System1 Q4 2024 Earnings Call Transcript

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Kyle Ostgaard
Kyle Ostgaard
Vice President of Finance at System1

you for standing by and welcome to the fourth quarter twenty twenty four earnings conference call for System One. Joining me today to discuss System One's business and financial results are our Co Founder and Chief Executive Officer, Michael Blend and Chief Financial Officer, Tridvesh Khandambi. 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.

Kyle Ostgaard
Kyle Ostgaard
Vice President of Finance at System1

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 2024 filed on March 10, 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 System One disclaims any obligation to update any forward looking statements except as required by law.

Kyle Ostgaard
Kyle Ostgaard
Vice President of Finance at System1

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

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Thanks Kyle. Good afternoon everyone and thank you for joining System One on our Q4 twenty twenty four earnings call. We wrapped up the year with solid execution across the business. For the fourth quarter, System One delivered $76,000,000 in revenue and $45,000,000 in gross profit. Adjusted EBITDA came in at $17,900,000 which was a 79% year over year increase.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

It is good to see our financial performance starting to reflect all the hard work and progress by our team over the past year. Although we perform well overall, our strong results were primarily driven by our owned and operated products with revenue increasing 30% sequentially from Q3 and 60% compared to Q4 last year. Our products like Startpage, MapQuest and coupon follows higher engagement benefiting from improvements in SEO, user experience and product expansion. In contrast, our marketing driven businesses continue to be negatively affected by fluctuations in our Google related business. As I discussed during my remarks last quarter, we continue to see ongoing volatility due to changes enacted by Google in their search partner network.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

These changes have the longer term goal of improving advertiser conversions and traffic quality to the Google Partner Network. However, in the short term, they continue to cause significant volatility and lower payments by Google to Google partners like SystemONE. As Google pays out less for traffic, System One makes corresponding adjustments to the amount we pay for traffic in order to ensure marketing businesses remain profitable. Consequently, lower monetization from Google caused our advertising spend to decline 26% sequentially. Now Google has been implementing rapid fire changes to its search partner network products over the last eighteen to twenty four months and frankly keeping up with these changes has been a challenging process for our team.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

That said, we remain steadfast in our Google partnership. We've continued to invest heavily in our ramp platform and we have strategically positioned ourselves when the Google network ultimately rebounds. On the technology front, our investment in AI powered automation within ramp has yielded very promising results. It's been increasing efficiency and scale across all of our marketing operations. In 2025, we are strengthening our focus on AI integrations across all facets of ramp and our overall organization and we expect to see continued improved efficiency.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Now, let's go into more detail on our owned and operated segment which includes both our marketing driven businesses and our owned and operated properties. Total owned and operated revenue reached $65,000,000 reflecting a 19% year over year decline and a 9% sequential decrease. This decline was driven by 40% year over year revenue decline in our marketing businesses offset by a 60% increase in our owned and operated products. While revenue decline adjusted gross profit was up at $32,000,000 This marks a 20% year over year increase and a 21% sequential rise from the third quarter. The gross profit expansion despite a revenue decline highlights our ability to drive efficiency and margin growth within this segment, as well as the higher gross profit margins of our owned and operated products.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Sessions across our owned and operated properties totaled $1,900,000,000 down 8% from Q3 due to reduced ad spend, but up 79% year over year. Our year over year growth reflects the increased scale of campaigns being run on ramp as well as growth in our owned and operated products. International markets remain a key driver with international revenue representing 36% of total owned and operated revenue up from 26% in Q4 twenty twenty three. In Q4, we launched over 22,000 marketing campaigns, a 5%, a five times year over year increase. This huge increase in marketing campaigns simply would not have been possible prior to our embrace of AI.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Our medium term goal for scaling marketing campaign launches is 130,000 per quarter for launching a new marketing campaign every minute of every day around the clock. As I mentioned, while we are confident in ramp's ability to scale, we are being limited by fluctuations in the Google SPM performance. One recent change made by Google is worth highlighting as it helps explain how Google changes directly impact our business. A few weeks ago, System one was informed by Google that they plan to automatically opt out advertisers on a rolling basis from participating in their AdSense for Domains product known as AFD beginning later this month. The practical effect of Google's pending change is that AFD monetization is likely to materially decline, making it significantly more difficult to profitably send acquired traffic to AFD powered websites.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

