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System1, Inc. (SST)

Q1 2022 Earnings Call· Sat, May 14, 2022

$3.58

-8.86%

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Transcript

Operator

Operator

Thank you for standing by, and welcome to the first quarter 2022 conference call and webcast for System1. On today's call are Michael Blend, Co-Founder and Chief Executive Officer of System1; Tridivesh Kidambi, Chief Financial Officer of System1; and Kyle Ostgard [ph], Vice President of Finance. I will now turn the call over to Kyle Ostgard.

Unidentified Company Representative

Management

Thank you. Welcome to the System1 earnings call for the quarter ended March 31, 2022. Joining me today to discuss System1's operational financial results are 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 at ir.system1.com shortly after this call has ended. I'd like to take this opportunity to remind you that during the call, we will be making forward-looking statements. This includes statements relating to the operating performance of our businesses, future financial results and guidance, strategy, long-term growth and overall future prospects. We may also make statements regarding regulatory or compliance matters. These statements are subject to known and unknown risks and 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 included in our registration statement on Form S-1 filed on April 13, 2022, and our Form 10-K for the fiscal year 2021 filed on March 31, 2022, and in our Form 10-Q for the first quarter of 2022 that will be filed shortly as well as certain uncertainty and unpredictability in our business, the markets and the global economy generally. You should not rely on forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date 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 pro forma revenue, pro forma gross profit and pro forma adjusted EBITDA. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. Information regarding our non-GAAP financial results, including a reconciliation of our historical GAAP to non-GAAP results may be found in our earnings release, which was furnished with our Form 8-K filed today with the SEC and may also be found on our Investor Relations website. I would now like to turn the conference call over to System1's Co-Founder and Chief Executive Officer, Michael Blend. Michael?

Michael Blend

Chief Executive Officer

Good afternoon, everyone, and welcome to System1's first earnings call as a public company. As Kyle mentioned, I'm Michael Blend, and I'm the Co-Founder and CEO of System1. Joining me today is Tridi Kidambi, our longtime CFO. To begin, I want to say a quick thank you to our System1 shareholders, including our great employees and our new public investors. Thank you for taking the time to learn our story and for supporting our company. We're going to do our absolute best to reward your belief in System1. So we had a great quarter financially and Tridi is going to walk you through the details. Before we get to the numbers, I would like to provide you with some color about how we're doing operationally at System1, where we're seeing good opportunities and also what our challenges are. My goal is for you to hold System1 as a long-term investment, and the better you understand our company, I think the more excited you're going to be about it. So Q1 was pretty momentous for us. After 8 years as a private company, we went public, completed our merger with Protected.net, made a couple of acquisitions and we even got popular on the Reddit stock boards. Throughout all of it, our team did what they've always done, they ignored the noise, executed on the business and focused on the long term. I'm proud of the team for making a very smooth transition into a public company. So on the business front, both of our major business lines, advertising and subscription, had really good momentum in Q1. Advertising saw nice revenue growth across the board and we don't see any signs of that slowing down. Now as you know, some of the other public advertising companies have had mixed results because of…

Tridivesh Kidambi

Chief Financial Officer

Thank you, Michael. Hello, everyone. I'm Tridivesh Kidambi, the CFO of System1, and I'm very pleased to welcome everyone to our 2022 Q1 earnings call. Before I get into specifics on the company's performance this quarter, I thought it'd be helpful for this initial call to be more granular in terms of our operating philosophy. First, in terms of how we evaluate initiatives and run our business. Everything starts with RAMP, which is designed to optimize for gross profit dollars. While gross margin is important and a metric we do think about when evaluating opportunities, gross profit dollar generation is the ultimate metric we use to measure the effectiveness of the platform and our initiatives. Second, as Michael mentioned earlier, we have purposely built a diverse business model that is distributed across multiple advertising verticals and acquisition channels. And now with the full acquisition of Protected, we have a platform through which to launch and market multiple subscription products across multiple consumer and product verticals. Diversification and sustainability are key to both our past and future success. This is a key focus area as we evaluate new acquisition channels and initiatives to invest in and a significant criterion for evaluating M&A opportunities. Third, RAMP automation is key to our organic growth. Everything we do is anchored on our technology platform, which enables continuous optimization and drives operating leverage in our business on an ongoing basis. In addition to investing in new initiatives and features for RAMP, we also prioritize investing in automation. This investment generally comes in the form of product, engineering and data science resources. Finally, we have a strong track record of executing on accretive M&A transactions. And less than 4 months into our history as a public company, we've continued to do so. Now I'd like to…

