VerticalScope Holdings Inc

TSX:FORA

Earnings Call Analysis

Steady 2024 Outlook with Strategic Investments and Growing Video Revenue

For 2024, the company anticipates its performance will align with 2023 levels due to continued investment in initiatives like AI and a mobile app that should drive growth beyond 2025. Even as traffic increases on its Fora platform, CPMs lag due to macro conditions, yet a rebound in overall revenue is projected. Video, comprising 10% of total revenue, is expected to grow. Margins are predicted to follow historical trends with Q4 typically peaking at around 46%. Investment in the platform is ongoing, with the mobile app outperforming expectations in terms of monetization due to higher engagement, and political cycles may yield additional programmatic ad spillover.

Adapting in a Challenging E-commerce Environment

As we assess the landscape of our company's performance, we've discerned vital information that indicates an intricate mixture of growth and challenges. Our total revenue for Q4 stood at $17.9 million, representing a 6% dip from the previous year, although our advertising business displayed resilience with a 6.5% organic growth. The revenue for the full year did not fare as well, landing at $60.9 million, which is a notable 24% lower than the previous year. This decline was punctuated by a 9% dip in advertising and a significant 57% decrease in e-commerce, exemplified by our streaming property, TheStreamable.com, whose revenue plummeted by 80%.

Solidifying Cash Flow and Reducing Leverage

Navigating through the financial straits, we've achieved a remarkable free cash flow conversion rate of 98% during Q4, escalating from a 59% conversion the previous year, resulting in $8.1 million of free cash flow for Q4 alone. Annually, we managed to convert our cash flow at 87%, thereby generating $20.5 million. These improvements have been fueled by a reduction in capital expenditures, especially in capitalized software development, and a decline in income taxes paid, a result of our optimized tax strategy. We have diligently worked on reducing our net leverage ratio to 2.1x, and we anticipate it will drop below 2x in 2024. Our unwavering focus on profitability has manifested in EBITDA margins that expanded over the year, with adjusted EBITDA up 14% for the quarter. Despite the overall yearly decrease of 23.9% in adjusted EBITDA to $23.5 million, we remain confident in the underlying strength of our core platform.

Strategy and Expectations Going Forward

With a keen eye on the future, our company is positioning itself as a cash buyer in the space of mergers and acquisitions. We're set to resume a trajectory of positive revenue growth in 2024, and we're showing promising signs even in Q1. Our video segment, representing approximately 10% of total revenue, is also expected to grow significantly as it becomes a more critical part of our offering. The margin cadence for the coming year will follow our historical trends, with Q1 typically being the lowest in terms of revenue, and Q4 expected to peak. Investors can anticipate a similar sequential growth pattern between Q2 and Q3.

Leveraging Mobile for Monetization

Our mobile app initiative presents a beacon of success, monetizing above our expectations due to a surge in user engagement. While the Cost Per Thousand Impressions (CPM) is lower compared to mobile web, the increased engagement has led to a higher overall revenue per session. There's a strategic focus on reaching critical mass with the mobile app to ensure it accounts for a significant portion of our mobile traffic, working towards an 'absolutely amazing product' that will appeal to both our long-time users and the tech-savvy new users who are more inclined towards apps. The goal is not just to switch existing users to the app but to create a compelling, 'completely killer app' that stands on its own merits.

Earnings Call Transcript 2023-Q4

[Operator]

Hello all, and welcome to the VerticalScope Holdings Fourth Quarter and Full Year 2023 Earnings Call. My name is Lydia, and I'll be your operator today. [Operator Instructions]

I'll now hand you over to your host, Diane Yu, Chief Legal Officer, to begin.

[Diane Yu, executive]

Thank you, operator. Good morning, everyone, and welcome to VerticalScope Holdings' Fourth Quarter and Full Year 2023 Earnings Call. I'm joined by Rob Laidlaw, our Founder, Chair and Chief Executive Officer; Vince Bellissimo, our Chief Financial Officer; and Chris Goodridge, our President and Chief Operating Officer. We'll begin with 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 appears in the company's management discussion and analysis for the 3- and 12-month period ended December 31, 2023, which is 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, free cash flow, free cash flow conversion and MAU, 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, Chair and CEO of VerticalScope. Rob?

[Robert Laidlaw, executive]

Thanks, Diane. Good morning, everyone, and thank you for joining us today.

I was very pleased with the performance of the business in Q4. We continued on the momentum that we've been building throughout the year and saw some nice gains on both Fora MAUs and on digital advertising revenue. These positive trends have accelerated in Q1 2024.

