Good morning. My name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the System1 Fourth Quarter and Full Year Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Kyle Ostgaard, Vice President of Finance. Kyle, you may begin your conference.

Thank you, operator. Joining me today to discuss System1's business and 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 shortly after this call has 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 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 annual report on Form 10-K for the fiscal year 2023 filed on 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's 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 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. Additionally, for all periods discussed, unless otherwise noted, the company will be referring to its results adjusted for the divestiture of the Total Security business, which closed on November 30, 2023. 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's Co-Founder and Chief Executive Officer, Michael Blend.

Thanks, Kyle. Good morning, everyone, and thanks for joining us on our Q4 System1 earnings call. We have a lot to discuss today. The fourth quarter of 2023 was pretty jam packed for our company as we completed a number of important strategic shifts for System1. We believe these moves have set us up well for the future, and I'll go into them one-by-one. First, as we previously announced, we sold our Total Security subscription business towards the end of the quarter, and I'll talk about that in more detail in a moment. Importantly though, we also saw solid execution in our remaining advertising business on a number of fronts. As a result, we believe we are set up well for what we hope to be a secular reacceleration of spending in online advertising in 2024. As you know if you follow System1, we sold our Total Security business during the quarter for consideration consisting of $240 million in cash, the redemption of 29 million of our outstanding shares, and the termination of certain earn out payments associated with our destock merger. I want to say a few words about our rationale behind the divestiture of that business and how it helps our remaining advertising business going forward. Now our Total Security was and remains a great business, like most subscription businesses, it has high upfront capital requirements to cover new customer acquisition costs. As the business grew under our ownership, Total Security required increasing amounts of capital to maintain a healthy new subscriber growth rate. When System1 acquired the business in early 2022, the heavy upfront marketing costs were not really a significant concern for us. We had a low cost of capital during that low interest rate environment and spending $1 upfront to make $3 over the long-term…

Thanks, Michael. Thank you everyone for joining us today. I wanted to start by echoing Michael's comments on the recently completed Total Security transaction. While we remain believers in the opportunity for RAMP to power Owned & Operated subscription businesses at significant scale, the Total Security business in particular was characterized by high upfront customer acquisition capital requirements and in turn required an increasing amount of our available capital to maintain its healthy growth rate. Given the increased interest rate environment compared to when we acquired the business, when combined with the secular headwinds we faced in our advertising business over the past 18 months, the divestiture was an important step in rightsizing our capital structure and improving our balance sheet. As a result of the transaction, we used a portion of the cash proceeds to pay down approximately $155 million of notional debt, in addition to our scheduled mandatory amortization of $5 million per quarter. And we still retain substantial liquidity on the balance sheet to grow our core advertising business, which we believe to be at or nearing a secular trough. Now, on to our operating results. Q4 revenue was $96.1 million, representing a 31% year-over-year decline, which was narrower as compared to the 44% decline that we saw in Q3. This also represents growth of 9% sequentially compared to an 11% sequential decline from Q3 to Q4 of 2022. This comes in above the top end of our implied Q4 revenue guidance range that we provided in December. Owned & Operated advertising revenue was $79.4 million representing a 38% year-over-year decline, also narrower than the 54% decline that we saw in Q3, a sequential growth of 20%. Last year, Owned & Operated advertising declined quarter over quarter from Q3 to Q4 by 11%. Network advertising revenue was…

[Operator Instructions] Your first question comes from the line of Dan Kurnos from The Benchmark Company.

Michael, Tridi, just how do we think is there any way to get some incremental thoughts around the integration and streamlining? I mean, this is the year for ad tech in general of streamlining businesses. I'd like what you guys are doing in terms of sort of the enhanced offerings. Can we just maybe even just get some cadence or timing thoughts on how that could impact the business? And if there's any way to kind of, I know you won't maybe put numbers around it, although it would be great if you did, but just any way to kind of think about the size of the impact that could have?

So as far as streamlining the business, I can answer on a couple of fronts. So first of all, we on the OpEx side, we took a bunch of calls out of the business over kind of the latter half of 2022 and 2023. So we're operating off of a reduced cost base and we don't expect that to grow much on a go forward basis. As far as kind of a growth on the business, I've mentioned AI and incorporation of it into our overall platform. And what that is allowing us to do is essentially scale a lot of the processes that typically would have done by employees of the company. And we're automating and scaling. And so the growth of ramp going forward is going to be largely driven by AI. And we don't expect to hire much headcount to really support that growth. So on a go forward basis, the business is scaling. It's going to be dropping cash to the bottom-line. Tridi, you want to kind of extrapolate on that?

