System1 Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 18, 2024

There are 8 speakers on the call.

Operator

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 Systems 1 4th 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

Thank you. I would now like to turn the conference over to Kyle Osgaard, Vice President of Finance. Kyle, you may begin your conference.

Speaker 1

Thank you, operator. Joining me today to discuss System 1's business and financial results are our Co Founder and CEO, Michael Blend and our Chief Financial Officer, Trudyesh Gaudhambi. 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.

Speaker 1

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 ks 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. Forward looking statements that we make on this call are based on management's assumptions and beliefs as of the date hereof, and System 1 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.

Speaker 1

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 System 1's Co Founder and Chief Executive Officer, Michael Blend.

Speaker 2

Thanks, Kyle. Good morning, everyone, and thanks for joining us on our Q4 System 1 earnings call. We have a lot to discuss today. The Q4 of 2023 was pretty jam packed for our company as we completed a number of important strategic shifts for System 1. We believe these moves have set us up well for the future and I'll go into them 1 by 1.

Speaker 2

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 System 1, we sold our total security business during the quarter for consideration consisting of $240,000,000 in cash, the redemption of $29,000,000 of our outstanding shares and the termination of certain earn out payments associated with our De SPAC 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.

Speaker 2

Now while 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 System 1 acquired the business in early 2022, the heavy upfront marketing costs were not really a significant concern

Speaker 3

for us.

Speaker 2

We had a low cost of capital during that low interest rate environment and spending $1 upfront to make $3 over the long term was a great investment for our company. Things changed significantly towards the end of 2022 and heading into 2023. As interest rates and our corresponding interest expense costs rose over that period, our cost of capital to support total securities upfront marketing expense went up quite a bit. And at the same time, our advertising business suffered a downturn along with our industry generally. And this left our overall business more highly leveraged than we would have liked.

Speaker 2

In the current operating environment where cash is king and debt is expensive, once we received an offer for total security, we decided to run an extensive process. In the end, we determined the offer from the Total Security management team combined with private equity was the best deal for System 1. From a financial perspective, the sale of total security provided us with approximately $240,000,000 of cash. This cash has allowed us to significantly delever our remaining business. The total security sale also included the redemption of 29,000,000 shares held by the total security management.

Speaker 2

So going forward, we have a smaller shareholder base to realize the benefits from future growth in our remaining advertising business. Having a healthy amount of cash on our balance sheet is very important to our remaining advertising business. On the buy side of the business, access to capital gives us substantial capacity to scale our marketing spend and offer aggressive payment terms and return for buy side discounts. On the technology front, we can continue to invest in new innovations utilizing generative AI to incorporate into our ramp platform. And finally, our improved balance sheet gives us capacity for any accretive or strategic tuck in acquisitions we may identify.

Speaker 2

Now on to the advertising business overview. I want to spend some time discussing our core advertising business in more detail. Let's talk about the nature of our go forward business, changes and developments in the business over the past year and our plans to grow the business going forward. Our advertising business has been the core system once since we founded the company a decade ago. Except for the last 2 years, it was our only business.

Speaker 2

And so by divesting Social Security, we are returning to our core roots. The advertising business has 2 basic components. First, our network business and second, our owned and operated business. Each of these in turn are organized between our paid and our organic business lines. Our paid business lines rely on paid marketing to fuel their growth and our organic business lines are primarily driven by consumers going directly to our properties or utilities.

Speaker 2

All of these components are then powered by our proprietary responsive acquisition marketing platform, which we refer to as RAMP. Our network business is the original legacy business of System 1 and has historically been a very profitable business line for us. In this business, hundreds of network partners buy traffic on their own behalf and then use our ramp platform to monetize this traffic. In our network business, we do not take any risk on the buy side. Our partners incur all the traffic acquisition costs and then send that traffic through ramp for system 1 to monetize for them.