Our business has recovered well since the challenging start to 2023. Digital advertising, which now accounts for 85% of our revenue, grew by 6.5% in the quarter. Our new video advertising platform was a key driver of this growth, and we have been impressed with the advertiser demand for video in Q1.

Our advertising business typically experiences its strongest quarter of the year in Q4 and the weakest in Q1. We are seeing video revenue actually sequentially grow between these 2 quarters. It's impressive and there's real excitement around this new platform addition from direct advertisers and programmatic partners alike.

Commerce continues to remain challenging. But now that it's about 15% of our business, there is much less of a growth headwind for us and more of a future opportunity. Despite lower revenue, we have recently seen an uptick in streaming conversions and are introducing some new engagement tools and user subscription packages to these websites. We are continuing to put in the scrappy work required to build a bright, long-term future for these properties.

Our product initiatives for 2024 are largely focused on 3 key areas on our forum communities. First, we are continuing to invest in the Fora mobile app. We are adding new user functionality based on feedback on a weekly basis and focused on delivering a high-quality user experience as we continue to observe that users who are on the app are more engaged in contributing more content than those on mobile web. We are very long-term focused on the mobile app and believe we have plenty more work to do, yet, at the same time, happy to build momentum with our user base.

Second, we are investing in our core forums experience on Fora and making it easy for our members to contribute valuable content. We have over 2 billion posts on our platform, and we think we can grow this number even faster, which in turn will drive further growth on MAUs.

Third, we continue to believe we have a unique characteristic in our online forums. We have authentic enthusiast audiences discussing products that they own and use and are very passionate about. By utilizing AI to improve the organization of post feeds, we believe there is immediate potential for increased engagement and time on site and on app. This is just one area where we think AI will help grow our communities.

Next, I would like to highlight the impressive traffic growth on our forums, which grew by 18% in Q4 from 61 million to 72 million MAUs. Overall, VerticalScope clocked in at 108 million MAUs in the quarter, which if you exclude the paid traffic, primarily driven last year by our commerce business from the year-over-year results, overall MAUs were up 5.4% versus 2023.

We are seeing continued momentum and growth in Q1, and this should be further enhanced as Google increased its crackdown on low-quality, AI-written content with its announced March algorithm update. It is clear now that users are seeking authentic, real enthusiast opinions on products and services, and they are finding them on forums like our own and those of Reddit. We are winning the minds of users versus the low-quality AI content that is flooding the Internet.

In the past few weeks, we've had a number of questions around Reddit with their upcoming IPO and, in particular, their deals with various AI, LLMs. We believe that we share similarly attractive characteristics as Reddit in the value of our posts and content for AI training data.

We also believe we are differentiated by the enthusiast audiences that are primarily posting about products they own and love on our communities. This unique data is highly valuable in an AI world, and we have to be extremely careful about how we treat it. We are in the early stages of this highly confidential process, but we are confident that AI will help us further unlock our platform's value.

Before I turn it over to Vince and Chris to walk you through the quarter financials, I wanted to spend some time on capital allocation. Since last January, we have reduced our debt by over $17 million and today sit with a net debt position of less than $50 million with high confidence in our business prospects. We will continue to consider voluntary prepayments against our credit facility. However, we have strong conviction that there are attractive opportunities to put our free cash flow to work in other ways as well.

As mentioned in our press release, we will be focusing on 2 key areas, depending on which is most accretive to our shareholders. First, we believe that the business we know best, have a high degree of confidence in is our own. We believe there is an attractive opportunity and perhaps a very time-limited one with Reddit's upcoming IPO, resetting our comparable set to repurchase our own shares through our approved NCIB program. We will be aggressively buying back shares if we can do so at attractive prices.

Second, we believe that AI has welcomed a material improvement in our long-term revenue and traffic opportunity for our forum communities, and this makes tuck-in acquisitions very attractive. We will look to add more high-quality, product-focused forum communities to our platform at accretive multiples. Most sellers are seeing the same opportunities that we are and may be reluctant to sell to us at an accretive multiple. But we will remain disciplined in adding scale if multiples are not accretive.

With that covered, I will turn it over to Vince and Chris to go into the numbers on Q4 and full year 2023. Chris?

[Christopher Goodridge, executive]

Thanks, Rob, and good morning, everyone. The momentum we built throughout 2023 continued in Q4 with some notable gains in advertising, which benefited from improving MAU trends, ad experience improvements and the introduction of video advertising in Q2.