This AFD change will be both a short term negative and medium term positive for System One. In the short term, both our owned and operated and partner network clients do substantial AFD related business and we expect that business to decline as Google rolls out this change on its AFD product. On the flip side, Google is making this change to AFD to encourage adoption of its newer related search on content product which is known in the industry as RSOC. Our company is well positioned to navigate this transition to RSOC, as SystemONE has been allocating significant resources into our RSOC efforts for both owned and operated and network partners over the last twenty four months. SystemONE is a leading partner with Google on this new and exciting product.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

So, while we believe System one is among the best position in the market to navigate this change from AFD to our stock, Google's decision to opt out advertisers from AFD will likely cause significant business and product disruption. We are rapidly shifting our remaining owned and operated and partner network AFD businesses over to the newer RSOC product, while also keeping pace with rapid changes Google is making to RSOC as it continues to roll out this product offering. Now ultimately, we welcome this disruption to the Google Search Partner Network. It is aimed at weeding out bad actors from the ecosystem and ultimately is going to benefit the technology driven companies who are focused on high quality consumer and advertiser experiences. While we expect the stormy weather will continue for a bit longer, we're looking forward to the sunny days ahead where we can return our focus on scaling our Google business back up.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

With that, let's move on to some highlights from our products group, which as I mentioned is on a seller run. First, let's go ahead and start with Coupon Follow, our leading couponing and promo code service. A coupon follow had a very strong holiday shopping season and a great fourth quarter with the site continuing to perform well following Google search algorithm updates in 2024. Our focus on a high quality user experience and delivering verified real time promotional codes continues to pay off. Organic sessions rose more than 20% sequentially from Q3 and sessions were up 129% year over year.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

In addition to our growth in site traffic, our browser extension users have more than doubled year over year. We have a very nice flywheel going with Coupon Follow. As our usage increases, we get better signals on which promo codes are currently working for users. That enables a higher quality experience for users because the promo codes that the users try actually work. This in turn brings in users and more users and more data and so on.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

And as Coupon Follower continues to scale, we're able to land more direct deals with brands, which in turn improves the accuracy in deals found on Coupon Follow. In 2025, we're going to aggressively capitalize on these great trends and with a continued focus on providing a better experience for both consumers and merchants. Now I'm going to move on to Startpage, our privacy focused search engine. Startpage continues to gain traction as global concerns around online privacy and data security showed no signs of letting up. The regulations like GDP in Europe and evolving U.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

S. Privacy laws place greater emphasis on consumer data protection, Startpage is very well positioned to provide an alternative to mainstream search engines. Startpage user sessions grew over 20% year over year as more users seek private search and in addition, the Startpage private browser apps we launched last year already have more than 200,000 downloads across both Android and iOS. As usage and revenues grow on Startpage as more mainstream users seek private search engines, our 2025 is going to be about continuing to add the bells and whistles these users expect when they switch from Google or Bing or DuckDuckGo over to Start Page. We also intend to make AI integration a major focus on the start page in 2025.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

And lastly, let's talk about MapQuest, everybody's favorite oh, that still exists internet service. Well, I'm happy to let you know that MapQuest is back. MapQuest continues to experience strong engagement with user sessions growing more than 45% year over year. The demand for alternative mapping and navigation solutions remains strong especially as users seek more privacy conscious and feature rich alternatives to dominant platforms. Our team has revitalized MapQuest by introducing new functionality, enhancing our mobile experience and optimizing local mapping capabilities.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Recently, we relaunched private maps, offering users enhanced control over their location data and all these efforts are paying off and the renewed MapQuest recently went viral all over social media and MapQuest was called out in segments on CNN and Stephen Colbert. Now, I'll move on to our partner network performance. Partner network revenue was $11,000,000 and adjusted gross profit was $14,000,000 up 10% both year over year and sequentially. Our partner network results included an accounting revenue adjustment which lowered both revenue and COGS and had no impact on gross profit. We will be excluding the adjustment as we make comparisons to prior periods and report business metrics.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Without the adjustment revenue was $18,000,000 which represents an 8% year over year increase. In Q4, average revenue per partner decreased 6% versus the third quarter while active and scale partners increased. Total active partners increased 6% from Q3 to over 300 partners. At the end of Q4, we had 65 scaled partners, a 12% increase from the third quarter. As a reminder, we consider our platform customer to be a scaled partner when they are generating at least $50,000 of revenue per quarter on ramp.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Now similar to our owned and operated business, our partner network team has had to navigate the rapidly changing Google landscape. The team has done a great job handling the volatility and we are very well positioned as we ship business over to the new Google RSOC product. Looking forward to the rest of 2025, we remain cautiously optimistic. Our owned and operated products continue to demonstrate strong fundamentals and I'm excited to see us expand on our core platforms in couponing, private search and mapping. And on the marketing side, our investments in AI driven optimizations are positioning us well for future growth.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

