System1, Inc.

over to Kyle Osgard, Vice President of Finance. Kyle, you may begin your conference.

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, Trudevesh Kadambi. A recording of this conference call will be available on our Investor Relations website shortly after this call has ended. I'd like to take this opportunity to remind you that during the call, we will be making certain forward-looking statements. This includes statements relating to the operating performance of our business, future financial results and guidance, strategy, long-term growth, and overall future prospects. We may also make statements regarding regulatory or compliance matters. These statements are subject to known and unknown risks and uncertainties that could cause our actual results to different materially from those projected or implied during this call. In particular, those described in our risk factors, including our annual report on form 10 K for the fiscal year 2023 filed on March 15th, 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 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. 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 30th, 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.

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 fourth quarter 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 one by one. First, as we previously announced, We sold our total security subscription business towards the end of the quarter, and I'll talk about that in more detail in a moment. Importantly, though, we also saw solid execution in our remaining advertising business on a number of fronts. As a result, we believe we are set up well for what we hope to be a secular reacceleration of spending and 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 million in cash, the redemption of 29 million of our outstanding shares, and the termination of certain earn-out payments associated with our D-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. 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 for us. We had a low cost of capital during that low interest rate environment, and spending $1 upfront to make $3 over the long term 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. 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 one. From a financial perspective, the sale of total security provided us with approximately $240 million of cash. This cash has allowed us to significantly deliver our remaining business. The total security sale also included the redemption of 29 million shares held by the total security management. 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 in 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. 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 of System 1 since we founded the company a decade ago. Except for the last two years, it was our only business, and so by divesting Social Security, we are returning to our core roots. The advertising business has two 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. 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 it's 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 a system where to monetize for them. 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 partners. The scale of our own business gives us very good insights into the challenges and opportunities faced by 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&O and the network businesses is the launch of our Ramp Partner Console, which we publicly announced last August. 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&O business. As a result, both our paid O&O business and our network business experienced solid growth in Q4. Our network business grew 37% year over year, and our paid O&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. 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, three of our top 10 partners were new to the network in the year, and the remaining seven 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. Instead, they are mostly powered by consumers direct navigating to these destinations or reaching them via non-paid organic search results. Our Vanna 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 and year. In addition to the launch of the RAMP Partner Console, we've also been highly focused on integrating AI into 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. And we believe that we are just beginning to scratch the surface on this front. For example, in our own businesses, we've been utilizing AI machine learning tools to build optimized by 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 five times as many campaigns per week per buying resource than we were able to achieve just six 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. 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 sheets, We're anticipating some tailwinds from market changes as Google deprecates cookies within its industry-leading Chrome browser. 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. 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 relationships with our network and advertising partners. 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. 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 out to Triti to discuss the quarterly results in more detail, as well as our Q1 2024 guidance. Take it away, Triti. Thanks, Michael.