Total revenue in Q4 was $17.9 million, which was 6% lower than prior year. However, our advertising business, which represents 85% of overall revenue, delivered 6.5% organic growth in the quarter. E-commerce, now 15% of total revenue, continued to be challenged and was down 45% compared to prior year, a slight improvement to the trend we experienced in the first 3 quarters of the year. For the full year, total revenue was $60.9 million, 24% lower than prior year, with advertising down 9% and e-commerce down 57%, mainly as a result of performance on TheStreamable.com.

Turning more specifically to advertising, advertising revenue was $15.2 million in Q4, up 6.5% compared to prior year. Programmatic revenue was the highlight of the quarter. It was up 20% compared to prior year versus the 3% decline experienced in Q3, and it made up approximately 65% of total ad revenue in Q4.

As our MAU trends continue to strengthen and advertising budgets improved, our programmatic business is well positioned to capitalize. The investment we've made in our ad tech is driving better yield per page, and video has added an incremental source of valuable monetization. Q1 has started out strong on programmatic with year-over-year growth trends continuing.

Direct advertising was down 12% in Q4 and 9% for the full year and accounted for 35% of our total ad revenue. The direct channel continued to see some softness in Q4 from U.S. auto insurance and online marketplaces as well as retail advertisers. Year-over-year trending to start the year, however, has improved, and we expect the direct channel to show growth in Q1.

Turning to e-commerce revenue. E-commerce was challenged throughout 2023, and we experienced only modest improvements in trend in Q4. In the quarter, e-commerce revenue was $2.7 million compared to $4.9 million in the prior year and flat to Q3 of this year. TheStreamable.com accounted for approximately 40% of the year-over-year decline in Q4 with the balance coming across commerce-focused properties, including fitness sites. Subscription-based revenue accounted for 56% of total e-commerce revenue in Q4. And as I mentioned earlier, overall e-commerce revenue accounted for 15% of our total revenue in Q4.

Turning to our outlook. Advertising is off to a good start in 2024, and we expect to deliver another quarter of organic growth in Q1. As Rob mentioned, we're seeing really strong growth in MAUs in our forum communities, and this is resulting in double-digit impression gains that we're better able to monetize with improved ad experiences in our video platform.

In our direct channel, the U.S. insurance business has been slow to return, but overall sentiment with our direct customers is improving. We are also encouraged by the 2024 return of some auto and powersports customers who pulled back advertising in 2023.

I also wanted to comment briefly on VerticalScope's unique positioning in the advertising landscape as the industry begins to grapple with the loss of third-party cookies in the Chrome browser. That change is expected to happen over the next several quarters, although Google has, on a few occasions, kicked the can down the road. Our data will prove increasingly valuable as cookies go away. This will provide tailwinds to our advertising business and represent a growth opportunity for VerticalScope.

As data signals become increasingly scarce on the open web, VerticalScope's community data, which has the combined power of contextual relevance with product niches, high addressability with over 60 million registered users and high purchase intent, we expect this will support stronger CPMs for both programmatic and direct channels and will give advertisers an even stronger incentive to work directly with our sales team to target custom audiences and grow campaign performance.

With that, I'll turn it over to Vince to walk you through the rest of our financial results.

[Vincenzo Bellissimo, executive]

Thanks, Chris, and good morning, everyone, and thank you for taking the time to join our call today.

Our Q4 results highlight a successful turnaround and our exciting entry into a period of growth. Our strategic initiatives focused on improving profitability have yielded impressive results, including expanded margins and robust free cash flow conversion. The ability to generate a continuous cycle of profitability gives us a powerful advantage, not only allowing us to invest our free cash flows towards strengthening our financial position, but also allows us to continue to invest in high-growth areas that will drive long-term value for our users, employees and shareholders.

Our commitment to optimizing cash flow has yielded impressive results. Free cash flow conversion rates increased in both the quarter and year, resulting in a 98% conversion rate in Q4. This translates to $8.1 million in free cash flow for the quarter, a substantial increase from the 59% conversion and the $4.2 million generated in the prior year.

For the full year, our free cash flow converted at 87%, generating a total of $20.5 million, which is also an improvement from the 70% conversion rate in the prior year. The key drivers behind these improved conversions were reduction in capital expenditures, particularly in capitalized software development, and a decrease in income taxes paid due to revenue declines and an optimized tax strategy. The majority of the cash flow generated in the period was reinvested towards reducing our debt position and improving our leverage profile.

In Q4, we generated $4.6 million in cash flow from operations, bringing the year-to-date total to $15.5 million. In Q4, we made $4.4 million in principal payments on our credit facility, with $3.8 million of those being voluntary. Year-to-date, we made a total of $15.3 million in principal payments with $12.8 million being voluntary. Our net leverage ratio in the quarter, as defined by our credit agreement, was 2.1x, and we expect the ratio to drop below 2x in 2024.