Yes. I think just on that point, I mentioned in our prepared remarks that the specifically the Q1 OpEx and per the guidance, kind of implied between $30 million and $31 million should be the high point in terms of OpEx. And to Michael's point, that's going to kind of drop throughout the year as we get through some of the Q1 accruals. And, also, we've said this on previous calls as well, but, we do continue to plan streamlining, continue to take kind of cost out of OpEx going forward throughout the year. And so, again, as we think about just the ad market and ad demand coming back, all of that gross profit growth, that we're expecting throughout this year, knocking on wood here, will flow down to EBITDA profitability.

Let me maybe rephrase a little bit. I guess I was thinking more just in terms of integration and buy side simplification of the process. And when we found out that ad buyers are frankly need a lot more handholding than I think a lot of people thought. And so to the extent, Michael, that you've sort of made the process easier to access, you've given them all the tools, they can now be walked through at AI, can explain a lot of the more complex components to them. Just how do we think about sort of the growth opportunity from a revenue perspective?

Yes. So the way to think about our business on the Owned & Operated side, and this is more of the marketing driven part of our business, would be, we have thousands of marketing campaigns that we put out there across hundreds of different advertising verticals, and they don't all work. So in aggregate, they're profitable, but as we're launching new campaigns, they're not all going to be profitable out of the gate. And some of them are going to be negative, and when we kind of cut them off as quickly as possible. And so what AI has allowed us to do is essentially scale pretty dramatically. And I'm talking if you look at a year ago, we're up over, I believe, 5x the number of campaigns we can we can roll out on a weekly, monthly basis. And so we can basically put more lines in the water. And the more we do that, the more we find the profitable campaigns. We can then use AI to optimize our bid pricing on those. And so we and once things are optimizing, a campaign is kind of profitable for us on a on a regular basis, and we stopped seeing volatility in the campaign. We kind of leave it out there running. And, so it's essentially allowed us to scale that buy side of our business, pretty dramatically as I mentioned. And so when you talk about RAMP and opening up the buy side to our network partners, what we're doing is pretty difficult. We're one of the largest our Owned & Operated business, one of the largest advertising buyers out there. And, we run this process through a bunch of different marketing channels, everything from native to social to search buy side. And it's quite difficult to do if you're a smaller average size shop. So on the network side of our business, as we open up those capabilities, we expect we're going to enable, a fair number of our partners to scale their business on us substantially just by incorporating what we're already doing. Does that answer your question, Dan?

Yes. No, that's helpful. I'm just trying to get sort of directionally how we should think about the impact of that decision, but obviously very early, most of the adoption is. One other kind of, let's just call it, two parter. You've been unwilling to really get into CTV before. It feels like we're having a dead cat balance in CPMs. I don't know if there's any incremental appetite to get into that side. And we're also seeing some green shoots in international too, Michael. So if you want to address both of those topics, love to hear it.

Yes, sure. I'll just the first and Tridi can talk about international. On the CTV side, we're still really not aggressively going after it. As I've mentioned in the past, we're performance based advertisers, and we need to see measurability in terms of if we put a dollar play on CTV, we need to be able to make sure we're making over a dollar on the sell side. And some of that tracking is not really yet in place to help us support that. What I would say is that when you go beyond CTV and just kind of look at more broad based video, everything from TikTok to YouTube, the reels, reels on Facebook, on Meta. We are we are starting to play a bit more heavily in the video side, and we're seeing some pretty nice beginning scale there. We're seeing pretty good profitability. And, that's another area where we have had a pretty good boost from AI. Early stages in terms of video creation with AI, but what you've been seeing out there in the market are some capabilities of putting together these video ads, and in a much, much, much more efficient way. So not much directly on CTV, but video as a whole, we see pretty good opportunity. And go ahead, Tridi, on international.

Yes. Sure. Thanks, Dan. We haven't talked about it explicitly. It still remains a growth channel for us. So, again, our current international footprint, roughly, a little bit south of 20% of our total, kind of total advertising revenue comes international. We know if we look at just how that's how that actual share is between international and U.S. in terms of total advertising spend is significantly higher international. And so we think that we can eventually mimic that, just as we focused on, the platform, the tools and integrating AI, we probably not have spent as much time, thinking about and growing that international business, but its still, something that's on our radar, and on the road map. And, again, just with the integration of these tools and RAMP in general, it's a relatively easy lift for us to go and do that. Again, the translation of our content creative, etcetera, all happens pretty quickly. And being able to test or automatically test our channels, even in different languages, makes it easier for us to grow. So that is something we'll continue to try and grow and focus on throughout this year and the years going forward.