Speaker 2

Our paid owned and operated advertising business is similar to the network business I just described. The primary difference is that in our owned and operated business, we purchase traffic for our own digital destinations, while utilizing both the buy side and monetization functionalities within Ramp. The simple way to think of this is that Ramp supports both hundreds of network partners as well as our own internal team, with our internal team being the largest customer of Ramp. Having a large owned and operated business also provides a lot of long term value to our network

Speaker 3

partners. The scale of

Speaker 2

our O and O business gives us very good insights into the challenges and opportunities faced by our network partners with respect to both buy side and monetization dynamics. We utilize these insights to continually improve ramp and we can seamlessly test these improvements through their impact on our paid owned and operated business. When we are convinced that our new improvements are effective, we roll these out to our partners. In doing so, we constantly invest in the success of our network partners, attract new partners and in turn make our ramp platform that much stickier for our network partners. One example of the synergies derived between our paid O and O and the network businesses is the launch of our ramp partner console, which we publicly announced last August.

Speaker 2

The ramp partner console provides self serve tools that allow our partners to create and manage campaigns, adjust bidding strategies, access financial reporting and get detailed analytics and reporting in near real time. Essentially, we provide to our partners most of the tools that we use to manage our paid O and O business. As a result, both our paid O and O business and our network business experienced solid growth in Q4. Our network business grew 37% year over year and our paid O and O business grew 20% sequentially over Q3. While some of this growth is attributable to typical Q4 seasonality, our technology improvements and rapid incorporation of AI into our ramp platform are having a materially positive effect on our overall business.

Speaker 2

Since first releasing the ramp partner console to partners in late 2022, the number of active network partners has increased 50% from 135 at the end of 2022 to over 200 today. The partner console has also allowed our partners to grow quicker. For example, in Q4 of 2023, 3 of our top 10 partners were new to the network in the year and the remaining 7 top 10 partners grew 120% collectively year over year in Q4. In addition to our marketing driven owned and operated business, we have several great organic traffic businesses such as MapQuest, Startpage and Coupon Follow. These businesses are fairly distinct from our marketing driven business lines as they do not rely heavily on paid marketing.

Speaker 2

Instead, they are mostly powered by consumers direct navigating to these destinations or reaching them via non paid organic search results. Our Avanda businesses are stable sources of high gross margin revenue and in 2024 are projected to provide over 35% of our total revenue less marketing expenses. These businesses are strong cash flow generators and have a relatively light engineering and overhead footprint within our organization. Together, our organic businesses provide a nice degree of consistent profitability and they also present opportunities for high margin growth as they seek to attract more organic users. On the technology side, we have also made substantial improvements to our ramp platform over both the past quarter year.

Speaker 2

In addition to the launch of the ramp partner console, we've also been highly focused on integrating AI in the critical aspects of ramp in our business processes. AI is enabling us to scale the creation and distribution of our marketing campaigns at a pace we haven't previously seen.

Speaker 3

And we believe that we are just beginning to scratch

Speaker 2

the surface on been utilizing AI machine learning tools to build optimized buy say capabilities that are directly linked to the performance of our ramp monetization platform. To give you a sense of the impact on our ability to scale, this initiative has permitted our internal teams who are testing it to identify, launch, optimize and monetize 5 times as many campaigns per week per buying resource than we were able to achieve just 6 months ago. While we continue to refine the AI capabilities incorporated into ramp, our ultimate goal is to be a one stop buy and sell side platform for performance marketers across the Internet. As our next step towards this goal, we are working to make our buy side capabilities available to our network partners. These partners have historically used us only for sell side monetization and we plan to open up buy side capabilities over 2024.

Speaker 2

If we are able to successfully roll this out, our partners will be able to manage almost all of their business operations via ramp. In addition to providing an integrated platform to our partners, we also plan to use our healthy balance sheet to help them scale their businesses. One example is System 1 providing revenue guarantees across buy side channels in return for favorable pricing and then passing these savings on to our partners. In return, we can enable the partners to further scale their business on the ramp platform. In addition to the momentum that we've realized from our technology improvements and stronger balance sheet, we're anticipating some tailwinds from market changes as Google deprecates cookies within its industry leading Chrome browser.

