System1(SST) - 2023 Q4 - Annual Results

Executive Summary System1 reported strong Q4 2023 results exceeding guidance, with full-year revenue of $402.0 million and management expressing optimism for 2024 Fourth Quarter 2023 Financial Highlights System1 reported Q4 2023 financial results exceeding guidance, showing QoQ growth in Revenue, Gross Profit, and Adjusted EBITDA Fourth Quarter 2023 Financial Highlights (QoQ Change) | Metric | Q4 2023 Value | QoQ Change | | :-------------------- | :------------ | :--------- | | Revenue | $96.1 million | Increased 9% | | Gross Profit | $25 million | Increased 1% | | Adjusted Gross Profit | $37.5 million | Increased 1% | | GAAP Net Loss | $25 million | Decreased 2% | | Adjusted EBITDA | $10 million | Increased 24% | Fiscal Year 2023 Financial Highlights For FY 2023, System1 reported total revenue of $402.0 million and Adjusted EBITDA of $29.2 million, reflecting overall performance Fiscal Year 2023 Financial Highlights | Metric | FY 2023 Value | | :-------------------- | :------------ | | Revenue | $402.0 million | | Gross Profit | $103.4 million | | Adjusted Gross Profit | $153.3 million | | GAAP Net Loss | $111.3 million | | Adjusted EBITDA | $29.2 million | Management Commentary Management expressed satisfaction with Q4 results, citing strategic focus, AI integration, and a streamlined cost structure for 2024 optimism - Q4 results exceeded guidance for Revenue, Adjusted Gross Profit, and Adjusted EBITDA despite a challenging online advertising environment[4] - Optimistic about 2024 and beyond, expecting benefits from increased advertiser demand, deprecation of third-party cookies, AI integration in RAMP, resurgence in Partner Network, and streamlined strategic focus after Total Security sale[4] - Entered 2024 with a streamlined cost structure, a capital-efficient advertising business, and substantial liquidity, with a focus on investing for growth and strategically deploying capital to reduce leverage[4] Business Updates & Outlook System1 completed a major divestiture and debt reduction, issued Q1 2024 guidance, and detailed its RAMP-driven customer acquisition platform Fourth Quarter 2023 and Subsequent Business Highlights System1 divested Total Security for $240 million, retired 29.1M Class A shares, repaid $155 million in debt, and introduced product enhancements - Sold subscription business segment (Total Security) for $240 million gross cash and retired approximately 29.1M Class A shares[10] - Successfully completed a modified "Dutch auction" tender offer in January 2024, repurchasing $63.7 million of term debt for $40.9 million, contributing to a total debt repayment of $155 million between November 2023 and January 2024[10] - Introduced new enhancements to Owned & Operated product offerings, including a "proof of delivery" feature for the RoadWarrior app, and announced a strategic partnership to power Ecosia's search results[10] First Quarter 2024 Guidance For Q1 2024, System1 anticipates revenue between $82 million and $84 million, with Adjusted EBITDA projected between $(2) million and $(1) million First Quarter 2024 Guidance | Metric | Range (Millions) | | :-------------------- | :--------------- | | Revenue | $82 - $84 | | Gross Profit | $15 - $17 | | Adjusted Gross Profit | $28 - $30 | | Adjusted EBITDA | $(2) - $(1) | - Expects interest expense in the range of $7.5 million to $8.0 million, depreciation and amortization expense in the range of $20 million to $21 million, and acquisition and restructuring costs in the range of $2.0 million to $2.5 million for Q1 2024[7] About System1, Inc. System1, Inc. operates an advanced Responsive Acquisition Marketing Platform (RAMP), an omnichannel, omnivertical platform built for a privacy-centric world - System1 operates an advanced Responsive Acquisition Marketing Platform (RAMP) that is omnichannel, omnivertical, and built for a privacy-centric world[9] - RAMP facilitates the building of powerful brands, the development and growth of privacy-focused products, and the delivery