VerticalScope (TSE:FORA) reported an 11% decline in third-quarter revenue as digital advertising weakened, while the online community operator said two newly signed artificial intelligence data agreements are expected to begin generating revenue in the fourth quarter.
Revenue fell to $13.1 million from a year earlier, and adjusted EBITDA declined to $4.8 million from $6.2 million. The company also pulled back its AudienceEngine paid-traffic initiative, a move it expects will reduce reported monthly active users further in the fourth quarter but have little effect on revenue.
AI data agreements expected to contribute in Q4
VerticalScope said it signed agreements with two frontier AI labs but could not disclose their names or the financial terms because of confidentiality provisions.
One agreement is a nonexclusive license for training data from selected communities. The company completed delivery in early November and expects to recognize most of the associated revenue in the fourth quarter once the content is accepted. Fees are being calculated based on the volume of contributed tokens, and the agreement includes options for future data refreshes.
The second agreement pays VerticalScope based on its content’s contribution to AI-generated responses. It covers a subset of communities initially and began generating revenue in November, the company said. The arrangement has the potential to expand over time.
CFO Vince Bellissimo said the training agreement could be a meaningful part of quarterly results. He also said data-agreement revenue will likely be presented separately from e-commerce and digital advertising on the income statement.
VerticalScope said that, by its measures, AI companies, search engines and agents made 115 million attempts to access its communities over the preceding 30 days. Those attempts do not count toward traditional traffic or monthly active user figures. The company said it continues to block access by companies without agreements and is pursuing its court claim against OpenAI.
Advertising declines weigh on results
Programmatic revenue fell 13% to $6.1 million, including a partial-quarter contribution from AudienceEngine. Bellissimo attributed the decline mainly to lower search impressions and softer advertising rates during the summer. Direct advertising revenue decreased 14% to $4 million as some customers ran smaller custom-content programs.
E-commerce revenue was flat at $3 million, or 23% of total revenue. Excluding Ritual, the channel grew 10%. VerticalScope said AI-powered recommendations helped lift affiliate commerce revenue on its Fora platform by 29%, offsetting weaker results from Ritual.
The company reported net income of $100,000, compared with a net loss of $400,000 a year earlier. Its adjusted EBITDA margin was 37%, down from 42% in the prior-year quarter. Bellissimo reiterated an expectation for a full-year adjusted EBITDA margin of at least 30%.
AudienceEngine pullback frees up capital
VerticalScope said AudienceEngine demonstrated that it could acquire traffic profitably at scale, but those users monetized at a substantially lower rate than its core audience and required significant working capital. The company said it chose to redeploy capital toward AI investment and debt reduction.
Monthly active users averaged 77 million in the third quarter. Bellissimo said the company stopped funding AudienceEngine near the end of August and expects a further sequential decline in the fourth quarter, the first period without paid traffic from the initiative. He said the third-quarter decline in users from the preceding quarter was entirely attributable to AudienceEngine.
Average revenue per user rose to $0.057 from $0.045 in the second quarter, and Bellissimo said the measure should rise further as lower-monetizing paid traffic rolls off. He said the company does not expect the pullback to materially affect revenue and anticipates a seasonal lift in the fourth quarter.
Cost cuts and debt repayment
VerticalScope said an organizational realignment in early November is expected to reduce annualized costs by approximately $4.4 million. Bellissimo said the company expects to capture about two months of savings in the fourth quarter and record approximately $1.6 million in one-time termination costs outside adjusted results.
Operating cash flow increased to $6.1 million from $4.7 million a year earlier, helped by working capital released from AudienceEngine. Free cash flow was $3.7 million after approximately $1 million in capital expenditures, mostly related to applied AI work with AltaML.
VerticalScope ended the quarter with approximately $26 million in net debt. Bellissimo said the company repaid another $2 million on its revolving facility after quarter-end, bringing the facility balance to $31 million. It expects leverage to trend toward one times in coming quarters as debt is paid down.
About VerticalScope (TSE:FORA)
Founded in 1999 and headquartered in Toronto, Ontario, VerticalScope is a technology company that has built and operates a cloud-based digital platform for online enthusiast communities in high consumer spending categories. VerticalScope’s mission is to enable people with common interests to connect, explore their passions, and share knowledge about the things they love. Through targeted acquisitions and development, VerticalScope has built a portfolio of over 1,200 online communities and approximately 100 million monthly active users.
