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Hello, everyone, and welcome to the VerticalScope Holdings Inc. Q4 and Full Year 2021 Earnings Call. My name is Emily, and I'll be coordinating the call today. [Operator Instructions]
I will now hand the call over to our host, Diane Yu, Chief Legal Officer of VerticalScope Holdings. Please go ahead.
Thank you, Emily. Good morning, everyone, and welcome to VerticalScope Holdings Fourth Quarter and Full Year 2021 Earnings Call. I'm joined by Rob Laidlaw, our Founder and Chief Executive Officer; Vince Bellissimo, our Chief Financial Officer; and Chris Goodridge, our President and Chief Operating Officer. We'll begin our 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 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 appear in the company's management discussion and analysis for the 3- and 12-month period ended December 31, 2021, which are available under the company's profile on SEDAR 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 and free cash flow, 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 and CEO of VerticalScope Holdings. Rob?
Thanks, Diane. Good morning, everyone. 2021 was an important year for VerticalScope as we completed our initial public offering and continued to build on our mission to give enthusiasts and hobbyists safe communities to share knowledge and details on their passions. Our employees have worked tirelessly to deliver the strong results we are sharing with you today and for that, I say thank you to all of them. We wouldn't be here without you. VerticalScope is uniquely positioned in the market as we have a growing EBITDA positive, high free cash flow business that is driven by our user generated communities that are on our Fora platform. We believe that we can continue to profitably grow our business both organically and through highly accretive acquisitions.
In fact with 2 of our larger acquisitions that we completed in mid-Q4 of 2021, TheStreamable and HomeTalk, we believe they are well positioned to contribute between USD 10 million and USD 14 million of adjusted EBITDA to our business in 2022. Meanwhile with Threadloom, we are off to a great start building dedicated experiences to help people discover and buy the products they love in hyper targeted enthusiast categories. With these 3 transactions, we have added communities that are growing revenue even faster than our own, amazing people and teams that are fitting in very well at VerticalScope, has an incredible technology that advances and derisks our broad platform build.
Turning to our Q4 and full year 2021 results. Our business is growing very nicely and in line with our expectations and goals. We faced a variety of challenges in 2021 head-on as the unwinding of the pandemic induced shopping trends, challenged our commerce business and supply chain issues and semiconductor shortages continued to drag on many of our consumer categories, including automotive and power sports. Q4 was a record breaking quarter as we grew revenue by 6% year-over-year to $21.4 million led by an increase of 35% in our digital advertising business and offset by a 30% decrease in our e-commerce revenue. For the full year 2021, that brought revenue growth to 16% for the year, including a 37% increase from digital advertising and a 12% decline in e-commerce revenue.
We think that our e-commerce revenue will reverse its decline in Q2 2022 as we finish lapping the COVID induced gains in the prior year in late Q1 and then look to grow on a year-over-year basis for the rest of the year. We believe that supply chain issues and chip shortages are affecting both advertising and e-commerce revenues and that these headwinds will persist through the rest of 2022 as automotive manufacturer supply remains short and new supply chain challenges present themselves due to the war in Ukraine and sanctions on Russia. We remain in touch with all of our clients where we continue to be a valued partner awaiting inventory issues to resolve in order to once again step up spending.
Turning to our adjusted EBITDA for the full year, we recorded $29 million of adjusted EBITDA, a 9% gain versus the prior year. This gain jumps to 18% if we exclude incremental public company costs, FX impacts and benefits from government subsidies. In Q4 specifically, we recorded $9.4 million of adjusted EBITDA, down 16% versus last year as we experienced higher costs due to increased headcount, incremental public company costs and less favorable FX. While we are not immune to some of the inflationary pressures and technology staff wage increases being experienced more broadly, we have confidence that we can continue to grow our adjusted EBITDA by double digits in 2022 with some organic gains and more importantly, contributions from the new acquisitions we made in mid to late Q4.