of high-intent customers to advertising partners[9] Financial Statements This section details System1's Q4 2023 and FY 2023 statements of operations and consolidated balance sheets Unaudited Condensed Statements of Operations (Q4 2023 vs. Q4 2022) In Q4 2023, System1's revenue decreased to $96.1 million, with an operating loss of $(19.1) million and a net loss of $(27.6) million Unaudited Condensed Statements of Operations (Q4) | Metric (in thousands) | Q4 2023 | Q4 2022 (As Revised) | | :-------------------- | :------ | :------------------- | | Revenue | $96,120 | $140,071 | | Operating income (loss) | $(19,078) | $(45,720) | | Net loss from continuing operations | $(25,426) | $(29,801) | | Net loss attributable to System1, Inc. | $(27,628) | $(32,751) | Consolidated Statements of Operations (FY 2023 vs. FY 2022) For FY 2023, System1's revenue was $402.0 million, with an operating loss of $(86.0) million and a net loss of $(227.2) million Consolidated Statements of Operations (FY) | Metric (in thousands) | FY 2023 | FY 2022 (Successor, As Revised) | | :-------------------- | :------ | :------------------------------ | | Revenue | $401,971 | $612,229 | | Operating income (loss) | $(85,989) | $(457,683) | | Net loss from continuing operations | $(111,258) | $(384,363) | | Net loss attributable to System1, Inc. | $(227,221) | $(330,392) | Consolidated Balance Sheets (Dec 31, 2023 vs. Dec 31, 2022) As of Dec 31, 2023, System1's total assets decreased to $605.5 million, cash increased to $135.3 million, and total liabilities decreased to $436.2 million Consolidated Balance Sheets | Metric (in thousands) | Dec 31, 2023 | Dec 31, 2022 (As Revised) | | :-------------------- | :----------- | :------------------------ | | Total assets | $605,470 | $1,160,456 | | Cash and cash equivalents | $135,343 | $8,905 | | Total liabilities | $436,155 | $689,785 | | Long-term debt, net | $334,232 | $399,504 | | Total stockholders' equity | $169,315 | $470,671 | Non-GAAP Financial Measures This section defines and reconciles System1's key non-GAAP financial measures, Adjusted Gross Profit and Adjusted EBITDA, for Q4 and FY 2023 Definition and Limitations This section defines Adjusted Gross Profit and Adjusted EBITDA as non-GAAP measures, outlining their use by management and their inherent limitations - Adjusted Gross Profit is defined as gross profit plus depreciation and amortization related to cost of revenues[15] - Adjusted EBITDA is defined as net income (loss) before interest expense, income taxes, depreciation and amortization expense, stock-based compensation, deferred compensation, management fees, minority interest, restructuring charges, impairment, and certain discrete items[15] - These non-GAAP measures are used by management to measure operational strength and performance but have limitations, including potential non-comparability with other companies and not being a substitute for GAAP measures[15][16][18] Adjusted EBITDA Reconciliation (Q4 2023 vs. Q4 2022) Adjusted EBITDA for Q4 2023 was $10.0 million, a decrease from $14.3 million in Q4 2022, despite a lower net loss Adjusted EBITDA Reconciliation (Q4) | Metric ($ in millions) | Q4 2023 | Q4 2022 (As Revised) | | :--------------------- | :------ | :------------------- | | Net loss | $(25.4) | $(29.8) | | Income tax benefit | $(8.8) | $(15.3) | | Interest expense | $12.0 | $9.7 | | Depreciation and amortization | $19.7 | $19.1 | | Impairment of goodwill | - | $26.6 | | Stock-based compensation & distributions to members | $5.8 | $6.9 | | Acquisition and restructuring costs | $3.3 | $6.2 | | Adjusted EBITDA | $10.0 | $14.3 | Adjusted EBITDA Reconciliation (FY 2023 vs. FY 2022) For FY 2023, Adjusted EBITDA was $29.2 million, a significant decrease from $68.4 million in 2022, reflecting various adjustments to net loss Adjusted EBITDA Reconciliation (FY) | Metric ($ in millions) | FY 2023 | FY 2022 (Successor, As Revised) | | :--------------------- | :------ | :------------------------------ | | Net loss | $(111.3) | $(384.4) | | Income