Our culture of profitability has fueled positive results, not only in our robust free cash flow generation, but also in our adjusted EBITDA margins that expanded throughout the year. Adjusted EBITDA returned to growth in the quarter, up 14% compared to the prior year as a result of first half cost reduction and growth in digital advertising revenue.

For the year, adjusted EBITDA decreased 23.9% to $23.5 million, a key driver being a significant drop in e-commerce revenue from our streaming property, TheStreamable.com. In the year, The Streamable's revenue decreased by 80% from $12 million to $2.5 million, and the property's adjusted EBITDA decreased by 88% from $10.1 million to $1.2 million as a result of traffic declines and significant cuts and commissions from streaming partners.

Despite these challenges, our core business continued to perform well. Excluding The Streamable from our full year results, adjusted EBITDA would have increased by 7% compared to the 23.9% decrease recognized over the prior period; and free cash flow would have increased by 67% compared to the 5% decrease over the prior year that we recognized, underscoring the strength and resilience of our core platform.

Adjusted EBITDA margins for both the quarter and the year expanded compared to prior year. The year-over-year declines in revenue, offset by an -- due to year-over-year declines in revenue, offset by an optimized cost base. Our Q4 and year-to-date margins were 46% and 39%, respectively, compared to 38% margins in both periods in the prior year. Given our stable cost base, margin performance in 2024 will continue to be in line with top line revenue growth and our ongoing investment in the Fora platform.

Our focus on operational efficiencies and cost reductions, driven by first half initiatives, and a reduction in amortization from acquired intangibles resulted in a 115% increase in operating income to $2.8 million compared to $1.3 million in the prior year. This strong operating performance translated directly to the bottom line with net income increasing to $2.1 million, representing a $1.9 million improvement compared to the prior year.

Earnings per share also climbed to $0.10 from $0.01 in the prior year and surpassed market expectations. For the full year, our net loss narrowed to $19.8 million, primarily driven by a $21 million reduction in operating losses. The improvement in both periods underscores the effectiveness of cost optimizations and positions us well for continued profitability.

We have navigated success -- we've navigated a successful turnaround, are encouraged by our positive financial MAU trends leading into 2024. Our profitable business model gives us a competitive advantage and allows us to make strategic investments that will drive sustainable, long-term growth on our platform. This is a pivotal moment for forums and user-generated content, and we are positioned well to capitalize on this opportunity and deliver significant long-term value for our shareholders.

And with that, I'll pass it back to Rob for closing remarks. Rob?

[Robert Laidlaw, executive]

Thanks, Vince. And very much agreed, it's a pivotal moment here for forums and user-generated content.

So with that, operator, we'll open it up for questions.

[Operator]

[Operator Instructions] Our first question today comes from Drew McReynolds of RBC.

[Drew McReynolds, analyst]

Great to see everything kind of building momentum-wise here. I'll kind of limit my questions to 2 or 3 here. I guess, first, Rob, on the AI side, it's amazing how that narrative has evolved. As it pertains to VerticalScope, you talked about kind of AI on the content side, on the cost structure side and now on the training side. Can you just kind of flesh out what we should be looking for here in 2024 with respect to your use and adoption of it?

[Robert Laidlaw, executive]

Yes. Thanks, Drew. I mean AI has been and proves -- is proving to be a huge help for our members and engagement. And we're really working through kind of putting it almost everywhere we can within our product to make it better. It's also making us more efficient operationally. If you think about our staffing levels year-over-year, our staff are just -- they're using AI in their day-to-day work. They're using it in their workflows. It's making us more efficient operationally. And we're trying to weave it into literally everything we do. And I think it's really incredible how productive we can be and how AI can help us.

But I think there's also a really important kind of point around how much is being used online to just flood the Internet with oftentimes kind of poor-quality, unchecked, unreviewed content. And that has really kind of raised the, I think, the eye of Google and I think users alike. And users, I think, are now really noticing when content is written by AI. It's becoming hard to trust a lot of this stuff. And users are turning to forums like our own and those of Reddit with increasing frequency and getting more and more comfortable with these user-generated content platforms to find the authenticity that they're looking for, especially when it comes to a purchasing decision.

And I think that's what really makes our forum so wonderful is that they're very much tied to products. And while it's hurt us a little bit on the professional-generated commerce side of our business, the user-generated content side of our business, which is more than 85% now, is absolutely a beneficiary here. So we're really excited about these trends from both an operational efficiency standpoint, but also user engagement and platform growth.