Our financial performance was driven by a record Q4 as we attracted 105.8 million monthly active users to our platform, up 18% versus 89.7 million in the prior year. During the month of December, we finished the year strong with 113.5 million active users. Our record MAUs were driven by a combination of 4% organic growth and the rest coming from acquired properties. For the full year 2021, we averaged 99 million monthly active users, an increase of 10% over the year prior. We do expect Q1 of 2022 to be more challenging for our organic MAU growth as we see increased competition for user attention from the war in Ukraine and some unwinding of pandemic induced traffic patterns that drove impressive numbers last year. We expect organic MAUs to be in the range of negative 4% for the first quarter before returning to positive growth in Q2 onwards, but overall MAU growth in Q1 is expected to remain strong at between 10% and 15%.
We concluded the year with 86% of our forum community MAUs on the Fora platform. This number will fluctuate going forward based on our acquisition activity and how quickly we are able to migrate those acquired communities over to Fora. On the product side, we are making some great strides forward. We have rolled out our small business subscription packages and introduced new marketplace experiences on to Fora. We expect to launch our Fora mobile app in the next few months to increase user engagement and drive more cross community usage. The Threadloom team is already integrating well with our business and is far ahead of schedule on experimenting with some new strategies to better organize Fora products content and make product content more accessible to our users. 2022 is set to be an impressive year for the continued growth and evolution of our Fora platform driven by our talented technology team.
Now I will turn it over to Vince to discuss the financial details -- the financials in further detail.
Thanks, Rob, and welcome to everyone who has joined. I'm excited to walk you through our Q4 and fiscal year 2021 financial results. We had a very strong year-end with record-breaking results for both MAU and revenue. Q4 revenue was up 6% year-over-year and, as indicated by Rob, was the highest grossing quarter on record at $21.4 million. Growth in the quarter was driven by an 18% increase in overall MAU, a 14.7% increase in digital advertising ARPU and contributions from acquisitions. Fiscal year 2021 revenue was up 16% year-over-year and finished at $65.8 million. Growth in the year was driven by a 10% increase in overall MAU, a 25% increase in digital advertising ARPU and contributions from acquisitions. The exciting trends in digital advertising have continued with the channel posting its fourth consecutive quarter of double-digit growth.
Digital advertising finished up 35% in the quarter at $15.1 million and up 37% for the year at $44 million with 57% of the full year revenue coming from programmatic channels and the remaining contribution coming from direct advertising. Programmatic revenue experienced strong gains in both the quarter and year led by the growth in MAU and increased performance from advertising units on the Fora software platform when compared to legacy Fora platforms. Programmatic revenue grew by 40% in the quarter and 41% for the year contributing USD 8.5 million and USD 25.2 million, respectively. Overall, we feel the channel's organic growth opportunities will be accelerated by the new partnerships, strategies and technology from the Q4 acquisitions of ProBoards and HomeTalk.
Direct advertising rebounded nicely from a difficult 2020 led by renewing an incremental spend from national retailers and brands looking to reach our niche audiences. Direct has posted 4 consecutive quarters of double-digit growth with Q4 up 30% at $6.5 million and the year up 33% at $18.8 million. Growth in the channel was slowed by the impacts of chip shortages and supply chain issues across categories like automotive and power sports, which as indicated by Rob, we expect to continue into 2022. Our acquisition strategy will continue to expand and diversify our audiences across multiple categories and will drive organic growth in the channel as our experienced sales team introduces new brands and advertisers to these sites.
Turning to e-commerce revenue. The decline in e-commerce ARPU of 30% in the quarter and 20% in the year was a key driver of year-over-year results when compared to the surge in online shopping in 2020 offset by the increase in overall MAU and contributions from acquisitions. The channel's revenue was down 30% in the quarter and 12% in the year recognizing USD 6.3 million and USD 21.8 million, respectively. Supply chain issues also had an impact on the channel with the rise in out-of-stock statuses across major retailers and marketplaces resulting in a lower level of attribution from the traffic we drove to those sites. Despite the pullback in activity compared to 2020, the channel did grow by 18% when compared to 2019 and is positioned to return to growth in 2022. Overall, we are really excited about the future organic growth opportunities in the channel, which we feel have been -- now have been accelerated by the talent and technologies added from our Q4 acquisitions of TheStreamable and Threadloom.