Operator

Operator

[Operator Instructions] Our first question comes from the line of Tom Forte with D.A. Davidson.

Tom Forte

Analyst · D.A. Davidson

So first off, Michael and Tridi, congrats on the successful de-SPACing and the performance in the first quarter. So I had one question and then one follow-on question. So Michael, can you talk about sources of traffic for you? To what extent, if at all, you're dependent on Google? And then what your thoughts are on other advertising opportunities such as connected TV?

Michael Blend

Chief Executive Officer

Yes. Sure, Tom. So first of all, I hope you're having a good day today. Thanks for calling in. So we've broken out our sources of traffic, I believe, in our presentation. But when you think about our -- where we get our traffic from, it's really anywhere that there's scale on the Internet. So we are buying traffic on search engines like Google, Bing, Yahoo! We're on all the native networks. We're on display. We're not doing much on connected TV right now, primarily because we like to really enter markets when there's more sophisticated technology to kind of track performance, and we're not seeing that yet on connected TV. When those tools are there, I expect that we'll be entering there as well. But some of the newer emerging areas, we're starting to figure out TikTok, which has been growing pretty nicely for us. And really wherever there's a pocket of people that want to buy things, that's where we're going to be. Like the Internet's pretty heavy on Google, and so we're going to be buying a lot of traffic from Google.

Tom Forte

Analyst · D.A. Davidson

Great. And then for my follow-up question, you had talked about privacy. I think privacy is very important right now. When you look at the digital advertising landscape, Apple's efforts to emphasize privacy seems to be pretty... [Technical Difficulty]

Operator

Operator

It looks like we have lost connection with Tom Forte. We will go to the next question from Shweta Khajuria with Evercore ISI.

Shweta Khajuria

Analyst · Evercore ISI

I guess my question is on the first quarter performance and the full year guide. Tridi, if possible, would love to hear your thoughts on what -- how are you -- the makeup of your full year guide. What assumptions are baked into getting to your full year guide? I saw the disclosures of how much you're expecting from the acquisitions for EBITDA and revenue. But outside of that, to the extent, how much of macro impact is embedded and how you thought about that? And then how did you -- the similar question on first quarter performance, how did your results compare to your internal expectations for the first quarter?

Tridivesh Kidambi

Chief Financial Officer

Sure. Thanks for the question, Shweta, so just answering that in order. In terms of our performance for the full year guide, as you see in the earnings release, we essentially reaffirmed our guidance from where we were at the end of March when we released our FY '21 guidance. The makeup of how we're seeing the year come together has basically stayed in line with where we were 6 weeks ago, which is why we're reaffirming guidance. The beginning of Q2 has gone the way that we had anticipated, again seeing strong growth both on the advertising and the subscription portions of our business with the completion of the acquisition of Protected. I think most importantly, we spent a lot of last year in investment mode, both in terms of headcount and resources on the platform as well as investing in marketing initiatives and new channels. And we're really expecting to see that manifest itself in gross profit in our business, which is why we see and are projecting a very nice growth rate, even absent the acquisitions on an organic basis, still seeing very strong growth year-over-year. With respect to the first quarter, came in, in line. We didn't provide Q1 guidance when we released our financials because we were already at the end of Q1. But Q1 came in line with where we'd expect specifically when it comes to gross profit and EBITDA.