[Drew McReynolds, analyst]

That's great. And then just 2 follow-ups on that. Obviously, on the margin side, with all of the efficiency you've talked about in rationalization last year, we saw very good margins this quarter. As we look into 2024, how should we expect you to kind of balance continuation of that kind of profitability curve with reinvestment?

And secondly, just on the M&A playbook, great to see you guys back on your front foot with respect to looking at targets. Just how has the criteria of M&A changed or evolved for you guys relative to either pre-advertising slowdown or pre-gen AI? Is everything you're looking at kind of pretty much what you looked at before? Or is it evolving in different ways?

[Robert Laidlaw, executive]

Drew, maybe I'll take the M&A question first, and then I'll turn it to Vince on the margin side. On the M&A side, I think we are definitely seeing some benefits again of our scale against the independent operators. So when you think about things like the opportunity behind training data, when you think about the opportunity to implement gen AI into a platform and also to get the benefit of kind of that operational efficiency, those mostly qualify to a scaled operator like ourselves.

And from that perspective, I think it can make these potential acquisitions more accretive. It kind of rewrites the playbook for us, again, giving us advantages of scale that smaller operators won't be able to unlock themselves. So that's pretty exciting for us.

On the actual targets themselves, I would say we're very much -- a bit of a funny story, but I got an e-mail the other day from somebody reaching out that I had contacted in 2009 saying he was finally re-interested in transacting. So some of these are very, very old contacts. Some of them are new contacts, but we are very much focused, really 100% focused on tuck-in forum acquisitions that can be highly accretive.

So I don't think you're going to see a crazy amount of spending, but we definitely will be disciplined about keeping these acquisitions accretive. And we think there's great targets with really a freshened playbook on how we can make them even more accretive and grow faster once they're on our platform.

With that, I'll turn it to Vince on the margins.

[Vincenzo Bellissimo, executive]

Thanks, Rob. And thanks, Drew, for the question. Yes, so Drew, with regards to margins, right now, what we're saying for 2024 is that the levels are pretty much in line with what we saw in 2023, and there's really 2 reasons for that. One that you touched on, we're still investing in the platform. So this investment is in the form of bodies and people and tech that will help us drive initiatives like AI, mobile app, et cetera. And we'll realize the growth from these initiatives in outer years, so in 2025 and beyond, very confident of that.

And then, two, it's really the timing of a return in CPMs from sort of the depressed macro conditions. We're seeing some great movement on traffic across our Fora platform, and we're seeing positive trends there. But those trends aren't necessarily transpiring into a one-to-one relationship to top line revenue growth because CPMs are lagging behind. Once CPMs, though, do start to uptick and we see that return in macro, that's when we'll start sort of modeling in some lift in the operational leverage that will come from that. But as of now, we're saying that we feel that margins will stay in line with what we saw this year.

[Operator]

Our next question comes from Vince Valentini of TD Newcrest.

[Vince Valentini, analyst]

Maybe, first, I can try to tie a loose end on the M&A question. Would you envision using more cash or stock to pay for deals?

[Robert Laidlaw, executive]

Vince, just on M&A, we're a cash buyer.

[Vince Valentini, analyst]

That's pretty clear. In terms of the outlook, I think what I'm hearing is you'd be expecting to be back to positive consolidated revenue growth in full year 2024, but even in the first quarter, given the video advertising trend and given that the headwind from Streamable is now so small. But is that -- am I reading that right?

[Christopher Goodridge, executive]

Vince, it's Chris here. Yes, you're reading that right. We're expecting to turn the corner there on overall revenue.

[Vince Valentini, analyst]

And is The Streamable, that $2.5 million, do you think that goes to 0? Or have you reached a floor there?

[Christopher Goodridge, executive]

No, we don't think it goes to 0. I mean it may bounce around a little bit, but it's obviously a relatively small part of the overall business now. So it doesn't really have that swing factor on the overall number. The team is doing a really good job in finding its place. And as Rob mentioned, we started to see improving conversions for streaming clients. So it's early days there, but we think the property definitely has long-term value in our portfolio.

[Vince Valentini, analyst]

Okay. Sorry, maybe 2 more. The full year revenue growth in '24, just to be clear, that should be achievable with or without some sort of deal to monetize your data with LLMs?

[Christopher Goodridge, executive]

Yes, that's correct.

[Vince Valentini, analyst]

And if you can, I know you said highly confidential, Rob, but if you can get something done, is a realistic time frame in the next couple of months? Or should we be thinking more 6 to 12 months?

[Robert Laidlaw, executive]

Yes, Vince, I don't want to compromise our position too much here, so I'll probably say no comment on timing for now.