Operating expenses increased by 88% in the year finishing at $73.2 million. Notable incremental costs recognized in the year include $5.7 million in general admin expenses associated with the IPO and operating as a public company and $2.6 million in wages and consulting expenses associated with FX movement, M&A and market based incentives. Excluding these items and noncash operating expenses, cash operating expenses were up 16% year-over-year primarily driven by growth in headcount. Our global headcount as of December 31 was 304 employees, up 29% compared to last year with 52 employees added from Q4 acquisitions. Further to Rob's comments on adjusted EBITDA, we continued to generate profitable results and positive free cash flow that will be reinvested in our business and M&A. Free cash flow generated in the year was $23.6 million, up 8% and resulting in a free cash flow conversion of over 80%.
Total comprehensive loss for the year was $12.4 million, less favorable by $10.9 million compared to last year. The loss was primarily driven by $15.9 million in incremental costs relating to the IPO, the amendment of the credit agreement, acquisition expenses and market based incentives. Our overall efforts in 2021 have strengthened our balance sheet and left us in a much stronger financial position to drive accelerated future growth. We raised $110 million in net proceeds from the IPO and we added over $100 million in assets through acquisitions while lowering our debt by $22 million in the year. We renegotiated our credit agreement and strengthened our liquidity position by adding a $75 million revolving credit facility, of which $45 million remains undrawn and will be used towards M&A, and we ended the year with $20.5 million in unrestricted cash on the balance sheet.
And now I will pass you over to Chris for an update on M&A. Chris?
Thanks, Vince. As Rob mentioned in his opening remarks, our M&A activities had a very strong finish to the year. In total, we completed 21 acquisitions in 2021 with 13 of those transactions closing in Q4 alone. We deployed over $95 million of capital excluding earn-outs in the year and have far exceeded our IPO guidance back in June that we would deploy the proceeds within 1 year. Over 90% of the capital we deployed occurred from mid-November onwards and so the full impact of these acquisitions will surface in our 2022 results. In November, we announced 3 major acquisitions of HomeTalk, TheStreamable and Threadloom. The integration work for each of these acquisitions has gone very well and each has performed in line with our expectations to close out 2021 and thus far in 2022.
But beyond these deals, we added a number of additional communities that will really benefit from the platform gains that Fora can offer. For example atvrider.com, one of the largest motorcycle communities in North America and thumpertalk.com, the top site for ATV and dirt bike enthusiasts. Our 2021 acquisition activity will drive tremendous value and provide a number of benefits for VerticalScope moving forward. We've acquired large diverse and engaged communities, which deepen our user base in categories like automotive and power sports, but also expand our universe of product focused communities to cover topics as varied as outdoor activities, digital content streaming, home DIY activities, photography, coffee, gaming and fashion. The common thread throughout is a focus on helping people make product -- make decisions about product purchases with the benefit of the expertise and trust that comes from these communities and marrying that with our Fora platform to drive better experiences for our users and greater value for our customers.
We've also added new technologies and capabilities to VerticalScope. Threadloom's technology and team is organizing the product content that exists in our communities and using that product data to surface new commerce experiences that are relevant to our users. It's early days, but the rapid advances we are seeing to our commerce capabilities will be an important driver of growth. And with ProBoards, we've opened up an additional organic growth driver for our business with user generated communities. And with HomeTalk, we've added great video and e-mail technology and capabilities. And last but not least, as Rob alluded to earlier, these acquisitions will add a significant amount of EBITDA to our business in 2022 and beyond.
Turning to our 2022 activity and pipeline. As Vince alluded to, we have the capacity from cash on hand, our credit facility and the free cash flow that our business is generating to continue to execute our accretive M&A playbook. We've signed 4 purchase agreements so far this year on smaller tuck-ins and there are several more opportunities that we're actively pursuing. We'll continue to stay disciplined and value focused and will act decisively when the right opportunity surface at the right multiples.
And with that, I'll pass things back to Rob to wrap things up.
Thanks, Chris, and thanks, everybody, for joining us today. As always, we appreciate your trust and support and look forward to accelerating our growth going forward.
We'll now open it up for questions.
[Operator Instructions] Our first question today comes from Vince Valentini from TD Securities.