Speaker 2

We believe this change represents an opportunity for us given our vast amounts of first party data and our focus on contextual based advertising. We do expect there to be some disruption in the marketplaces once these changes are rolled out. So we could see some volatility in these markets during the back half of the year. However, as always, we welcome the volatility and believe Ramp is well positioned to take advantage of any choppiness in the advertising markets. We also feel well positioned to capitalize on an anticipated reacceleration in digital ad spending in the latter half of this year.

Speaker 2

Looking forward to 2024 and beyond, I believe System 1 is a very rejuvenated, refocused and well capitalized company set up for a return to solid growth. We have excellent technology, solid assets and strong relationships with our network and advertising partners. And most importantly, we have a focused and highly motivated team all moving in the same direction. That said, while we are optimistic about 2024, I as always don't have a crystal ball about what the overall economic environment is going to look like. And after a rocky 2023, I don't want to promise an operating performance that we aren't confident we can meet or exceed.

Speaker 2

I encourage our shareholders to view System 1 as a long term investment opportunity and judge our success on an annual basis rather than on near term quarter to quarter results. As a much leaner and focused digital advertising business, we are ready for the next chapter of System 1. I'll now hand things off to Trudy to discuss quarterly results in more detail as well as our Q1, 2024 guidance. Take it away, Triti. Thanks, Michael.

Speaker 2

Thank you, everyone, for joining us today.

Speaker 4

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 and 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 $155,000,000 of notional debt. In addition to our scheduled mandatory amortization of $5,000,000 per quarter.

Speaker 4

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 $96,100,000 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.

Speaker 4

Owned and operated advertising revenue was 79,400,000 dollars representing a 38% year over year decline, also narrower than the 54% decline that we saw in Q3 and sequential growth of 20%. Last year, owned and operated advertising declined quarter over quarter from Q3 to Q4 by 11%. Network advertising revenue was $16,700,000 up 37% year over year. As Michael mentioned during his remarks, we remain incredibly bullish about the growth potential of our network advertising business, especially given the investments in additional features and tools for our ramp platform that we are now making available to our partners. Adjusted gross profit was 37,600,000 down 12% year over year versus a 18% year over year decline in Q3 of 2023 and comes in above the high end of the implied Q4 adjusted gross profit guidance range previously provided.

Speaker 4

Revenue less advertising spend for our owned and operated advertising segment declined 24% to $26,600,000 dollars versus a 36% decline in Q3 of 2023. Network revenue less agency fees was up 35% to 13,100,000 dollars versus $9,700,000 in the prior year quarter. Owned and operated cost per session and revenue per session were both flat sequentially at $0.05 and 0 point 0 $7 respectively, with the spread also flat sequentially at $0.025 On the network advertising business, RPS was $0.02 per session. Most importantly, total sessions processed by ramp in the most recent quarter was $1,850,000,000 up 4% sequentially and 31% year over year. Operating expenses net of add backs were $27,600,000 down 3% year over year and down 5% sequentially.

Speaker 4

Adjusted EBITDA was $10,000,000 versus $14,400,000 last year, down 31% year over year, but up 24% quarter over quarter. This represents a margin on adjusted gross profit of 26.6% versus 21.8% in Q3 of 2023 and came in above the high end of the implied Q4 guidance range. With respect to liquidity, we ended the year with $135,300,000 of unrestricted cash on our balance sheet and a balance of $365,000,000 of term loans under our credit agreement. Taking into account the modified Dutch auction to repurchase term loan debt under our credit our credit agreement that we completed in mid January, we had $94,400,000 of unrestricted cash and a balance of $301,300,000 of term loan under our credit agreement. Our implied net leverage at year end pro form a for the impact of the completed modified Dutch auction is slightly above 7 times.