Michael Blend

Chief Executive Officer

Yes, and Shweta, just as a quick follow-up to that. It came in line, but also we understand the importance of kind of our first few quarters out of the gate, making sure we don't disappoint our investors. So when we look at our full year guidance, we would -- we feel pretty confident in the numbers we put out there and hopefully given ourselves some room to do some incremental marketing when the opportunities arise.

Operator

Operator

There are currently no further questions registered. [Operator Instructions] Our next question comes from the line of Dan Kurnos with Benchmark.

Dan Kurnos

Analyst · Dan Kurnos with Benchmark

Just a couple of things. In terms of CouponFollow and sort of the integration, how we should think about another license to come and the contribution results, obviously, you guys have given sort of the annual contribution in the guide, but just incrementally, potential areas of upside. I know, Michael, in your prepared remarks, you talked about integration challenges being a larger company. Obviously, a super-hot space. And we've seen a lot of other larger players. Take that is pretty logical and their teams seems like there's a lot of cross-pollination between that business and your other segments. So if you could just provide a little bit more color as to how -- thoughts around that and sort of when we might hear from you not maybe specifics, but when we might hear from you directionally about some of the additional opportunities that, that acquisition could provide.

Michael Blend

Chief Executive Officer

Yes, sure. Thanks for the question. So regarding CouponFollow, I'd mentioned there's so many opportunities we're trying to pick the best ones. Our thesis when we acquired the business, which has proved out true is really in 3 areas. Well, the first one being our ability to buy traffic, use RAMP to increase the traffic to CouponFollow in a profitable way. That's an area that is right in our wheelhouse, and we're, I would say, early stages in that one. We remain very confident in our ability to do that. The second big one would be integrating CouponFollow throughout the rest of our properties. And what I mean by that is when you go to one of our search engines like Startpage or Info.com, there's a lot of queries happening on the search engines in which people are looking for things like coupons and promo codes and various retailers. We think there's going to be a really good opportunity to incorporate all of the databases they have as CouponFollow of those promos and coupon codes throughout the rest of our properties. That's going to get more traffic to CouponFollow. It's going to make our existing properties more relevant and useful to users. So that's a pretty straightforward opportunity for us as well. We're actively working on that. It involves some technical integration and basically having CouponFollow give us the APIs to integrate those properties. So that's ongoing. The third, and what I would call, almost the outlier opportunity that we think could have some huge upside would be in the cashback area. So CouponFollow is just starting to roll out cashback offerings at scale. We think that is a really interesting offering to integrate throughout our subscription business. And so as we're potentially going to offer cashback as a stand-alone service and also offer cashback shopping potentially in our existing subscription products, we think we could -- our goal would be to turn that into one of our other hit products. But also by offering more products -- more product offerings in our existing subscription products, increase retention on those products. So, when I talked about CouponFollow being the kind of company and having the kind of assets that we can disperse throughout our entire company, I think that's a pretty good indication of where we're seeing the opportunity.

Dan Kurnos

Analyst · Dan Kurnos with Benchmark

Got it. That's super helpful. And then speaking of the subscription side, can you give us a little more color just on cadence of kind of new products? I know you want to hold that a little bit close to the vest, but just in terms of how we should be thinking about timing of rollout testing. And while I assume the answer to this is it kind of doesn't matter, but obviously, people think, oh we're in a recession, they think fewer subscription products, but your RAMP platform obviously allows you guys to sort of participate in the customer acquisition channels in a much different way than other players in the space. So just any thoughts that you have on impact to or growth in subscription, just given the kind of the back -- given the macro backdrop.