[Vince Valentini, analyst]

No problem. And then I will speak in -- sorry, I'm going to -- I don't know how many more people on the line, so I want to make sure these can get covered. The free cash flow conversion almost seems too high, Vince. It just begs the question, is there anything timing issue-wise related to taxes or any other items that you think would flush back in '24 to make the conversion a little bit less?

[Vincenzo Bellissimo, executive]

Yes. So Vince, yes, that's exactly right. For Q4, the elevated levels were related to timing of a refund that pertained to a prior period filing. I think all of those have washed -- have flushed out now. We have right now, in terms of full year cash taxes, we're estimating approximately $1 million next year, and that's effectively reduced because of pullback in like properties like Streamable and just we've overall scrubbed our tax. And our tax framework here, it's really optimized now. So we're thinking it's about $1 million next year from a cash perspective.

[Vince Valentini, analyst]

Excellent. And last but potentially not least, if my memory is correct, back in your IPO process, you had some metrics to compare VerticalScope to Reddit in terms of engagement and monetization and maybe other stuff. Is there any refresh on any of those stats you can help us with? Because obviously, we all think Reddit will be in focus over the next month.

[Robert Laidlaw, executive]

Yes, Vince, we're thinking about how we can kind of put something together and maybe at a future kind of Investor or Analyst Day. But certainly, MAUs is one, and the 2 billion posts is another and probably pertains also to some of the LLM thinking. So again, we think we compare very, very favorably. We're still seeing in a number of areas where our communities are, in some cases, growing faster than Reddit's or just receiving a lot more posts.

We definitely think, look, people are coming to -- they're using Reddit absolutely. Reddit and ourselves have both grown very, very nicely since the kind of proliferation of AI. And our view here is that users will use Reddit, and that will benefit our platform as well as they look to go deeper on topics that they're very, very passionate about. Reddit is still hugely successful on kind of everything from what you know and interesting content and memes and news. But when you really want to go deep on mountain biking or snowboarding or watches, I think that's where our platform shines.

And I think as much as they're a competitor of ours, I think the 2 platforms exist very well together. And we're kind of differentiated based on our product focus here. So we're excited about their IPO. And I think our platform and their platform have both benefited quite a lot from this kind of proliferation of AI and how it affects both of our businesses.

[Operator]

The next question is from David McFadgen of Cormark Securities.

[David McFadgen, analyst]

A couple of questions. So first of all, on AI, do you think it's reasonable that you would announce some revenue from licensing your database to AI this year?

[Robert Laidlaw, executive]

Thanks for the question, David. Look, we're in pretty confidential discussions. And I think, look, one way or another, there's going to be some revenue. What forms that comes in, I want to be careful about what we say here because we're obviously covered by confidentiality and we're also in a negotiating process. So I think that's probably all I'll say on that one.

[David McFadgen, analyst]

Okay. And then for the quarter, you talked about video ad revenue and also how it's looking good in Q1. It's increased sequentially from Q4 to Q1. Can you give us an idea on the magnitude of video ad revenue as a percentage of your total ad revenue?

[Christopher Goodridge, executive]

Yes, David, it's Chris here. So video overall, it's in the ZIP code of around 10% of total revenue right now. It continues to grow, though, and we think there's great potential for it this year.

[David McFadgen, analyst]

When you say 10%, you're talking just ad revenue or total revenue, including...

[Christopher Goodridge, executive]

Total revenue.

[Robert Laidlaw, executive]

And that's very much just kind of [ run rate ] looking forward.

[David McFadgen, analyst]

Okay. And then just on MAUs, obviously, we saw a sequential improvement, obviously, a good sign. And you talked about, at least in the MDA, you talked about it was driven by an increase in search engine traffic. But can you give a little more detail on that? Like what is driving that increase in search engine traffic?

[Robert Laidlaw, executive]

Yes. I think, David, I think what's driving it is the change in how Google has viewed and, frankly, what users are viewing as credible product reviews and really thinking through -- and I think we've all seen it, right? I mean, through COVID, everybody built a commerce business. Every old media company built a commerce business. Then they decided, as some of the COVID trends started to wear off, let's supercharge it with -- let's go from 10 product review articles to 1,000 product review articles and then it became 1,000 per day. And the Internet just became flooded with this stuff where nobody had touched the products. It was just machine written, in many cases, not reviewed by humans and it proliferated.

And I think what happened was users started doing things like typing in snowboard review, Reddit, snowboard review, snowboarding forum, they started seeking out Reddit and forum-based reviews because they understood that all the other stuff they were getting was really a shell for a product. It was looking for commission or affiliate revenue, and it wasn't authentic.

