Q1 2022 System1 Inc Earnings Call
Whereas.
After eight years as a private company, we went public completed our merger with protected Dot net made a couple of acquisitions and we even got popular on the stop words.
Throughout all of it our team did what they've always done.
They ignore the noise executed on the business and focus on the long term.
I'm proud of the team for making a very smooth transition into a public company.
So on the business front, both of our major business lines advertising and subscription had really good momentum in Q1.
Advertising saw nice revenue growth across the board and we don't see any signs of that slowing down.
As you know some of the other public advertising companies have had mixed results because of shifting consumer demand and some privacy related initiatives by Apple the beauty of our model is that we are independent in any particular category of vertical and we can shift to meet changing consumer demand. We also our privacy forward advertising.
Platform in many ways economic downturns or shifts in the advertising markets help us we were able to step in and purchase more traffic volume often at cheaper prices.
Now our biggest challenge in the advertising business is ensuring our ramp platform can scale to handle our very ambitious goals. We're spending currently about $650 million annually on advertising and we'd like to scale that to at least $2 billion over the next several years.
<unk> growth is going to entail expanding ramp and a new advertising markets and making ever increasing use of our enormous amounts of first party data.
Our team is ready for the challenge, it's going to be a lot of hard work. It's also gonna means substantially scaling our engineering team.
Now in our subscription business Q1 offers some very nice pockets of opportunity to scale marketing spend.
As our total Avi product matures rates and we think we have a new hit on our hands with our total AD block product that product has gone from zero subscribers at the beginning of 2021 to over 200000 at the end of this quarter.
Subscribers are behaving and renewing as we expected and in line with total <unk> customers.
Similar to our diversification advertising, we like having multiple subscription services that complement each other.
Our longer term goal here is to have at least 10 hit products, which we define as a product with over a million subscribers with total Avi in total our block. We believe we have our first two.
Our biggest challenge in subscription is continuing to develop and scale these new products to add to our mix.
Michael on the advertising side. This requires great engineers and product managers ultimately we believe system. One is almost uniquely positioned to offer offer a bundle.
Subscription products, all lumped into a single payment for.
For example, why would people want to pay $10 a month for 10 different products when they can get all of these bundled together for $30.
Similar to our advertising business our goals here are ambitious and will require a lot of hard work, but we're going to see enormous upside when we pull it off.
On the M&A front, it's really business as usual.
Concurrent with our destock system when merged with protected Dot net.
And we took a majority investment in protected four years ago and have been close to their management for over a decade.
So we're protected acquisition was more like a marriage after a long engagement I'm happy to say the honeymoon is over and we remain happier than ever.
Our integration we're protected has mainly been focused on combining our marketing efforts.
And we're starting to see really good early progress there we.
<unk> also been gun coordination on product development, and I expect to see our joint product initiatives start to rollout later in the year.
Now in Q1, we acquired two fantastic founder led companies in road Warrior and coupon follow.
Our strategic rationale for these acquisitions are very straightforward in the case of road Warrior. We added a route planning mobile labs sold as a subscription service that is a perfect tuck in to our map quest business with coupons follow we're accelerating our efforts in the direct to consumer shopping vertical as well as our reach with direct advertiser.
<unk>.
The integration of both these companies is going well.
Our first step of any acquisition is getting the teams working together as one company Rover.
<unk> was a smaller team and already is working hand in hand, with our map quest team. So we consider the first step of that integration complete we're now moving on to focusing on using your ramp to scale of that product.
Coupon follow is a much larger and more dispersed organization and with any bigger acquisition. The integration post acquisition is always a risk.
I'm very happy to report that the coupon followed team led by the efforts of their founder Mark Masako has embraced joining the system. One organization system has multiple synergies with coupons following both advertising and subscription and our biggest challenge is making sure we focus on the right opportunities.
Our first step we're working to integrate the coupon followed codes throughout our network of properties.
Now we have a really good track record of acquisitions I'd like to think we're good at predicting how well theyre going to go after the deal closes, but you don't always get it right.
With coupon follow and road Warrior, we've been dead on so welcome to their teams.
We also last week acquired answers Dot com. This year was a little bit different for us and that the company was struggling and we purchased the asset for an immaterial price.
However, within those assets, we believe we've identified a crown jewel answers dotcom has millions and millions of user generated answers to questions. We.
We intend to integrate these throughout our properties and search engines. We believe we can provide a much richer experience on our existing network of websites and we also will use ramp to substantially increase the traffic to answers dot com to very very attractive price. We've got some really good potentially asymmetric upside on that deal.