And I'm very glad we made the early decision to invest heavily in the new Google RSoft product. To close, I want to reiterate as I always do, System One's leadership team remains fully aligned with our shareholders and as a group we remain one of the company's largest shareholder bases. As we continue our transition back to growth mode, we very much appreciate your continued support and we look forward to delivering long term value. With that, I'll hand it over to Triti to go over our financials and provide Q1 guidance. Take it away Triti.

Tridivesh Kidambi
Tridivesh Kidambi
CFO at System1

Overall, we are pleased with our fourth quarter financial results with the highlight being our $17,900,000 of adjusted EBITDA, representing year over year growth of 79% and quarter over quarter growth of 73%. For the year, we generated $38,600,000 of adjusted EBITDA, representing year over year growth of 32% and demonstrating our ability to grow through a challenged marketplace. Now, let's dive into our operating results. Q4 revenue was $75,600,000 representing a 21% year over year decrease and sequential decline of 15%. Owned and operated advertising revenue was $64,700,000 down 19% year over year and 9% sequentially.

Tridivesh Kidambi
Tridivesh Kidambi
CFO at System1

The decrease in revenue is directly related to an $11,600,000 sequential decline in advertising spend. Within the owned and operated advertising segment, our O and O products business generated $27,100,000 of revenue, up 60% year over year and 30% sequentially, as to be expected in a seasonally strong Q4. Our fourth quarter RPS was $0.03 and in line with the third quarter and CPS was $0.017 down 20 from $0.021 in the third quarter. As we lowered our advertising spend, we were able to shift towards lower CPS traffic sources. Overall, RPS and CPS were both down significantly year over year as throughout the year we have called certain acquisition channels that had both higher RPS and higher CPS.

Tridivesh Kidambi
Tridivesh Kidambi
CFO at System1

RPS was down 55% year over year and CPS was down 65% year over year. The spread between RPS and CPS in Q4 was 1.7¢ or 98% margin compared to 1.3¢ or 59% in Q3. Network revenue was $10,900,000 but adjusted for our net revenue adjustment was $18,000,000 which was up 8% year over year and in line with Q3. Total sessions were $1,900,000,000 up 46% year over year and down 20% sequentially. Partner network RPS after adjusting for the out of period revenue adjustment decreased 26% year over year, but increased 24% quarter over quarter.

Tridivesh Kidambi
Tridivesh Kidambi
CFO at System1

Adjusted gross profit was $44,700,000 up 19% year over year and sequentially. Revenue less advertising spend for our O and O advertising segment increased 21% sequentially to $32,000,000 Revenue less advertising spend for our O and O products was $25,600,000 up 62% year over year and 27 sequentially. Network revenue less agency fees was $14,400,000 up 10% year over year and sequentially. Total sessions processed by ramp in the most recent quarter was $3,800,000,000 up 61% year over year and down 14% sequentially. On to operating expenses and EBITDA.

Tridivesh Kidambi
Tridivesh Kidambi
CFO at System1

In Q4, operating expenses net of AdVash was $26,800,000 down $500,000 quarter over quarter and down $700,000 year over year. We continue to focus on reducing OpEx to create operating leverage. Adjusted EBITDA was $17,900,000 in Q4 versus $10,000,000 in the same quarter last year, representing a 79% year over year increase. With respect to liquidity, we ended the quarter with $63,600,000 of unrestricted cash on our balance sheet and an outstanding balance of $280,000,000 of term loan debt under our credit agreement. Our net consolidated leverage at quarter end was approximately 5.6 times.