So as users kind of changed their behaviors, Google updated their algorithms to really ensure that their users were getting the right results they were looking for. And I think that's worked to the benefit of Reddit and ourselves. So we see this uptick as being kind of a fundamental shift in how consumers and algorithms think about user-generated content versus professional content.

And particularly, when I say professional content, I really lean towards the professionals now primarily using AI and not actually touching and feeling these products compared to our users who not only own them and are passionate about them, but tear them apart, rebuild them and give sometimes multiple page-long product reviews with detailed pictures and everything else.

So I think it's just a market shift, and it's one that you could kind of see it coming in the past few years, but in some ways, like our business, the commerce business was just doing so well. It was like it was kind of hard to see when it might happen. And I think AI was probably the thing that pushed it back towards our favor.

[David McFadgen, analyst]

Okay. So you talked about Google coming up with an algorithm update this month. Sometimes these algorithm updates are hard to predict what's going to happen. So you don't really know what they're going to do. But I guess your view is that this algorithm update is definitely going to be positive for your search traffic. Is that accurate?

[Robert Laidlaw, executive]

Yes. David, I think one of the things that I would clarify there is I actually think Google has become pretty good at telling the market what these algorithm updates will do. And on this one, they've been pretty clear about what they've targeted, and that is the proliferation of low-quality AI content, people that are highjacking domain names, old domain names with domain rank and then putting thousands of articles on them very, very quickly. So we know what they're getting at, and I think it's fairly clear that forums and Reddit could again kind of benefit because of our authenticity and kind of the depth of our content.

[Operator]

Our next question comes from Valery Heckel.

[Valery Heckel, analyst]

This is Valery on for Todd Coupland. Congratulations on the good quarter. I wanted to circle back on the topic of AI and the LLM data licensing opportunity you mentioned previously, and I realize you're currently in confidential discussions on the topic and are limited on what you can say. So my questions are a bit more broad, but I would be curious to hear your general views on the topic.

And so I was wondering, given that VerticalScope's communities are a more disparate collection of properties compared to Reddit who has a more centralized platform, does this difference create any challenges for LLM providers who may want to train on your data? And I have a brief follow-up after this.

[Robert Laidlaw, executive]

Thanks, Valery. No, because we have the Fora platform. The Fora platform, basically, while we continue from a user-facing perspective, certainly kind of have many different enthusiast brands, which our users love and are very loyal to. From a back-end perspective and from a training perspective, it's very centralized and much like Reddit. We operate a massive platform with, again, over 2 billion posts on the Fora platform. So that's not a challenge.

[Valery Heckel, analyst]

Okay. That makes sense. And then just I realize that the LLM data licensing market is still in its early stages, but I'm also wondering if there's anything that might prevent LLMs from just simply scraping the data from your communities?

[Robert Laidlaw, executive]

Look, I think there's plenty of -- you can see there's a lot of lawsuits out there. There's a lot of pushback. We do, on all of our communities, have kind of more recently announced kind of no training tags on our sites, whether some of the LLMs will actually obey those or not, but I think there's a lot of pressure in the AI industry to kind of self-regulate so that they don't have to be regulated. And I think a part of that is signing deals with some of these very large platforms like Reddit and our own. So I think that's why there are negotiations and there's, I think, a high degree of confidentiality around them because the data itself is extremely valuable and extremely important to our users and to our business.

[Operator]

Our next question comes from Aravinda Galappatthige from Canaccord Genuity.

[Aravinda Galappatthige, analyst]

Just a quick follow-up on the LLM opportunity. Rob, is there operationally some sort of preparation you need to do there? I mean, is there any kind of reorganization or sort of restructuring of sort of your platforms? On the software side, perhaps that's needed before you can kind of implement whatever deal that you're negotiating. I just maybe start there.

[Robert Laidlaw, executive]

Thanks, Aravinda. Actually, there was some tweaking to the platform and just how we make our kind of back end work, but that work was done last year. So there's nothing further from a platform perspective that's operationally required.

[Aravinda Galappatthige, analyst]

I see. Okay. And just a couple of financial questions, perhaps for Vince. I think you're pretty clear on your margin expectations. Is there anything that we should be aware of from a cadence standpoint, first half, second half given sort of, obviously, the cost reductions were made in the middle of the year and it started to kind of play out more in the second half last year? How should we think of sort of that margin cadence through the year?

[Vincenzo Bellissimo, executive]

Yes. So I think our margin cadence -- and thanks for the question. I think our margin cadence is more aligned with sort of our historical trends and seasonality. As Rob noted, Q1 historically has been a low point of the year from a revenue perspective and margins follow suit. And Q4 being sort of a peak, and we saw that this year in our Q4 results with a 46% margin.