Can I ask about margins first? If we look into 2022, you shouldn't have any year-over-year impacts anymore from wage subsidy programs and you've already lapped for most of the year the public company costs and then you start to benefit from adding in these acquisitions that were done late in 2021. But package that all together, it would seem like there should be some positive operating leverage and EBITDA margins for the full year should be able to increase maybe as much as 100 basis points to 200 basis points. But are there any other factors we should think about given some of the factors you talked about of supply chain disruptions and new e-commerce platforms? Are there the other costs that we should be aware of that may offset some of that margin gain that seems likely?
Vince, do you want to take that one?
Yes, sure. Vince, cost to keep in mind, you're going to have the full year impact of those incremental heads that we added from acquisition. But outside of that, in any M&A costs you will see a normalized position. So to your point, we likely will see an increase in margin north of the 44% hopefully that we posted at the end of the year, but no subsidies or other sort of anomalies that we have sort of in view for 2022.
Okay. And second one I'll throw in is on the acquisitions for Chris. Is there expected to be a bit of a pause now as you had a flurry of activity since November or is it still lots on your plate and we could expect to see some more sizable deals in the next couple of months? And maybe I'll tag in on that. I know it seems premature because you just IPO-ed. But with this wonky market and with the share price down recently, would you consider maybe using a little bit of your excess cash for buybacks opportunistically or is it purely acquisition still?
I'll let Rob tackle the question on buybacks, Vince. But just on the question with respect to the pipeline itself. So the deals we've done so far this quarter are small, sort of our typical community tuck-ins. And I don't see us doing anything as large this quarter as we did in Q4, that's for sure like we won't see that level of activity. But as we get out into Q2, we expect to see potentially some larger opportunities come in. It's always obviously hard to predict when deals will land. But I expect that with Q1, you'll definitely see a lower level of activity and capital deployed compared to the prior quarter.
Yes. And Vince, just on the buyback question. We went public for a reason, we want to grow and get bigger. We think we've got a great M&A pipeline and we think we'll be able to prove to the market that any fluctuations in the stock price are just very temporary. We're excited about where we think the business is going so we're just going to kind of keep our nose down and work harder. And we think that -- I don't foresee there being buybacks and we're really focused on just growing the business.
Our next question comes from Aravinda Galappatthige from Canaccord Genuity.
I have 2 questions for Rob and one for Vince or Chris. For Rob, I mean when I look at the quality of the acquisitions that you made in November, in particular HomeTalk and TheStreamable, can you just talk to as you kind of integrate those assets sort of the revenue synergies that you see? I mean TheStreamable, I think as you've discussed, looks like a really fantastic model with all these affiliate agreements. Routing more audience there suggest from the outside it looks like there's significant upside over time. So can you maybe just talk to that? And then secondly, a quick clarification. Rob, I think in your prepared remarks, you mentioned you expect EBITDA growth in '22. Were you referring to organic EBITDA growth sort of excluding some of these acquisitions or is it sort of a blended? Just wanted to kind of get your thoughts on that.
And then quickly a question for Vince or Chris on the acquisition cost. Obviously these were large acquisitions, the ones you made in November, so there was some maybe slightly more lumpier cost items attached to it. I think it was $3 million or $3.1 million, which I think you did add back to adjusted EBITDA. Is it fair to say that going forward, there won't be -- the kind of acquisition-related onetime items won't be as material? I know it's hard to predict, but I just wanted to get a sense of that.
Aravinda, just talking on the first question there around the high quality acquisitions that we've done with HomeTalk and TheStreamable, definitely really impressed with both of those teams. We're seeing a lot of synergies just from an operating perspective, some of the talent that we brought in there, some of the capabilities that they bring to our team and looking to potentially leverage some of the technology that they've built, particularly around that HomeTalk platform on how it could potentially fit in with some of our work and advance some of our communities as well. On the revenue synergy side, you're right. I mean there's a lot of -- we own a lot of large communities in these types of spaces. AVS Forum is a big one that fits really nicely with TheStreamable. HomeTalk, we've got a number of kind of DIY and contractor type communities.