Your next question comes from the line of Shweta Khajuria from Evercore ISI.

This is Luke on for Shweta. Just two questions. Could you give us a sense, just because you operate obviously both on the buy and the sell side, what you're seeing just generally in the digital advertising kind of space so far this year and as we go into 2024? And I know you mentioned at the end there that you're not seeing a real upturn yet. And then just second question, could you remind us of what your target leverage is? I think, you might have said it in prior calls.

Again, I'll take the first question. Tridi, you can take the second. I'd kind of call it Goldilocks at this point, in terms of what the overall advertising market looks like for us right now. Not hot, not cold. We haven't seen a big bounce back. The quarter did start off a little bit slow, slowly for us. A lot of that we believe had to do with, like, to really the calendar days of the year, in terms of when it started. But then kind of heading into kind of the mid to end of January, we started seeing typical come back from what's almost always a slow start to the year. We're not seeing huge acceleration yet, but we're also not seeing any kind of alarming decline, in the overall ad market. And we're not seeing any particular verticals look bad or good. So nothing super out of the ordinary except that we're not ready to call kind of a big dramatic reacceleration, in the ad business. And we'll if we see that, we will let obviously, we'll let investors know, but so far, nothing looks like everything's reaccelerating as we talked about in the prepared remarks. Tridi, do you want to take the second question?

Sure. Thanks, Luke. Our target like, we have those reports. So our target leverage is to get closer to that 3x range. Again above that now, I've mentioned in my remarks a little bit south of 5x of 4.8x, after the Dutch auction. But our target where we'd like to be operating or we're trying to get through both the organic growth and other things is closer to that 3x.

Your next question comes from the line of Thomas Forte from Maxim Group.

I think I have 6 total, so I'll go one at a time. You made a lot of progress on straightening your balance sheet. Can you talk about your plan to continue doing so in 2024?

Sure. And then I can give the brief overview and Tridi, you can follow-up if you want. So thanks, Tom, and thanks for joining. Yes, it was Q4 and selling Total Security was had a really positive effect on our balance sheet. We're happy about that. On a go forward basis, we've got cash on the balance sheet. We're going to be pretty conservative about how we use that. We can take a look at buying some debt that would have a good effect. We're going to look at acquisitions. If we do acquisitions, they've got to be low risk and accretive quite quickly. Probably what we're most focused on would be our organic growth. We believe we've got a nice business ready to scale. And as that business is organically growing, we'll be using that cash to further pay down the debt on our balance sheet. So, I guess in summary, we do have cash on the balance sheet to be used, but when we do use it, we're going to be pretty conservative with it. And, organic growth is what we're focused on. Tridi, do you have any follow-up to that?

No, that's the total menu, yes.

So, Michael, you sort of touched on this in that answer, but on the M&A front, I would imagine there's a lot of assets that might be available at attractive prices. Can you just talk about, should we assume that your strategy going forward has been, I guess, the strategy you've employed mostly over time, which is smaller scale, kind of widely accretive deals versus maybe larger scale ones?

Yes. I mean, that's a good assumption, Tom. So you're correct on the first part. We're seeing a lot of companies in market right now. And while I haven't done kind of a formal analysis on multiples, I can tell you that it does seem as though pricing is coming down. People are starting to be a little more realistic about the value of their companies and we're just seeing a lot of them out there. So we do plan on being conservative. Anything we buy has got to be pretty low risk. Likely, it's got to be, we're looking for tuck in acquisitions that complement the core business. I don't think right now we're looking to do anything dramatically large. And so kind of on a go forward basis, I said, we're really looking for deals that are going to support the organic growth of the core business that are right in our wheelhouse. If we do go into other areas of on the advertising side, it likely would be with pretty small acquisitions that might have a product that that would get us to market quicker, but nothing super aggressive planned right now.

And then for my next one, this is one of those where I really don't know the answer. So I look forward to your thoughts on this one, Michael. So with this being a presidential election year, historically has that a positive or negative impact on your digital advertising efforts, including raising the cost of ad impressions?

