VerticalScope Holdings Inc T.FORA

RBC 2

[retiredcf]

Their upside scenario target is now $20.00. GLTA

November 13, 2024

VerticalScope Holdings Inc
The Breadth of Key Growth Drivers Widens

Outperform

TSX: FORA; CAD 8.89

Price Target CAD 16.00 ↑ 15.00

Our view: Q3/24 financial results were slightly ahead of our forecast while MAUs were well ahead. Following upward revisions to our digital advertising and MAU estimates and incorporating slightly lower but still healthy 40%+ EBITDA margins, our price target increases from $15 to $16.

Key points:

• Rising demand for authentic content remains a tailwind. 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 what is now a cyclical ad recovery sets up for accelerating earnings growth in Q4/24 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.

• The breadth of key growth drivers widens setting up for a strong Q4/24 and 2025. Following a solid Q3/24 for digital advertising with revenue growth accelerating to +22.0% (versus +20.3% in Q2/24), momentum is continuing into the seasonally strongest Q4/24 with management expecting: (i) low-to-mid double-digit digital advertising revenue growth in Q4/24 with strength in programmatic CPMs (in part due to a boost from the U.S. election) and double-digit growth in direct advertising as the automotive category returns; (ii) positive YoY growth in MAUs in Q4/24 and 2025 (despite tougher YoY comps) driven by the structural shift in search to more authentic forum/community content alongside initiatives to improve user engagement/retention; (iii) digital advertising ARPU growth driven by improved user monetization (particularly with the expansion of video on mobile), stronger CPMs and a more meaningful contribution from direct advertising; (iv) low-double digit consolidated organic revenue growth in 2025 with e-commerce expected to be stable; and (v) adjusted EBITDA margins in the low-40s reflecting ongoing reinvestment into technology and partnerships with modest margin expansion as tuck-in acquisition activity increases and acquisitions are integrated.

• Other notables. (i) management expects to close on tuck-in forum acquisitions in Q4/24 with M&A being a more material growth driver in 2025 reflecting a growing pipeline of targets; (ii) conversion of MAUs to DAUs is improving (registered members increased +29% YoY in October) with the increased engagement in part due to the mobile app and AI; (iii) programmatic revenues (71% of digital advertising revenues) increased +36% YoY in Q3/24; and (iv) additional direct DSP connections are being pursued following the integration of The Trade Desk in Q2/24.