System1, Inc. (NYSE:SST) Q1 2024 Earnings Call Transcript

System1, Inc. (NYSE:SST) Q1 2024 Earnings Call Transcript May 11, 2024

System1, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, my name is Sarah and I will be your conference operator today. At this time. I would like to welcome everyone to the System1 Q1 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Kyle Ostgaard, Vice President of Finance. You may begin.

Kyle Ostgaard: Thank you for standing by and welcome to the first quarter of 2024 conference call for System1. Joining me today to discuss System1 business and financial results our Co-Founder and CEO, Michael Blend and our Chief Financial Officer, Tridivesh Kidambi. A recording of this conference call will be available on our investor relations website shortly after this call is ended. I'd like to take this opportunity to remind you that during the call, we will be making certain forward looking statements. This includes statements relating to the operating performance of our business, future financial results and guidance, strategy, long term growth in overall future prospects. We may also make statements regarding regulatory or compliance matters.

These statements are subject to known and unknown risk of uncertainties that could cause our actual results to differ materially from those projected or implied during this call. In particular, those described in our risk factors, including in our annual report on form 10-K for the fiscal year 2023 by March 15, as well as the current uncertainty and unpredictability in our business, the markets and the global economy generally. You should not rely on our forward looking statements as predictions of future events. All forward looking statements that we make on this call are based on management, assumptions and beliefs as of the day hereof. And System1 disclaims any obligation to update any forward looking statements, except as required by law.

Our discussion today will include non-GAAP financial measures, including adjusted EBITDA and adjusted gross profit. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. Historical performance and future estimates provided during this call exclude results from total security. Information regarding our non-GAAP financial measures, including a reconciliation of our non-GAAP financial measures to our most comparable historical GAAP financial measures, may be found on our Investor Relations website. I would now like to turn the conference call over to System1 Co-Founder and Chief Executive Officer, Michael Blend.

Michael Blend: Thanks, Kyle. Good afternoon, everyone, and thanks for joining us on our Q1 System1 earnings call. Let's get right into our quarterly performance. I'm happy to announce that System1 was able to deliver financial results, which exceeded our earlier guidance. System1 delivered $85 million of revenue and $31 million of gross profit. Adjusted EBITDA was $423,000. Owned and operated revenue was $69 million, down 35% year-over-year and down 13% from last quarter. This was driven by a 12% sequential decline in advertising spend. We generated over 1.2 billion sessions, an 18% year-over-year increase, and a 14% quarter-over-quarter increase. Spread was approximately $0.02 per session. International revenue continued to remain a highlight with international revenue representing approximately 29% of owned and operated revenue.

This was up from 25% of owned and operated revenue in Q4 of 2023. Now, overall Q1 was somewhat choppy, but ended on a positive note. The overall advertising marketplace started off a bit weak in January and improved as the quarter progressed. This pattern was expected to match what we see in a typical Q1. Our Q1 volatility was driven primarily by our Google relationship, which as a reminder is our largest revenue source. We saw significant volatility from Google during the quarter. Their sell side pricing moved around more than typical and the Google product team introduced new features at a very rapid pace with minimal advanced notice to us. Longer term, this is a good thing for System1. We worked closely with Google to integrate new features into our tech stack and the product improvements almost always lead to increased revenues for System1.

In the short-term, however, the rapid fire of Google changes caused quite a bit of volatility in the overall Google partner ecosystem. Unfortunately, things have begun to stabilize with Google. The last couple of weeks of Q1 were particularly strong and these favorable trends continue through the early weeks of Q2. If Google pricing and product rollout stay consistent, we expect all of our marketing driven businesses lines to benefit. Partner network revenue was $16 million and gross profit was $11 million. Revenue increased 5% year-over-year, but was down 5% sequentially as we expected due to typical seasonality. Sessions were $1 billion up 134% year-over-year and 32% sequentially as traffic from existing partners increased along with new partners joining the network.

Partner network RPS declined 55% year-over-year and 28% quarter-over-quarter driven by the same marketplace headwinds that impacted our owned and operated business. The marketplace headwinds we face in our O&O business, namely narrowing RPS spreads and volatility and sell side pricing were shared by our partners as well, but notwithstanding that our partner network business continues to perform through solid execution as well as what we believe is the attractiveness of our ramp platform. Key metrics evidencing this include, in Q1 of 24 total active partners grew 5% from Q4 to over 250 total partners. Average revenue per partner decreased sequentially by 9% due to Q1 seasonality and choppiness in the marketplace. Remember when partners join our ramp platform, there's a timeframe during which they begin to scale up with us.

This is a function of the partner getting more familiar with our platform as well as our constant evaluation and monitoring of their traffic quality. We consider a platform partner to be a scaled partner when they're generating at least $50,000 of revenue per quarter on ramp. At the end of Q1, we have 57 scale partners compared to 50 scale partners in Q1 of '23 representing a 14% growth rate. Moreover, as I mentioned previously, our partners are using us more and for more sessions. It is our hope that as the advertising market continues to improve, the combination of our growth in number of scale partners and the increase in the number of sessions will accelerate the growth of our partner network business. Moving to our organic businesses, they had a good quarter on several fronts.

First, we saw a significant increase in organic traffic to MapQuest and CouponFollow that began in March and should continue through Q2. These increases were driven primarily by favorable changes in the Google search algorithms. We've been working very hard to improve the customer experience on these sites in the hope our Google rankings would improve. Unfortunately, our efforts have began paying off with increased traffic that directly drives corresponding increases in revenue. We also saw the launch of several key business development partnerships with our Startpage and CouponFollow properties that we expect to begin paying dividends as the year progresses. Going forward, we are focused in a few key areas. First, we are continuing to invest in our RAMP platform.