Speaker 4

On a run rate basis, after giving effect to the operating expense cuts we made throughout 2023 as well as the increased professional services costs that we incurred to assist in the restatement of our Q1 through Q3 'twenty two financial statements, our pro form a net leverage would be approximately 4.8 times. While we are comfortable that our current capital structure, including the $50,000,000 of availability on our revolver, provides ample cushion for all of our short and medium term liquidity needs, we remain highly focused on continuing to delever in a prudent manner in the current market, including through further attractive and opportunistic debt repurchases, accretive M and A and most importantly through the organic growth of our core advertising business. And our entire team is now singularly focused on execution to achieve this organic growth. We remain cautiously optimistic about macro trends in digital advertising generally. We are also bullish on our identified near term opportunities as well as our team's ability to continue to improve and optimize our ramp platform, including offering both greater sell side and buy side functionality to our partners.

Speaker 4

That being said, an upturn in macro trends is unproven at this point. For example, to date in Q1 of 2024, we are not seeing evidence of a comparable rebound to what we experienced in the first half of twenty twenty three, much less the first half of twenty twenty two. Moreover, while we view Google's anticipated cookie deprecation on its Chrome web browser, currently anticipated in or around late 2024 as a net positive for our overall business, the change does create a significant amount of uncertainty in the online advertising environment in which we operate. As a result, at this time, we will not be providing full year guidance for 2024. We are estimating Q1 revenue to come in between $82,000,000 84,000,000 dollars representing a 31% year over year decline at the midpoint.

Speaker 4

We are estimating adjusted gross profit to come in between $28,000,000 $30,000,000 representing a 24% decline at the midpoint. We estimate Q1 adjusted EBITDA to come in between negative $1,000,000 and negative $2,000,000 which is reflective of some seasonality in operating expenses, where we see higher professional services expenses primarily related to our fiscal year audit as well as higher beginning of the year accruals for payroll and bonus related expenses. I want to reiterate that we are cautiously optimistic about macro trends in digital advertising for this current year and bullish about our abilities to execute against our near term opportunities.

Operator

Your first question comes from the line of Dan Kurnos from The Benchmark Company. Please go ahead.

Speaker 5

Great. Thanks. Good morning. Michael, Trini, 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.

Speaker 5

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?

Speaker 2

Sure. Thanks for joining in. Thanks for the question. This is Michael here. So as far as streamlining the business, I can answer on a couple of fronts.

Speaker 2

So first of all, we on the OpEx side, we took a bunch of cost side of the business over kind of the latter half of twenty twenty two and twenty twenty three. 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 growth on the business, I had mentioned AI and the 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.

Speaker 2

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. Triti, do you want to kind of extrapolate on that?

Speaker 4

Yes. I think just on that point, I mentioned in our prepared remarks that the Q1 specifically the Q1 OpEx and for the guidance kind of implied between $30,000,000 $31,000,000 should

Speaker 2

be the high point in terms

Speaker 4

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 streamline and 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.

Speaker 5

It's helpful. Let me maybe rephrase 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

Speaker 3

think a

Speaker 5

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?

Speaker 2

Yes. So the way to think about our business on the owned and 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

Speaker 1

to be profitable out of

Speaker 2

the gate and some of them are going to be negative and we kind of cut them off as quickly as possible. And so what AI has allowed us to do is essentially scale pretty dramatically. We're up over, I believe, 5 times the number of campaigns 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.

Speaker 2

We can then use AI to optimize our bid pricing on those. And so we and once things are optimizing, the campaign is kind of profitable for us 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.

Speaker 2

We're one of the largest our owned and 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 the 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?

Speaker 5

Yes. No, that's helpful. I'm just trying to get directionally how we should think about the impact of that decision, but obviously very early and we'll see what adoption is. One other kind of, let's just call it 2 parter, you've been unwilling to really get into CTV before. It feels like we're having a dead cat balance in CPMs.

Speaker 5

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. Shapes

Speaker 3

in international too, Michael. So if you want to address both

Speaker 2

of those topics, love to hear it. Yes, sure. So I'll address the first and then Shri, you can talk about international. So 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.

Speaker 2

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 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.

Speaker 2

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, Trudy, on international.

Speaker 4

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 kind of total advertising revenue comes international.

Speaker 4

We know if we look at just 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 it's still something that's on our radar and on the roadmap.

Speaker 4

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 creatives, 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 kind of we'll continue to try and grow and focus on throughout this year and the years going forward.