Michael Blend

Chief Executive Officer

Yes. We wouldn't view kind of any macro conditions really affecting our subscription products. We're not talking about a high ticket purchase. We're talking about products in which people for, on average, $10 a month or less, are getting huge value out of them. So we haven't seen that. I know the Protected business is -- their previous businesses have been doing subscription products for 15 years and have been through the various economic cycles and really never saw the effect of any downward economic cycle of affecting the business in any material way. On the cadence, what I would suspect is that certainly, every 6 months, and we would shoot for sooner, quicker than that, be rolling out new subscription products. We do have a new product on the horizon that we'll be rolling out certainly by the time we report next quarter, that we've got pretty high hopes for. And so I think you'll see that cadence continue. Not all the products are going to be hits. So our goal is we roll out products that we think are going to be really successful. And we don't have a 100% hit rate on that. But what you are going to see is the continued product rollout and from those products, some big ones are going to emerge. And kind of, as we mentioned, Total AdBlock, I took the liberty of going and comparing the -- when we launched our TotalAV product 5 or 6 years ago and looked at the cadence of the subscriber growth on there. And I overlaid our Total AdBlock product over the last 6 to 8 months, and there's a remarkably similar graph. And so that's just giving us the confidence that our hit product #2 is there. And now over the next few years, we're going to go 3 through 10.

Dan Kurnos

Analyst · Dan Kurnos with Benchmark

Got it. That's really helpful. I look forward to more color on the bundling in the future.

Michael Blend

Chief Executive Officer

Thanks, Dan. I think Tom is back on if he still wanted to ask his privacy-related question.

Operator

Operator

Yes, absolutely. Thomas, your line is now open again.

Tom Forte

Analyst · D.A. Davidson

Great. So Michael, apologies for the technical difficulties on my part. So you had mentioned privacy. Apple's efforts on privacy have been disrupting digital advertising in general. So what is your philosophy? And how is it that you haven't been negatively impacted by what Apple has been doing?

Michael Blend

Chief Executive Officer

So 2 things that are good for us in terms of kind of Apple's related -- privacy-related initiatives and also the ones that Google eventually is going to be getting to. They keep pushing that back but I'm sure they're going to be coming. So first of all, what Apple, and we've mentioned this on all of our calls to date and whatnot, what they're really trying to do is eliminate the intrusive use of third-party cookies and really intrusive data gathering on the phone, on mobile phones. And so that's what consumers hate and that's what we don't think has a lot of long-term longevity. So we applaud the moves that Apple's making and also the moves that Google will be making in the future. The good thing about our advertising platform is that we don't make use of that kind of third-party data in any material way. We're much more focused on intent-based advertising and contextual. So we're trying to find what people are searching for, and we're doing advertising based on people's searches. And we're also doing advertising on contextual-based advertising. That's the kind of advertising that really all of digital is moving towards. We just happen to be ahead of the game in that. And so the privacy changes are actually advantageous to us because it favors the kind of marketing we do. On a more macro sense, our system, our platform, does really, really well also when there's disruptions in the advertising landscape -- and what I mean by that is if you look at the last few quarters since Apple rolled out its changes, a good example of a segment that's been disrupted is mobile app download advertising, so advertising designed to get people to download mobile apps. That was, in large part, pretty heavily dependent on really kind of intrusive data gathering. And so when the overall market is disrupted, it gives us the opportunity to step in and purchase more traffic at reasonable prices. So we like disruption. We sail through that and you can kind of see that in our results. So we haven't been affected at all by privacy-related changes. And so if anything, we would encourage Google to speed up its changes that they're going to be rolling out. We think it's good for consumers but also specifically good for System1.

Operator

Operator

It is now my pleasure to pass the conference back to our host, Michael Blend, for closing remarks. Michael, please proceed.

Michael Blend

Chief Executive Officer

Thank you. So first of all, just to wrap up our first earnings call, I want to thank everyone for your interest in System1. We think we've got a really exciting story, and we know we have an opportunity for investors to capitalize on our business that's really fast growing and highly profitable, particularly in the current landscape in which we believe investors are going to be looking for not only fast-growing companies, but companies that have reliable cash flow. And there's not that many of them out there. We happen to be one of the few in the technology world. So we've got a really sustainable competitive advantage with our RAMP platform and our business is diversified. So with that, we think that we're the company that you should be betting on. We're betting on ourselves, and we welcome you coming in as long-term investors. So thank you. And with that, I'll conclude the call.

Operator

Operator

This concludes the System1 conference call. Thank you for your participation. You may now disconnect your line.