Key points:
• Demand for authentic content represents a major structural shift. Consistent with our mid-2020s content inflection period, we believe VerticalScope is well positioned to benefit from what is now rising demand for authentic content in a proliferating GenAI-driven content environment that will necessitate much more sophisticated personalization. While earnings have not been immune to lingering macro headwinds that first emerged in 2023, we believe this structural shift alongside an eventual cyclical ad recovery sets up for accelerating earnings growth in H2/24 and through 2025. Against this backdrop, we continue to believe current valuation levels represent an attractive buying opportunity given solid execution, new product traction, accretive tuck-in M&A potential, and a highly profitable and FCF generative business model.
• H2/24 earnings recovery remains firmly intact. While digital advertising growth decelerated sequentially from +26.0% YoY in Q1/24 to +20.3% YoY in Q2/24 due in part to flat direct advertising (32% of digital advertising revenues) that was impacted by the shifting of campaigns to Q3/24, management expects double-digit YoY growth in digital advertising in H2/24 underpinned by continued MAU momentum (up +23.4% YoY and +8.1% sequentially in Q2/24), renewed CPM strength, growth in video advertising (now ~10% of revenues) and mid-single digit YoY growth in direct advertising. In addition, management indicated: (i) e-commerce revenues are stabilizing with The Streamable returning to YoY growth in July; and (ii) Q2/24 adjusted EBITDA margins of 42.4% (+502bps YoY) are expected to be sustained if not higher in H2/24.
• A lackluster ad market. Management indicated that the overall ad market remains somewhat tepid and subdued, which it expects to continue through H2/24 and into 2025. While visibility on programmatic advertising has improved, direct advertising has become more difficult to predict with slower decision-making among advertisers and a degree of choppiness across ad categories. Despite this backdrop, management remains confident in delivering YoY growth in H2/24 with Q3/24 off to a solid start and any eventual cyclical recovery in the ad market becoming an incremental tailwind.
• Other notables. (i) the ongoing deployment of both the mobile app and video advertising remains measured with the primary objective of optimizing the user experience; (ii) management is looking for ways to better leverage AI to improve community/forum content including summaries, search and thread titles with the goal of increasing user engagement; and (iii) LLM data licensing discussions remain ongoing with no timeframe provided for consummating deals.