AI has materially improved our ability to scale our buy side capabilities. And we plan to open up our buy side to partners who currently use us primarily for sell side monetization. Second, our organic properties will keep focusing on their on side experiences, will be launching new and improved apps, and we will be integrating additional distribution partnerships. Third, we're planning to start expanding our subscription business by rolling out more internally developed subscription products. And finally, we have been back to exploring the M&A market again as the digital market stabilized and pricing has started to get a bit more rational. Overall, I'm very pleased with our execution in Q1, especially with respective product enhancements on ramp focused on AI driven automation.

We're executing with focus and we are shipping products faster than ever. Our execution is starting to show up in our performance and I'm increasingly confident we are moving back into growth mode. I also am happy to have Chuck Ursini rejoin System1 in official capacity as our President and COO. Chuck and I Co-founded System1 and Chuck was our original CEO. He has driven much more execution the last year and I'm happy to have him back in official capacity. As I mentioned every quarter, System1 management has much of our network and more than System1 shares we're highly aligned with our longer term shareholders. Management is in this for the long haul and we welcome investors who want to come along for the ride. I will hand things off to Tridi to discuss our quarterly results in more detail as well as our Q2 guidance.

Take it away Tridi.

Tridivesh Kidambi: Thanks, Michael. As Michael mentioned, there were market related challenges in Q1, especially early in the quarter, but we remain bullish given that March came in not just above the first two months of the quarter, but also above expectations and we delivered results above the high end of the guidance range for revenue, gross profit and for adjusted EBITDA. As I discussed Q1 results, I want to highlight that year-over-year comparisons continue to be a challenge as we haven't yet rebounded to the levels of advertising that we're currently in demand we saw in the first half of 2023 due to continued macro declines in the advertising market through the first three quarters of last year. And in Q1 of last year, our owned and operated SEM business still contributed $6 million of gross profit as compared to approximately $2 million of gross profit a quarter starting in Q2 of 2023 and continuing through last quarter.

Also, we typically expect a sequential decline in Q1 versus a seasonally strong Q4. Now on to our operating results. Q1 revenue was $84.9 million, representing a 30% year-over-year decline and sequential decline of 12%. That was good for 900K above the top end of our Q1 revenue guidance range that we provided in March. Owned and operated advertising revenue was $69 million, representing a 35% year-over-year decline and sequential decline of 13%. Network advertising revenue was $15.9 million, up 5% year-over-year and down 5% sequentially. Adjusted gross profit was $31.2 million, down 18% year-over-year and 17% sequentially. And that was above the high end of guidance by $1.2 million. Revenue less advertising spend for our owned and operated advertising segment declined 16% sequentially to $22.5 million.

Network revenue less agency fees was down 17% to $10.9 million versus the prior quarter. Owned and operated cost per session and revenue per session were both down $0.01 sequentially to $0.04 and $0.06 respectively, with the spread down slightly to approximately $0.02. On the network advertising business, revenue per session was $0.02 per session. Most importantly, total sessions processed by RAMP in the most recent quarter was $2.26 million, up 22% sequentially and 53% year-over-year. Adjusted EBITDA impacting operating expenses, which are net of ad-backs were $30.8 million, down 7% year-over-year. As a reminder, we expect Q1 to be the high water mark for OpEx driven by FY '23 audit costs. Adjusted EBITDA was $422,000 versus $5.2 million last year, which came in above the high end of the Q1 guidance range by $1.4 million.

With respect to liquidity, we ended the quarter with $69.9 million of unrestricted cash in our balance sheet and a term loan balance of $296 million. Our net leverage at quarter end was approximately 9.19 times. I want to reiterate my comments from our last earnings call with respect to capital structure. We remain comfortable that our current liquidity, including the $50 million of availability on a revolver, provide ample cushion for all of our short and medium term liquidity needs. We remain highly focused on maximizing equity value for our shareholders, while remaining focused on continuing to deal ever the business. And we will continue to be opportunistic on debt repurchases. For example, we extinguished an additional $1.2 million of term debt for $720,000 of cash on April 30th.

And per Michael's comments, we will continue to explore a creative M&A, where we have a track record of execution of success. Most importantly, we'll continue to prioritize investment and execution to drive organic growth in our core advertising business. Although we have recently seen more stability in the market through the first several weeks of Q2, there's still quite a bit of uncertainty in the online advertising environment in which we operate, as evidenced by the recent news about Google delaying the deprecation of cookies. So again, we will not be providing full year guidance for 2024 at this time, other than to say that we expect to deliver year-over-year growth in revenue, adjusted gross profit, and adjusted EBITDA in the second half of 2024.

We're estimating Q2 revenue to come in between $88 million and $90 million, representing an 8% year-over-year decline at the midpoint. We're estimating adjusted gross profit to come in between $33 and $35 million, representing a 16% decline at the midpoint. And we estimate Q1 adjusted EBITDA to come in between $5 and $7 million, slightly down year-over-year at the midpoint. We remain cautiously optimistic about the digital advertising market stabilizing this year, and remain extremely bullish about our ability to execute against both near and long-term opportunities. Thank you.

Michael Blend: Thank you, Tridi. We are now going to open the line for some questions.

See also

20 Wealthiest Countries in Asia and

15 Easiest Degrees That Pay Well.

To continue reading the Q&A session, please click here.