Strong Q1 Results, Q2 Outlook Confirms Investment Thesis Our Conclusion
VerticalScope reported results well above FactSet expectations for revenue
(6% above Factset) and adjusted EBITDA (21% above Factset). The
company also provided a strong outlook for Q2. Top-line results were driven
by rising video ads (~10% of total revenue), growth in the number of monthly
active users (MAU) to 112.8MM, and an improving digital advertising market.
These factors, along with a catalyst-rich backdrop, give us confidence in
VerticalScope’s ability to execute on its growth priorities. We have raised our
forecasts and multiple, as the gap between its peers should further narrow.
Our C$12 price target (prior C$9) is based on an EV/2024E EBITDA (incl.
capex) multiple of 9x (prior 8x), and 11x (prior 10x) our 2024 free cash flow
forecast as a secondary valuation method. Our enterprise value includes net
debt of ~$35MM (including purchase obligations) and applies a 1.37
USD/CAD rate. This valuation is in line with peers that trade at ~9x and
~11x, respectively, due to its higher growth and margins but smaller scale.
Key Points
Revenues came in at $14.7MM (vs. FactSet $13.9MM), while adjusted
EBITDA was $5.2MM (vs. FactSet $4.3MM). Strong Q1 revenue was driven
by digital advertising (up 26% Y/Y) which benefitted from improving
programmatic CPMs, video ads (which yield higher levels of ARPU), and the
return of a key auto client within direct advertising. Growth in MAUs also
contributed via higher impression volumes.
In 2024, VerticalScope expects to return to growth and maintain ~40%
margins. Both assumptions are credible. The company also closed its first
acquisition of the year in April (a boating community), and plans to continue
allocating capital towards debt reduction, share buybacks, and M&A. It does
not expect a GEN-AI licensing deal to occur this year, which we have
removed from our upside scenario in 2024E. The company expects its Fora
app to remain small in overall terms. Our thesis is based on three points:
1. Digital advertising market growth of ~10%: Our forecast for
VerticalScope to return to growth in 2024E is aligned with digital ad spend
growth, including ad growth at Google and Meta.
2. VerticalScope’s monetization potential has improved: The company’s
online communities are unique within the market, given their highly specific
focus areas. These are often even more granular that direct peer Reddit’s
forums and, ultimately, provide advertisers with a contextually relevant target
audience. VerticalScope’s ARPU potential has improved, although remains
below that of peers like Meta, Snap, Reddit and Yelp.
3. Upside to forecast: Catalysts that could further contribute to revenue
growth include: 1) higher video ad adoption and ARPU; 2) increased mobile
app use; 3) faster debt repayment; 4) M&A; 5) Reddit results 5) GEN-AI data
licensing contract, 6) benefits from Google’s March algorithm update.