Regarding future acquisitions, nothing is imminent we will.
Remain on the lookout for companies that we can integrate into our existing network and accelerate using ramp.
There are literally hundreds of prospects out there and as always we're going to be very disciplined in our approach.
Looking ahead to the rest of the year I wanted to share a major corporate goals with you.
As I mentioned, our top priority is to continue developing ramp to ensure we have a path to tripling our scale.
This is going to entail entry into new markets scaling, our engineering and product teams and potentially doing some bolt on acquisitions.
Our subscription side, we want to start showing real progress towards our subscription bundle, we're going to keep rolling out new independent subscription products and we're going to start building the links between them such that we can offer an integrated bundle I can't promise that you will see tangible results on the bundle this year, but.
Behind the scenes work is going to be ongoing.
Regarding our system one team we want to continue making major strides such that by the end of the year all of our companies are operating as a single team. This doesn't happen overnight and it requires real work from the people involved but as I mentioned, we're seeing great progress with our most recent acquisitions.
And we also intend to keep investing in our product and engineering teams. We have so many potential opportunities in the more technical talent, we have the more opportunities. We can go after.
And finally, we want to work with you our new shareholders to start building, our long term shareholder base.
This is going to involve helping you get a really deep understanding of our business and also how we operate.
So before before I hand things off to Treaty I wanted to give you a brief overview of our operating philosophy and how we measure our progress.
We always want to meet and exceed our short term financial targets system. One is not the kind of company that operates quarter by quarter. We look at the longer term and we will make sacrifices. If we believe increased shorter term investments are going to pay off big in the future.
We almost definitely we'll have quarters, where we decided to invest more in marketing <unk> technology because of longer term payout is so obvious to us when.
When we do that we're going to explain to you exactly what our reasoning is and remember when we make beds. We're very aligned with you because management owns so much of the company.
Every dollar system, one invest today 70 cents of that comes from management's pockets. So we'd like to bet big on ourselves and it's paid off really well for our shareholders in the past we.
We encourage you to get a deep understanding of system, one and come along for the ride.
And with that I'd like to hand things off the treaty to discuss this quarter's results take it away treaty. Thank you Michael Hello, everyone I'm treated <unk>, the CFO system on and I'm very pleased to welcome everyone to our 2020 to Q1 earnings call.
Before I get into specifics on the company's performance this quarter I thought it'd be helpful. For this initial call to be more granular in terms of our operating philosophy.
First in terms of how we evaluate initiatives and run our business everything starts with ramp which is designed to optimize for gross profit dollars.
While gross margin is important and a metric we do think about when evaluating opportunities gross profit dollar generation as to alternate metric we use to measure the effectiveness of the platform and our initiatives.
Second as Michael mentioned earlier, we have purposely built a diverse business model that is distributed across multiple advertising verticals and acquisition channels and now with the full acquisition of protected we have a platform through which to launch and market multiple subscription products across multiple consumer and product versus.
<unk>.
Diversification and sustainability are key to both our past and future success.
This is a key focus area as we evaluate new acquisition channels and initiatives to invest in and a significant criteria for evaluating M&A opportunities.
Third ramp automation is key to our organic growth everything we do is anchored on our technology platform, which enables continuous optimization and drives operating leverage in our business on an ongoing basis.
In addition to investing in new initiatives and features for ramp we also prioritize investing in automation.
This investment generally comes in the form of product engineering and data science resources.
Finally, we have a strong track record of executing on accretive M&A transactions and less than four months into our history as a public company. We've continued to do so.
Now I'd like to get into the specifics for the first quarter of 2022, but first as a preamble when I talked about our financial performance. In every case I will be referring to pro forma financial metrics inclusive of protected <unk> results in all periods for a reconciliation of these metrics to our GAAP financials. Please.
<unk> to the reconciliation tables in the earnings release issued earlier today.
Now onto our results.
Revenue was $231 million as compared to $179 million last year with the year over year increase of 29%.
Gross profit was $61 million, an increase of 58% compared to last year's gross profit of $38 million.
The increase in gross profit was evenly split between growth in our owned and operating advertising business as well as in our subscription business.
Gross margin was 26, 2% of revenue in the first quarter of 2022 compared to 21, 4% of revenue in the prior year period.
On the advertising front, we acquired 975 million sessions to our owned and operated advertising properties in the quarter, reflecting a 32% increase year over year, our cost per session was 14th.
With a corresponding monetization of <unk> 18 per session, representing a 30% spread which is in line with where we were last year.
