (ii) mobile app engagement is tracking ahead of management's expectations with 2024 priorities shifting to mobile app enhancements and increased adoption; (iii) with a renewed focus on resuming tuck-in M&A in 2024, management sees the emerging LLM-driven data licensing opportunities for community forums accruing to scaled operators/platforms (like VerticalScope and Reddit) making acquisition targets potentially more accretive; and (iv) management continues to see Chrome third-party cookie deprecation as a tailwind as advertisers shift to first-party data and contextual and product-centric content where there is clearer bottom-of-the-funnel purchase intent.