tax benefit | $(20.4) | $(108.7) | | Interest expense | $48.7 | $31.6 | | Depreciation and amortization | $78.4 | $69.5 | | Impairment of goodwill | - | $372.7 | | Stock-based compensation & distributions to members | $21.2 | $22.2 | | Acquisition and restructuring costs | $14.7 | $26.6 | | Adjusted EBITDA | $29.2 | $68.4 | Adjusted Gross Profit Reconciliation (Q4 2023 vs. Q4 2022) In Q4 2023, Adjusted Gross Profit was $37.5 million, down from $43.0 million in Q4 2022, reflecting decreased revenue and gross profit Adjusted Gross Profit Reconciliation (Q4) | Metric ($ in millions) | Q4 2023 | Q4 2022 (As Revised) | | :--------------------- | :------ | :------------------- | | Revenue | $96.1 | $140.1 | | Less: Cost of revenues (excluding D&A) | $(58.6) | $(97.1) | | Less: Depreciation and amortization related to cost of revenues | $(12.6) | $(12.4) | | Gross profit | $24.9 | $30.6 | | Add: Depreciation and amortization related to cost of revenues | $12.6 | $12.4 | | Adjusted Gross Profit | $37.5 | $43.0 | Adjusted Gross Profit Reconciliation (FY 2023 vs. FY 2022) For FY 2023, Adjusted Gross Profit was $153.3 million, a decrease from $173.4 million in 2022, consistent with overall revenue decline Adjusted Gross Profit Reconciliation (FY) | Metric ($ in millions) | FY 2023 | FY 2022 (Successor, As Revised) | | :--------------------- | :------ | :------------------------------ | | Revenue | $402.0 | $612.2 | | Less: Cost of revenues (excluding D&A) | $(248.7) | $(438.8) | | Less: Depreciation and amortization related to cost of revenues | $(49.9) | $(45.6) | | Gross profit | $103.4 | $127.8 | | Add: Depreciation and amortization related to cost of revenues | $49.9 | $45.6 | | Adjusted Gross Profit | $153.3 | $173.4 | Legal & Risk Disclosures This section provides cautionary statements regarding forward-looking information and outlines key risks and uncertainties impacting System1's business operations Cautionary Statement Regarding Forward-Looking Statements This section cautions readers on forward-looking statements, noting actual results may differ due to risks and uncertainties, and advises against undue reliance - This press release includes "forward-looking statements" regarding System1's future results, expectations, hopes, beliefs, intentions, or strategies, identified by words like "anticipate," "believe," "expect," "intend," "may," "plan," "project," and similar expressions[10][11] - Actual financial results or operating performance may differ materially from forward-looking statements due to a number of risks, uncertainties, or other assumptions, some of which are beyond the company's control[12] - Readers are advised to review risk factors in SEC filings (Form S-4, 10-K, 10-Q/As, 8-K) and should not place undue reliance on these statements, as System1 does not undertake any obligation to update or revise them[12][14] Risks and Uncertainties Key risks include maintaining partner relationships, utilizing first-party data, RAMP performance, competition, acquisitions, financing, compliance, and intellectual property protection - Ability to maintain key relationships with network partners and advertisers, including monetization arrangements[13] - Ability to collect, process, effectively utilize, and safely store first-party data obtained through services[13] - Performance of the Responsive Acquisition Marketing Platform (RAMP) and ability to adapt to changes in customer demand[13] - Ability to compete with existing and new competitors, successfully source and integrate acquisitions, and raise future financing on market terms[13] - Changes in applicable laws or regulations impacting the business and the ability to maintain compliance, as well as the ability to protect intellectual property rights[13] Company Information This section provides contact information for investor relations inquiries Investor Relations Contact Investor inquiries can be directed to Brett Milotte at ICR, Inc - Investor contact: Brett Milotte, ICR, Inc., Brett.milotte@icrinc.com[27]