So as we kind of build on some of those ecosystems and do a little more integration work, we do expect to see both traffic and revenue synergies. So we're pretty excited about those. And again I have to give kudos to the teams there on both of those acquisitions, they've just been fantastic and really fitting in nicely. So performing financially to expectation and in terms of just kind of the softer side fit and feel, just really doing a nice job fitting in at VerticalScope culturally. With respect to the EBITDA growth, the second question, we expect to grow both on an organic basis and a blended basis. We've talked about those 2 acquisitions with TheStreamable and HomeTalk delivering in 2022 kind of $10 million to $14 million of adjusted EBITDA and we feel very confident in that number and their ability to deliver.
Threadloom was obviously a kind of a different kind of transaction, one that was not profitable and would provide some drag on EBITDA with -- I think we signaled a Q4 kind of view of where that could breakeven. Again they're out of the gate really, really fast so we think there may even be opportunity to accelerate that schedule. But yes, I think overall MAU growth will kind of be reflected in organic growth and we expect MAU growth to be positive for the year with just the kind of tough comparable and obviously the war in Ukraine causing some attention diversion in Q1. So Q1 will be a little bit tougher and then the rest of the year, we think things really go back to normal with respect to kind of the period that we're lapping. So overall, organic and acquisition EBITDA growth.
And then I'll turn it over to Chris or Vince for the other questions.
Aravinda, it's Chris here. I can take the question quickly and Vince can elaborate if necessary. We did have an extraordinary amount of acquisition activity happening at one time in Q4 and I think that contributed somewhat to the higher than normal acquisition related expenses. So I don't think we would see that type of expense going forward kind of on a run rate basis.
Our next question comes from Drew McReynolds from RBC Capital Markets.
Maybe starting off here for you, Chris, just on the M&A environment. A lot going on with respect to just technology valuations in the public market and a lot of volatility on that. I'm just wondering from your pipeline perspective, just how that M&A environment is evolving potentially into your favor? And then second question just with respect to the state of the union on the digital ad market. In the MD&A, you're obviously fairly clear just reiterating a lot of the weakness in the automotive and power sports categories. Can you just kind of broaden that out to your portfolio of digital advertising and just add a little bit more granularity on perhaps other categories that are weak or maybe others that are strong?
Drew, I wouldn't say we've seen a material change yet with respect to kind of multiple expectations with sellers. We're dealing with a lot of kind of individual owner-operated type businesses that are a little less connected and less sensitive to the public market comparables and these sorts of things. And so to the extent there's any kind of bleed through to those types of business owners, I think it probably takes a bit more time for that to play out. But having said that, the pressure on multiples overall definitely seems to have come off a little bit. But with the smaller deals, it's really no change from the playbook that we run.
And then with respect to the digital advertising market more broadly. So yes, we pointed out, as you mentioned, kind of continued weakness in our business with respect to automotive and power sports. But yes, we've still been able to grow that advertising business both programmatically and through the direct channel by double digits. And there are a number of categories there and have been relatively strong so we look to our insurance category has been quite strong; any aftermarket type partners, marketplace partners have been very strong; retail has been quite strong for us particularly in the outdoor part of the business. And so there are a number of different categories just generally that have performed quite well that haven't had the same direct impact that we've seen with the partners on the auto and power sports side of things.
Okay. And one final one from me just on the e-commerce side. And thanks, Rob, for just the update there on kind of expectations as we go through the year. Can you just maybe unpack it a little bit with respect to some of the capabilities that Threadloom are bringing in and presumably, you're going to leverage versus just kind of the base business that is already there versus maybe some other product initiatives that you have underway? If you can just kind of unpack that outlook a little bit, that would be great.
Drew, so one of the things that I think has affected the e-commerce revenue to a larger degree and unpacking it a bit is just the fitness space, right? We had an incredible kind of run there with some of the COVID induced kind of fitness trends and particularly people buying fitness machines and pelotons and these sorts of things for their homes and obviously as we've seen some of those companies' earnings, that space has become much more challenged and there's a lot less activity. So that's where we really turn our minds to what Threadloom can bring to the table and what that does is really diversifies us significantly across all of our Fora categories. So we become much less kind of focused on things like fitness and much more kind of spread across a wide swath of consumer categories.