Tridivesh Kidambi
Tridivesh Kidambi
CFO at System1

Now on to Q1 guidance. We are estimating Q1 revenue to come in between $69,000,000 and $71,000,000 down 18% year over year at the midpoint. Despite the revenue decline guidance, we are estimating adjusted gross profit to grow 25% year over year at the midpoint and come in between $38,000,000 and $40,000,000 We estimate Q1 adjusted EBITDA to come in between $9,000,000 and $11,000,000 up over $9,500,000 year over year at the midpoint. The adjusted EBITDA guidance also assumes a benefit from the reversal of the majority of the prior period partner payment balances related to fraudulent traffic on our network from Q2 of last year. For the reasons outlined by Michael during his remarks, specifically around Google volatility, we will not be providing full year guidance at this time.

Tridivesh Kidambi
Tridivesh Kidambi
CFO at System1

As we mentioned during our last earnings call, we have continued to see significant volatility in our marketing driven businesses due to ongoing sell site product and policy updates. However, our core product utilities such as private search, mapping and couponing provide a strong foundation that allow us to navigate these challenges effectively. Looking ahead, 2025 presents an opportunity to further scale these products, driving consistent user acquisition and engagement. By continuing to attract and retain users through differentiated high value services, we not only mitigate market fluctuations, but also create sustained monetization opportunities. Additionally, our ramp platform remains instrumental in generating gross profit and EBITDA.

Tridivesh Kidambi
Tridivesh Kidambi
CFO at System1

As we refine our AI driven strategies to optimize traffic quality and advertising yield, AI driven advancements to our platform and processes will also allow us to continue to optimize our operating expenses throughout the year. Our ability to balance growth and owned and operated with a disciplined approach to our marketing businesses will be a key focus in the year ahead. Thank you for joining us today.

Kyle Ostgaard
Kyle Ostgaard
Vice President of Finance at System1

Thank you, Trudy. We're now gonna open the line for some questions. The first question comes from Tom Forte with the Maxim Group. Go ahead, Tom.

Tom Forte
Managing Director & Senior Consumer Internet Analyst at Maxim Group

Great. So first off, Michael and Trudy, I hope you and your colleagues are okay when it comes to the California wildfires. Second, congrats on the improvement in the adjusted EBITDA for both the fourth quarter and full year. So I have three questions. I'll go one at a time.

Tom Forte
Managing Director & Senior Consumer Internet Analyst at Maxim Group

Michael, as experts on AI and one of the early users of the technology to advance your business, Would love your thoughts on DeepSeek and in general, your ability to invest in Ramp at much lower CapEx than your tech peers.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Thanks, Tom, thanks for joining and for the questions, good to see you. So I would say as far as DeepSeek goes, I don't have a specific opinion about what they're doing except that it's been very nice to see that DeepSeek along with a lot of some of the other open source providers as well as just general competition in the AI marketplace is really bringing costs down substantially for us. What we're seeing is that price, the price to use these tools has been coming down really every couple of weeks or so. And we're also seeing advances in a lot of the code assist tools that we're building where, we've been quite heavy users of AI and I'll talk about that in just a second, but what we're seeing is like every two weeks, people are leapfrogging the other products. And so the the the level of pace at which these tools are developing is pretty extraordinary.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

The way that AI is specifically affecting our business here at System One, a couple different ways. So, first of all, as we've discussed, I think on our last few quarterly earnings calls, AI is really perfectly built for a lot of the marketing that we do. So just tactically doing things like producing better ads, using AI machine learning to do things like really rapidly change bid pricing on our advertising, but also produce better taglines, make better advertisements, better content, our entire advertising flow has been improved. So, on the first side, you've got AI really helping our operations, which has been good. But what I would say more recently is what we're seeing are some really dramatic changes in the way that we're able to do product and engineering at our company.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