Speaker 5

Awesome. Thanks for all the color guys. Appreciate it.

Speaker 2

Yes. Thanks for joining, Dan.

Operator

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

Speaker 6

Hey, 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 generally in the digital advertising kind of space so far this year and as we go into 2024? And that 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?

Speaker 6

I think you might have said

Speaker 3

it in prior calls. Thanks. Yes.

Speaker 2

Thanks, Luke. Again, I'll take the first question. Triti, 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.

Speaker 2

The quarter did start off a little bit slowly for us. A lot of that we believe had to do with like 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.

Speaker 2

So nothing super out of the ordinary except that we, we're not ready to call kind of a big, big dramatic reacceleration in the ad business. And 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. Trudy, do you want to take the second question?

Speaker 4

Sure. Thanks, Luke. So, yes, our target leverage we have to support. So, our target leverage is to get closer to that 3 times range. Again, above that now, I've mentioned in my remarks, a little bit south of 5 times or 4.8 after the Dutch auction.

Speaker 4

But our target where we'd like to be operating where we're trying to get through both through organic growth and other things is closer to that 3 times.

Speaker 3

Great. Thank you so much. Thanks.

Operator

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

Speaker 7

Great. So Michael and Trudy, congrats on the quarter and the successful divestiture. I think I have 6 total, so I'll go one at a time. You've made a lot of progress in strengthening your balance sheet. Can you talk about your plans to continue doing so in 2024?

Speaker 2

Sure. And then I can give the brief overview and Trudy, you can follow-up if you want. So thanks Tom and thanks for joining. Yes, it was Q4 and selling total security was a really positive effect on our balance sheet. We're happy about that.

Speaker 2

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 back 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.

Speaker 2

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.

Speaker 2

Sri, do you

Speaker 4

have any follow-up to that? No. Yes. No, that's the total menu. Yes.

Speaker 7

So, Michael, you sort of touched on this in that answer. But on the M and 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?

Speaker 2

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.

Speaker 2

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. We 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.

Speaker 2

And so kind of on a go forward basis, I'd say 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 would get us to market quicker, but nothing super aggressive planned right now.

Speaker 7

Great. 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 had a positive or negative impact on your digital advertising efforts, including raising the cost of ad impressions?

Speaker 2

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 on 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 some businesses, I'm sure CTV, I would suspect will do all right as brands 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 in Chrome, which it looks like they're still going to be doing the back half of the year.

Speaker 2

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 System 1, we hope it will happen, We should see some pretty positive effects in 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 3rd party cookies.

Speaker 7

Great. All right, three more. 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?

Speaker 2

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 on a smaller base, for instance, on the video side, on the buy side. And so I at this point can't really point to any directly negative effect on our business from kind of the Chinese e commerce companies.

Speaker 7

Great. 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?

Speaker 2

So it's kind of I guess I'd answer 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 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 being the most prominent.

Speaker 2

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 System 1. 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.

Speaker 7

Great. 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.

Speaker 7

Banning it from app stores, would that have any impact on you?

Speaker 2

Yes. So we're just starting to scale TikTok. We are seeing pretty decent volume from their network. Some of that is international. Some of it's domestic.

Speaker 2

But the nice thing about TikTok and our kind of move into video on the buy side is that the ad creators are pretty similar across all the networks. So the work we're doing for instance, similar to starting with TikTok and then kind of moving those 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.

Speaker 2

And so we would suspect 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 rollover 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.

Speaker 2

S. App Store, there's going to be 2 or 3 months of pretty large disruption in that particular marketplace.

Speaker 7

Great. Thanks, Michael. Thanks, Trudy for taking my questions.

Speaker 2

Thanks, Tom. Appreciate it.

Operator

Thanks, Tom. 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.

Speaker 2

Okay, great. Well, thanks everybody for joining us early on Monday morning. We appreciate your following System 1, 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.

Speaker 2

And I'm going to wrap up the call, but look forward to joining you next quarter for our next quarter's earnings call. Thank you very much.

Operator

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

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Earnings Conference Call
System1 Q4 2023
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