So we would see that, you get what you'll see more with the election you're advertising is kind of on the branded side, of the business, not so much from performance side. I think that you'll see growth in overall impressions as people are just kind of tune to the news a bit more. We typically haven't really seen a really measured effect, on election year advertising on our business. Unlike, you know, some businesses, I'm sure CTV, I would suspect we’ll do our right as come on. But what I would mention, Tom, is kind of heading into the latter half of the year on the branded side of programmatic advertising, you're going to see a pretty substantial market shift as Google deprecates cookies and Chrome, which it looks like they're still going to be doing the back half of the year. We expect that will bring down pricing, overall in display and programmatic. And so any kind of effect you would see on the election side with pricing going up, potentially with a little bit more cash coming into the system, we believe would be more than counterbalanced by pricing coming down related to cookie deprecation. If that happens, which we're hoping, frankly for System1, we hope it will happen, we should see some pretty positive effects on the buy side of our business, keeping in mind that a lot of our business is going to be contextual based advertising, not really reliant on third-party cookies.

So there have been a number of e-commerce companies commenting that Timo and Shine are raising the cost of their digital advertising, giving their heavy spending. Is this a situation that's impacted you or that you've been able to take advantage of?

So we're not, again, this is an area where we have not seen a direct effect. It may be moving some of the market actually, I'm relatively confident it's moving some market pricing on kind of the app side of the business and, within kind of the Facebook ecosystem and TikTok ecosystem. But some of those areas are where we're kind of beginning to scale much more. And so we're working off a smaller base, for instance, on the video side, on the buy side. And so at this point can't really affect, can't really point to any directly negative effect on our business from kind of the Chinese e-commerce companies.

And then as AI is employed more broadly in search, how may that have a positive or negative impact on your ability to measure consumer intent and on RAMP in general?

So it's kind of I guess, I'd answer that that in 2 parts. So AI for us, I've kind of mentioned with the incorporation directly into our platform, which has been really good. We've seen really positive effects. On the AI side on search, if that kind of starts eating away at search market share. We won't be, we won't be exposed to that in a broad way. What we would expect to see, particularly given our relationships with some of the really large search engines out there, Google and Bing the most prominent, If they start seeing declines in overall search query volume, then they would look more towards their partner business, which we play a part of to get distribution for their advertising networks. So what we would suspect is that if they start seeing reduced queries on their own search engines, they might be a little bit more aggressive in working with their network partners like System1. And so while we don't see really, potential negative effects on our buy side of the business, we would anticipate seeing some positive effects on the sell side of our business.

Last one and then thanks again for taking all my questions. Can you tell us where you are today on leveraging TikTok? And if the law were passed in the U.S. banning it from app stores, would that have any impact on you?

Yes. So, we're just starting to scale TikTok. We are seeing that pretty decent volume from their network. Some of that is international. Some of it's domestic. So but the nice thing about TikTok and our kind of move into video on the buy side is that the ad creatives are pretty similar across all the networks. So the work we're doing, for instance, in which we're starting with TikTok and then kind of moving those that advertising over to YouTube and Reels and some of the other video platforms, what we would expect to see if TikTok were to dramatically go away, is a lot of those video views are going to move over to, the other video platforms. People just aren't going to change their media consumption if people, like, the average consumer, that's somewhat addicted to scrolling through TikTok, they're now starting to scroll through reels in the same manner. And so we would suspect a lot of that, a lot of that viewership would go over to the other platforms where we're starting to scale. So we wouldn't anticipate, a big negative effects that TikTok will go away. There will for sure be disruption in the market if that happens, and you're going to see a lot of advertising dollars that are currently on TikTok, roll over to the other platforms, relatively quickly. So while we don't anticipate negative effects, I would think over, if TikTok were to get banned from the U.S. App Store, there's going to be 2 or 3 months of pretty large disruption in that particular marketplace.

We have no we have no further questions in our queue at this time. I will now turn the call back over to Michael Blend for closing remarks.

Okay. Great. Well, thanks everybody for joining us early on Monday morning. We appreciate you're following System1, appreciate your support. As I mentioned, Q4 was a pretty substantial, very busy quarter for us, and we made some pretty big changes to our business, we believe, setting us up for a lot of success on a go forward basis. So we look forward to reporting that to you in the future and I'm going to wrap up the call, but look forward to joining you next quarter for our next quarter earnings call. Thank you very much.

This concludes today's conference call. Thank you for your participation and you may now disconnect.