What we're seeing is that as engineers and product folks are adopting the AI tools, we're seeing like two to four time improvements in efficiency and productivity from our team. So, we made the decision relatively early as the Codasys tool has been coming out and maturing to really go full force into them. We're able to do that given the size of our company and how adaptive our engineering and product teams are. So, we're seeing just really great efficiency improvements, but also on the I want to wrap up on the business side, some really cool things are happening as well. We're pushing our not only the product engineers, but also the the our entire company, to adopt these tools.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

And so what we're seeing are people on the business side that have never developed code, never written a line of software in their lives, they're actually turning out products themselves. One interesting thing that, you know, we had kind of fun thing a few weeks ago, One of our business heads on the MapQuest side, for instance, came up with an idea for just an interesting fungal product, one night a few weeks ago, worked on it that night, built it himself. The next morning, I worked with one of our engineers to productize it and I think about fourteen to fifteen hours from business concept, we had a product launch. And, a few days later that product, it was a fun little viral product, got featured on Steve Cobare and CNN. That that kind of stuff would have never happened before without these Codesys tools where where someone can come up with a product and build them at a pace that we've really never seen before.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

So AI, at least at our company, is increasing our efficiency and productivity, but it's also kind of unleashing creativity, which is nice to see.

Tom Forte
Managing Director & Senior Consumer Internet Analyst at Maxim Group

Excellent. All right. So then my second question is the question I get most often from investors. Can you talk about at least at a high level, your balance sheet and your efforts to improve your capital structure, including managing your debt?

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Sure. Something we focus on quite quite carefully. Trudy, you wanna go ahead and answer that question?

Tridivesh Kidambi
Tridivesh Kidambi
CFO at System1

Sure. Hey, Tom, how are you doing?

Tridivesh Kidambi
Tridivesh Kidambi
CFO at System1

Thanks for being here. Thanks for the question. So, obviously we think about our balance sheet and capital structure a fair amount. In August of this past year, we did some work around our corporate restructuring that aligned our corporate structure with how we actually manage the business and think about our own and operated business specifically between the advertising and the products businesses. That being said, as I mentioned in my prepared remarks, our net leverage at the end of the year was 5.6 times, which frankly is higher than we'd like it to be, probably higher than our lenders would like it to be, and definitely higher than we thought it would be when we started down the path a couple years ago.

Tridivesh Kidambi
Tridivesh Kidambi
CFO at System1

That being said, for all the reasons that we talked about in our prepared remarks that Michael just mentioned around AI, we feel very bullish about the prospects of the business to continue to grow and for us to grow into a net leverage position and that one more comfortable with. And specifically, we still have about two and a half years left on the term of our credit agreement and we believe we'll be in a strong position to refinance that when we get there.

Tom Forte
Managing Director & Senior Consumer Internet Analyst at Maxim Group

Great. All right. So then my last question, that was very helpful, Trudy, I appreciate that. Michael, can you remind me of how periods of heavy political advertising spending impact your business model like we had essentially all '24? And now that we're on the other side of the presidential election, can I assume it's a much easier operating environment for you?

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Yeah. Good question, Tom. So we're a little bit contra to a lot of the advertising businesses out there where in Q4 when political was pretty hot, what that does for us is it affects the buy side. So it drives up pricing a bit for us when we're buying our advertising. So we actually are happy that the political quarter has passed us and for us the buy side opens up a bit and we see pricing come down a little bit.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

So it's a good question, but as I said, it's and as you mentioned, the political season being behind us is a favorable thing for Systemwide.

Tom Forte
Managing Director & Senior Consumer Internet Analyst at Maxim Group

Great. Thanks for taking my questions.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Thanks, John. Appreciate it.

Kyle Ostgaard
Kyle Ostgaard
Vice President of Finance at System1

The next question is from Dan Kurnos with Benchmark. Dan, go ahead.

Daniel Kurnos
Equity Research Analyst at The Benchmark Company LLC

Great. Thanks. Good afternoon, guys. Michael, there's a lot to unpack, in here. So, maybe at the expense of, you know, potentially getting a little deeper in the weeds on the RSOC shift, I'm just curious, maybe at a higher level for investors, how well you're positioned?

Daniel Kurnos
Equity Research Analyst at The Benchmark Company LLC

You already talked about investing in the shift. It sounds like you're ahead of curve. We've been talking to a lot of the other premium publishers and some of the agencies about this. And it's gonna be interesting to see when this happens because I don't think they're gonna be ready. But can you just talk about your readiness and kind of where you still need to invest?