Our gross margin increase was driven by our subscription business, where the customer mix of our flagship total Avi product continues to shift towards renewing customers, who are at a higher <unk> relative to new customers, who are at our introductory pricing once we acquire the customer we have very little in the way of marginal cost to support them.
Subscriber <unk> increased to $20 22 in the quarter versus $18 84 last year.
As Michael mentioned earlier, while the total EV product is maturing total AD block as a new subscription product is accelerating at a pace that closely mirrors total av's trajectory at a similar appointed its lifecycle.
With respect.
Back to change in deferred revenue, which represents the delta between GAAP subscription revenue and billings, we had $5 $5 million in the quarter.
And our guidance for the year, we assumed change in deferred revenue remains flat with a similar seasonal spread through the quarters as we saw last year.
Operating expenses net of that $35 million in the quarter compared to $19 2 million last year.
The increase is reflective of our continued investment and ramp via engineering product analytics and data science head count.
As well as our transition from a private company to a public one via increased corporate and G&A head count as well as increased public company costs, such as legal and insurance with respect to public company costs. We expect Q1 to be a good baseline for what it will cost us to be a public company going forward.
As a result, adjusted EBITDA was $30 million for the three months ended March 31, 2022 versus $19 million last year, a 58% increase.
With respect to liquidity, we ended the quarter with a $42 million with $42 million of cash on the balance sheet.
Gross debt, including the revolver drawdown to finance the coupon follow acquisition was $449 million at March 31, LTM billings based EBITDA pro forma for the coupon follow on road warrior acquisitions as defined by our credit facility was $166 million, resulting in net leverage ratio of 245.
Times.
Finally guidance.
We are estimating Q2 revenue to come in between $223 million and $233 million, representing 11% growth at the midpoint. We are estimating Q2 gross profit to come in between $67 million and $73 million, representing pro forma growth of 25% at the midpoint and we are estimating Q2, adjusted EBITDA to come in between $36 million in <unk>.
$38 million.
Our Q2 guidance is reflective of a tough year over year comp versus last year or the subscription business generated a large sequential increase in gross profit in Q2 with the customer base hitting an inflection point with respect to renewals.
Combined with a digital additional forecasted marketing spend this quarter to accelerate the acquisition of customers for the total AD block product once we anniversary the Q2 comp we expect to be back to strong growth trends and for the full year. We are reaffirming the previous guidance. We released at the end of March with revenue of 1 billion and adjusted EBITDA of one.
<unk> hundred $74 million this.
This implies approximately 45% growth in the second half of 2022 versus the prior year, the majority of which is organic growth.
On liquidity, we expect to use our cash flow generated from operations towards amortization payments on our credit facility due over the remainder of the year as well as to pay down our revolver.
We are also due to pay another $21 5 million of deferred upfront purchase price payments for coupon follow.
We also paid approximately $5 million for answers dot com, including transaction costs, which we closed last week.
With that I'll come to the end of my prepared remarks. Thank you for joining us today and now let's go to questions.
First question comes from the line of Tom Forte with D. A Davidson.
Doing much on connected TV right now primarily because we like to really.
Enter markets when there is more sophisticated.
Technology to kind of track performance and we're not seeing that yet.
<unk> TV.
When those tools are there I expect that we'll be entering there as well.
But some of the newer emerging areas.
We're starting to figure out take tulloch.
She has been growing pretty pretty nicely for us and really wherever there is a pocket of people that want to buy things, that's where we're going to be.
<unk> like the Internet pretty heavy on Google and so we're going to be buying a lot of traffic from Google.
And then for my follow up question, you had talked about privacy I think privacy is very important right now when you look at the digital advertising landscape apples efforts to emphasize privacy seemed to be accretive.
Are you still with US your line getting you did on year end.
Okay.
We have lost connection with Tom Forte.
Go to the next question comes Schweitzer.
With Evercore ICI.
Please proceed with your question.
Okay. Thank you.
I guess my question is on the second quarter first quarter performance and the full year guide.
If possible, we'd love to hear your thoughts on what.
The makeup of your full year guide and what assumptions are baked into getting to your full year guide.
All the disclosures of how much.
Expecting from the acquisitions for EBITDA and revenue, but outside of that to the extent.
I'm not sure if macro impact is embedded in how you've thought about that and then.
How did you did.
The similar question on first quarter performance.
How did.
How did your results come.
Compared to your internal expectations for the first quarter. Thank you.
Sure. Thanks, Thanks for the thanks for the question.
I was just answering that in order.
In terms of in terms of our performance for the full year Guide you see in the earnings release, we affirmed our guidance from where we were at the end of March when we release, our FY 'twenty one guidance.