So as you're sort of going through your model, I would sort of follow that similar cadence. So call it, peak in Q4, 30% revenue at that point, 20% of revenue in Q1, then the quarters in between, sequential growth between Q2 and Q3, you can split the difference whichever way you see fit, but that's pretty much the cadence that you should expect.

[Aravinda Galappatthige, analyst]

Okay. Okay, that's pretty helpful. And lastly, on CapEx, obviously, you did see a material reduction in capital expenditure last year. Should we kind of think about you guys -- I know there's still some investments to be made as you kind of look to exploit these opportunities. Should we sort of see kind of lift off that low base in '23 on its way to where maybe you were prior? Or any kind of color on that?

[Vincenzo Bellissimo, executive]

Yes, for sure. So prior year -- prior levels were driven by migrations and work on the mobile platform. Now that migrations have been complete and the mobile platform has now been launched, the level of development work on either of those has come back. So we feel that $2 million a year baseline is going to hold for 2024. We also have -- under IFRS, we're limited to the amount of R&D or upfront R&D that we could capitalize anyway. So as the team goes through their experiment process and tries to find the next product or initiatives they're working on, those costs are hitting the P&L directly. So $2 million is what -- is how we think we'll sort of be from a 2024 perspective in terms of CapEx.

[Operator]

Our next question comes from Adhir Kadve of Eight Capital.

[Adhir Kadve, analyst]

I wanted to actually ask on the mobile app. It's been launched, it's been out in the market for a couple of months now. I think last quarter, you guys had mentioned it was early days, but I want to talk about how the monetization is actually trending on the mobile app. Anything to call out there?

[Robert Laidlaw, executive]

Sure, Adhir. I can take that one. Mobile app has been actually mobilizing kind of -- or monetizing above our expectations, and the main reason for that is the increased engagement. So generally, versus mobile web, we think of it as kind of slightly lower CPMs, but we're getting more engagement. So the overall revenue per session is actually much higher than mobile web at this point. So it's looking very positive, and that's why we want to get it into more users' hands. So we're really looking to kind of grow and stabilize and reach critical mass where it becomes a reasonably high percentage of our overall mobile traffic.

[Adhir Kadve, analyst]

Any time line to when that could potentially happen?

[Robert Laidlaw, executive]

The sooner, the better. Yes, we're pushing it, certainly. But I think for right now, it's a matter of just really trying to get those key features built that users are looking for. And obviously, we've got some very enthusiastic users, and some of them are even technical experts and tech support community members. So really building an absolutely amazing product for them is really our focus here. And as we accomplish that, I think we'll see the shift start to happen.

And it's really just going to be building momentum, right? There's a lot of our users, they've been on our platform for 5, 6, 7 years. They're probably perfectly comfortable operating off our mobile web platform. And I think it's actually a higher uptake with some of the new users who are just very comfortable with an app environment. So part of this would be time, but I think the other part is just building a completely killer app.

[Adhir Kadve, analyst]

Got it. I appreciate that. And then one thing I wanted to ask on is just the macro spending environment. 2024, just being a political year, we are expected to see some more -- some growth in advertising revenue simply from the presidential election in the U.S. Historically, have you seen that kind of flow through to your platform in past election cycles? Or are you kind of -- does your -- do your platforms stray away from that?

[Christopher Goodridge, executive]

Adhir, it's Chris here. So I wouldn't say we stray away from it. I think we benefit similarly to the way the market would benefit overall. So obviously, our sites aren't politically focused. They're not news sites. People are there to talk about products. However, we do have tremendous reach, and you would tend to see some spillover political advertising hit us predominantly through programmatic.

[Operator]

And our final question comes from Andy Nguyen of Raymond James.

[Andy Nguyen, analyst]

So just a quick follow-up on the mobile app. Do you have to spend money to get users to transition to the app? Or is there any acquisition cost there? And that's all of my questions.

[Robert Laidlaw, executive]

Thanks, Andy. No, right now, I mean we've got a huge user base, so we've got plenty of low-hanging fruit to convert. In the future, I think we can certainly look at more of an acquisition model as we get to that point. But right now, I think we've got plenty of low-hanging fruit with our existing user base.

[Operator]

We have no further questions in the queue, so I'll turn the call back over to Rob Laidlaw for any closing remarks.

[Robert Laidlaw, executive]

Great. Thanks, everyone, for joining. Thanks for all the questions. We appreciate all the trust and support that you've shown, and we look forward to delivering a really strong Q1 and 2024.

[Operator]

This concludes today's call. Thank you for joining. You may now disconnect your lines.