Daniel Kurnos
Equity Research Analyst at The Benchmark Company LLC

Obviously, it's gonna create some havoc in the marketplace, which we thought was gonna happen with the cookie deprecation. We're getting this instead. So, maybe just kinda talk through what you're seeing, and where you guys are positioning yourselves as we make this pretty big shift.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Yeah. Sure. Yeah. Also good to see you. So it's a little bit in the weeds for people, but because Google is such a major part of our business on the revenue side, probably worth expanding a little bit.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

So essentially, just to reiterate from my earlier remarks, Google's got a few different products, few different advertising products that we use and people in kind of the Google partner ecosystem use to monetize their traffic. And, one of them historically was a product called AFP, another one is a product called AFS, and then related to AFS is a product called RSOC. And, I don't know, eighteen months ago or so, Google introduced a new this new product called RSOC. And it was a pretty small product at the time, not one that had a lot of revenue on it. Google was putting a fair amount of focus on it internally.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

And so we made the decision as system one to really invest pretty heavily in it. I think we made the right decision because, you know, fast forward eighteen months, Google has been kind of informed us and informed the advertising market that, you know, we would expect that the AFD product that they offer, you know, over time is gonna be much less important product for Google and that they're gonna be shifting a lot of their emphasis into having Google partners such as ourselves promote the the RSOC product, which stands for related search on content. We've as I said, we've been putting a lot of our product and engineering efforts behind this, a lot of our marketing efforts behind RSOC and we think we're quite well positioned. We believe we're the market leader in this product or at least certainly we're one of the market leaders in the product. And so, in the short term, we expect to see some bumpiness as AFD, the revenue that we generate from AFD kind of begins shifting over more heavily to RSOC.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

But over the medium to long term, we're actually quite supportive of it. RSOC we think is a really good product for consumers and for advertisers And it happens to be one that we're quite well positioned for here at SystemONE. So we're happy to see the shift happening a little bit more quickly than I think anybody in the market would have expected, but we think that we're in the right position for it. I think you're on mute, Dan.

Daniel Kurnos
Equity Research Analyst at The Benchmark Company LLC

There we go. Sorry about that. Tricky in the back end here. So, no, Michael. Super helpful.

Daniel Kurnos
Equity Research Analyst at The Benchmark Company LLC

I appreciate it. And I can confirm you guys are definitely leading the charge on our SOC, at least based on my conversations. So we'll see how that plays out. But, you know, to to what you guys guided in q one, like, you're let's just call it revenue ex TAC, which is basically what it is, is, you know, you've guided it up pretty strongly. And I I know that's a lot of that's due to your o and o properties.

Daniel Kurnos
Equity Research Analyst at The Benchmark Company LLC

But can you guys just talk through I mean, the spread is huge in q four. You guys crushed it on spread. And I'm just curious how you guys are thinking about your ability to grow in this uneven environment, adjusted gross profit, revenue ex TAC, whatever you wanna call it.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Let's start with that, Trudy, and then I'll take over if you want.

Tridivesh Kidambi
Tridivesh Kidambi
CFO at System1

Yeah, no, I mean, again, we are guiding to some growth this year. Again, it comes down to we've seen a little bit of stability in the marketplace here to start the year, and when we see stability, that's good for us, that's kind of what ramp is built to take advantage of. So, sitting here kind of again in the third month of the quarter, we feel pretty good about our guidance and how the quarter is going to end up and it's a function of ramp working the way that it's supposed to work. And, yeah, I mean, there isn't much more to say other than it's execution.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Yeah, I would say that in general, as we've kind of mentioned on our earlier remarks, the organic products are doing quite well. You know, we're seeing nice growth there and we probably would have a little bit more confidence about the overall year if we weren't, you know, faced with this product transition on the Google side. So we're really waiting to see how that plays out and, you know, I think back half of the year, we're gonna have a lot more confidence in what numbers are gonna look like. But for now, we feel good and, you know, we're coming off, you know, 2024, I think was a year in which we started turning the corner and we're, you know, I think starting to feel increasingly confident about '25.