The makeup of how we're seeing the year come together has basically stayed in line with where we were six weeks ago, which is why we are reaffirming guidance the beginning of Q2.
John .
The way that we had anticipated.
Again, seeing strong growth on the advertising and the subscription portions of our business with that.
Completion of the acquisition of protected.
I think most importantly, we spent a lot of last year in investment both in terms of head count and resources on our platform as well as investing in marketing initiatives and new channels, and we're really expecting to see that.
Manifest itself in gross profit in our business, which is why the fee.
And are projecting very nice growth rate, even absent even absent the acquisition on an organic basis still seeing very strong growth year over year.
With respect to the first quarter came in in line, Yes, we didn't provide Q1 guidance. When we released our when we released our financials given you're already at the end of Q1.
Q1 came in line with where we would expect to specifically when it comes to gross profit and EBITDA.
Okay. Thank you.
Yes sure.
Sure.
Quick follow up to that.
We came in line, but also when we understand the importance of kind of our first few quarters out of the gate.
Making sure we don't disappoint our investors so when we look at our full year guidance, we would.
We feel pretty confident.
And the numbers, we put out there and hopefully given ourselves some room to.
Incremental marketing when the opportunities arise.
Okay. Thank you Michael.
Sure.
Okay.
Thank you for your questions right that there are currently no further questions registered as a brief reminder, it is star one on your telephone keypad.
Our next question comes from the line of Dan <unk> with benchmark Dan. Your line is now open.
Great. Thanks, sorry jumping around here.
Just a couple of things.
Firms.
Coupon Paolo.
The integration, how we should think about on a little late some economies contribution result, obviously you guys had given sort of the annual.
Contribution in the guide, but just incrementally.
Potential areas of upside I know Michael in your prepared remarks, you talked about.
Integration challenges being a larger company, obviously a super updates.
And we've seen a lot of other larger players takes out is pretty logical and there seems like there's a lot of cross pollination between that business and your other segment. So if you could just provide a little bit more color.
Thoughts around that and sort of waning.
Mike here from you, we're not maybe specifics, but when we might hear from you directionally about some of the additional opportunities for that acquisition could provide.
Yes sure. Thanks for the question. So regarding coupon follow I've mentioned there are so many opportunities we're trying to take the best ones.
Our thesis when we acquired the business, which is prove that <unk> is really in three areas.
The first one being our ability to.
By traffic user ramp to increase increase the traffic to coupons follow.
Profitable way, that's an area where it is.
In our wheelhouse and we are I would say early stages in that one.
We remain very confident in our ability to do that.
The bigger one would be integrating coupon followed throughout the rest of our properties.
And what I mean by that is when you go to one of our search engines I start page.
<unk> Dot com there is a lot of queries happening on those search engines in which people are looking for things like coupons and promo codes and retail various retailers, we think theres going to be a really good opportunity to incorporate all of the.
The database so they had a coupon follow of those promos at coupon codes throughout the rest of our properties.
Going to get more traffic too.
Coupon solow is going to make our existing properties more relevant and useful to users. So that's a pretty straightforward opportunity for us as well.
<unk> working on that.
It involves some technical integration and basically having coupons follow.
As the Apis.
To integrate that showed our property so thats ongoing.
Third what I would call almost.
The outlier opportunity that we think could have some huge upside.
That would be in the cashback area.
So coupon follow as suggest starting to rollout.
Cashback offerings at scale, we think that is a really interesting offering to integrate throughout our subscription business.
So as we are.
Potentially again offered cashback as a standalone service and also offer offer cashback shopping.
Potentially in our existing subscription products. We think we can our goal will be to turn that into one of our other hip products, but also by offering more products more product offerings in our existing subscription products.
Increased retention on those products. So so when I talk about coupon follow are being.
Kind of company and having the kind of asset.
As soon we can dispersed throughout our entire company I think thats, a pretty good indication of where we're seeing the opportunity.
Got it that's super helpful and speaking of the subscription side can you give us a little more color just on cadence of kind of new products I know.
You want to hold that a little bit closer to that.
But just in terms of how we should be thinking about timing of rollout.
The testing and wireline.
I assume the answer to this is it kind of doesn't matter, but obviously people think oh, the recession that eight fewer subscription products, but your ramp platform. Obviously allows your guidance.
To sort of participate in the customer acquisition channels in a much different way than other players in the space. So just any thoughts that you have on impact attack or growth in subscription just given the kind of the back given the macro backdrop.