And what they do is when we look at our communities and kind of communities in general that are like ours and kind of hypertargeted enthusiast niches, we see about 1 out of 4 posts is actually a post about product. But many of these products really are not -- they're talked about in kind of general terms. They will reference this company's exhaust system, but they don't link it. They're not providing hey, here's a clear path to purchase it and that's what Threadloom is really, really good at. It's bringing those products to the forefront so that average kind of drive by shopper, the guy that's just looking for hey, what exhaust do I need for my Toyota Camry is able to now kind of complete that purchase journey, doesn't need to kind of return back to Google and say okay, now I know what I'm looking for. Google connect me to Amazon and Amazon connect me to purchase.
But rather brings that product kind of into the forefront and then provides them with respect to that product with all of the posts that are in the community about that particular product. And I think really makes it just a far better user experience as we connect these consumers with these kind of niche, highly targeting kind of products that are kind of for their passion. So that's where we kind of see the shift and where we're really excited about the playbook going forward. This really brings commerce to the forefront on Fora, makes it a better user experience so it's something that our users can appreciate and we think really diversifies us away from kind of some of those hot topics. We're still very strong and we're still a market leader in places like fitness, but sales have tailed off post COVID.
Our next question comes from David McFadgen from Cormark Securities.
A couple of questions. So just on e-commerce. When we think about the impact to the business from supply chains and so on, do you expect that the business wouldn't be impacted by that beyond Q1 or is it just too uncertain to say right now? And then secondly, when I looked at leverage, it looks like you finished nearly around 2x EBITDA and given the fact that you expect to complete some more acquisitions in 2022, I was wondering if you could comment on your target leverage ratio where you feel comfortable.
Just on the e-commerce question so with respect to the supply chain, I'm obviously -- look, we're continuing to call out the supply chain. I kind of personally feel like this is just a new normal. We're pointing out we expect this to persist throughout the rest of 2022. I think this is post COVID, we've got a war in Russia -- or a war in Ukraine, sanctions on Russia. I think we're going to just continue to see this, but we're also lapping some of those quarters as we get towards Q2 where supply chain was already an issue in 2021. So I generally think again the COVID induced shopping is probably lapped in Q1 and then the supply chain starts to lap as we get towards Q2 results and Q3. So with respect to e-com, it's definitely affected by supply chain and where we usually see that it's just on out of stock. Popular products people trying to buy them, but they're just out of stock. They're not able to purchase.
So we have to do a lot more kind of work around trying to find that retailer that has it in stock and that retailer that has the last few items in stock may have a lower commission rate for us. And obviously the last thing we want to do is send that consumer to a retailer that doesn't have it in stock because that often ends up again off of our platform and outside of our ability to earn affiliate fees or commissions. So moving to the leverage. You mentioned kind of 2x EBITDA and one of the things that we really kind of focus on with our credit agreement is pro forma EBITDA, getting some credit for the acquisitions that we've made to date. And from that perspective, we're quite comfortable with the leverage we're operating with. Again we feel we're able to acquire at pre-accretive multiples. We certainly aim for kind of 5x to 7x EBITDA, but in some cases we're able to do even better than that and we've got a high free cash flow business. So I think we're very comfortable at these levels and continuing to acquire at good multiples. So I don't think at this point we're seeing any kind of constraints due to leverage.
Okay. And if I could just follow up. It looks like in Q4 there was a fairly large intangible spend outside of acquisitions and I was just wondering what drove that?
David, this is Vince. So in Q4, there's 3 main buckets that went through that intangible line so that's the approximately $64 million that you see in business combinations, $18 million coming from just asset deals so sort of go down the fairway acquisitions and approximately $4.3 million coming from internally developed software.
Okay. So when you're talking about that $18 million, there were additional tuck-ins that just weren't announced. Is that correct?
Yes, correct. Those are -- that's part of the overall [ $18 million ] spend in the year.
[Operator Instructions] At this time, we have no further questions so I'll hand back to the management team to conclude today's call.
At this time, we have no further questions so this concludes our call. Thank you, everyone, for joining us today. Please disconnect your lines.