Daniel Kurnos
Equity Research Analyst at The Benchmark Company LLC

I I know, Michael, you would be mad at me if I didn't ask you my standard international question. So, you know, it was a, obviously, a good, a good quarter for international. It's clearly moving ahead. We continue to hear actually some pretty good things out of APAC. Europe's kinda coming back up a little bit, although we've hit maybe hit a little bit of a bump now.

Daniel Kurnos
Equity Research Analyst at The Benchmark Company LLC

It seems like a real greenfield opportunity for you guys. I know you kind of keep pushing me off saying, hey. We're attacking it. It's 36% now. You know, how are you thinking about the TAM there, and how do you think about that contributing to growth this year?

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Well, I mean, we're we're I think we're making pretty good progress. Year over year, you're seeing an increasing percentage of our of our revenue, coming internationally. So we're feeling really good. You know, we're our efforts are are pretty focused, we're split domestic and international, our internal efforts, but one thing that our AI tools have enabled us to do is very quickly moving into international markets. It's actually been doing things like translation, making sure images are better, advertising copies better internationally has become much much easier for us.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

And we also have what we think some growth on in our shopping vertical with coupon follow has very little international presence. MattQuest has almost no international presence. So if you look on the organic product side, those are couple areas where we could be going international as well. So we're not gonna slow down. You know, TAM is obviously huge domestically, but we've got a huge TAM international as well.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

And, you know, what I suspect is that you're going to continue seeing an increasing percentage of our gross profit come international.

Daniel Kurnos
Equity Research Analyst at The Benchmark Company LLC

Got it. And I'll I'll bug you with one more and I'll take the rest offline because I have plenty. But, maybe just for treaty, you called out items in Q1 just around the, adjusted EBITDA margin. How should we just think about the trajectory for adjusted EBITDA margin this year? Should we be up?

Daniel Kurnos
Equity Research Analyst at The Benchmark Company LLC

And if you're calling for some growth in, adjusted gross profit, and I I know the you know, it's there's no crystal ball here, but just how do we think about your ability to generate incremental leverage, you know, going forward?

Tridivesh Kidambi
Tridivesh Kidambi
CFO at System1

Yeah. So I, you know, I I would expect kind of the bulk of our gross profit to flow through down to adjusted EBITDA. So as I mentioned, you know, we're continuing to look at OPEX, be very maniacal about making sure kind of every dollar we spend, we're getting a good ROI on it. And so we would expect that our gross profit growth throughout the year should flow down at a very high flow through, which should lead to expanded EBITDA margins as a percentage of gross profit.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Yeah.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

And I would reiterate to that. What we're seeing from our team is the going back to a question Tom had, the ability of our team to execute and on the engineering and product and business side, a lot of it driven by the new AI related products that we've been using is pretty impressive. And so we would expect that we're gonna be able to continue with around our current OpEx levels, execute better, roll out more products quicker, with relatively stable OpEx. So you're gonna see you should see as our gross profit expands a lot of leverage from that.

Daniel Kurnos
Equity Research Analyst at The Benchmark Company LLC

Got it. Super helpful. Thank you for the color guys and it was a lot of fun playing with the Gulf Of America on MapQuest.

Tridivesh Kidambi
Tridivesh Kidambi
CFO at System1

Thank you.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

Glad you enjoyed it. We had a few hundred thousand other people enjoy that as well. Well, I think it's not all of our questions, I believe. I want to thank everybody for joining us this quarter.

Michael Blend
Michael Blend
Co-Founder, CEO & Chairman at System1

We look forward to chatting with you next quarter where we hope to have some good news then. Thank you very much.

Executives
    • Kyle Ostgaard
      Kyle Ostgaard
      Vice President of Finance
    • Michael Blend
      Michael Blend
      Co-Founder, CEO & Chairman
    • Tridivesh Kidambi
      Tridivesh Kidambi
      CFO
Analysts
    • Tom Forte
      Managing Director & Senior Consumer Internet Analyst at Maxim Group
    • Daniel Kurnos
      Equity Research Analyst at The Benchmark Company LLC
Earnings Conference Call
System1 Q4 2024
00:00 / 00:00

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