Yes, we wouldnt view kind of any macro conditions really affecting our subscription products, we're not talking about a high ticket purchase we're talking about products in which people for.
On average $10, a month or less youre getting huge value.
So we haven't seen that I know the protected businesses.
Their previous businesses had been doing subscription products for 15 years and have been through the various economic cycles.
Really never saw the effective if any.
<unk> economic cycle affecting their business in any material way.
On the cadence.
But I would suspect is that certainly.
Every six months and we would shoot for sooner.
Quicker than that would be rolling out new subscription products, we do have a new product on the horizon that.
That will be rolling out.
Certainly by the time, we report.
Next quarter there.
We've got pretty high hopes for.
So I think youll see that cadence continue not all of the products are going to be heads. So.
Our goal as we rollout the rollout products and we think are going to be really successful and we don't we don't have a 100% hit rate on that.
But what we are going to see is the <unk>.
Prior to going out and then from those products and big ones are going to emerge and kind of as we mentioned total a block.
To deliberately are growing and comparing the when we launched our total they need product fiber.
Five or six years ago and looked at the cadence of the subscriber growth on there and I overlaid our total Avalon product.
Over the last six to eight months in.
There is a remarkably similar graph.
And so that's just giving us the confidence that hip product number two is there and now over the next few years, we're going to go three through 10.
Sure.
Got it that's really helpful. Thanks for all the color and look forward to more color on the bundling in the future. Thanks Michael.
Yes, I'm sorry.
Thank you thanks, Ken.
Thank you Tom is back on its feet still wanted to ask is privacy related question.
Yes, absolutely Amit your line is now open again.
Great Michael apologies for the technical difficulties on my part.
You had mentioned privacy.
Apple's efforts on privacy and disrupting digital advertising.
General So what is your philosophy and how is it that you havent been negatively impacted sorry, what Apple has been doing.
So two things that are that are good for us in terms of kind of apples.
Related privacy related initiatives and then also wanted to Google eventually is going to be getting too.
They keep pushing that back, but I'm sure they're going to be coming so first of all what Apple and we mentioned this on all of our calls today.
And whatnot.
They're really trying to do is eliminate the.
The intrusive use of third party cookies, and really intrusive data gathering on the phone on mobile phones and.
And so that's what consumers hate and Thats what.
We don't think has a lot of long term longevity. So we applaud the moves that Apple is making and also the moves that we're making in the future. The good thing about our advertising platform.
Don't make use of that kind of third party data.
In any material way, we're much more focused on intent based advertising and contextual. So we're trying to find what people are searching for.
And we're doing advertising based on people searches and we're also day advertising contextual based advertising that's the kind of advertising that really all of digital is moving towards <unk>.
Just happened to be ahead of the game.
And so so the privacy changes are actually advantageous to us.
Because it favors the kind of marketing we do on a more macro sense our system. Our platform does really really well also when there is disruptions.
And the advertising landscape.
What I mean by that is if you look at the last few quarters since Apple rolled out as changes are good example of a segment thats been disrupted is mobile app download advertising so advertising designed to.
Get people to download mobile apps.
That was in large part to pretty heavily dependent on really kind of intrusive data gathering.
So when the overall market is disrupted.
Gives us the opportunity to step in and purchase more more traffic.
At reasonable prices, so so we like disruption.
We sell through that and you can kind of see that in our results. So.
We haven't been affected at all.
But privacy related changes and so if anything we would.
We would encourage Google to speed up its changes that theyre going to be rolling out we think it's good for consumers.
But also specifically geared for system one.
Okay.
Wonderful. Thank you Michael Thank you Tracy.
Thanks, Tom appreciate it appreciate the question.
Thank you for your question question Thomas It is now my pleasure to turn the conference back to Michael.
Michael Glenn for closing remarks, Michael Please proceed.
Thank you. So first of all just to wrap up our first earnings call I want I want to thank everyone for your interest in the system one.
We think we've got a really exciting story and we know we have an opportunity for investors to capitalize on our business, it's really fast growing and highly profitable.
Particularly in the current landscape and which we believe investors are going to be looking for.
SaaS not only fast growing companies, but companies that have reliable cash flow and theres not that many of them out there we have to be one of the few in the technology World.
So we've got a really sustainable competitive advantage with our ramp platform and our business is diversified so.
With that.
We think that we're the company that you shouldnt be betting on we're betting on ourselves.
And we welcome you coming in as long term investors. So so thank you and with that I'll conclude the call.
Sure.
This concludes the system one conference call. Thank you for your participation you may now disconnect your lines.
Yeah.