I think we're going to get started. Good afternoon, everyone. Thank you all for joining us today. I'm Maria Ripps, Internet Analyst at Canaccord Genuity. And it's my pleasure to introduce Tridi Kidambi, CFO of System1. Tridi, thank you so much for joining us today.
Thank you so much. Great to be here.
Great. So just to start off, can you maybe share an overview of System1 today? And what is the company trying to solve? And what do you do differently from your competitors in the AdTech space?
Sure. So System1 is a customer acquisition platform. Specifically, we go to market with what we call RAMP, our Responsive Acquisition Marketing Platform. We're one of the largest performance marketers and customer acquisition spenders in the market right now. So anywhere between $400-$450 million a year of marketing spend is what we deploy. And our platform is omnichannel and omnivertical. So we can plug into basically wherever consumers are on the internet. And we can advertise across any kind of advertising vertical. Specifically, what we are doing is we're delivering customers to advertisers. So through our relationships, primarily with Google and Microsoft, we have access to large advertising budgets. And we're delivering them customers.
Great. So how would you describe the current state of the online advertising market today with respect to the macro backdrop, competitive dynamics, et cetera?
Sure. So I think from a macro backdrop, it's been a little bit in the wilderness for the last year and a half. I think kind of towards the tail end of Q3 of last year and Q4, we started to see some stability. I wouldn't say we're back to where we were in early 2022, but at least we're not seeing the declines that we saw before. In terms of the competitive dynamics, I think a phrase I've used in the past is constrained flux. So on the constrained side, there's a lot of the walled gardens, the big ones. So Meta, Google, Amazon are driving and getting a large lion's share of the advertising spend. And that first-party data component is a huge piece of that. And then also there are regulatory pressures, GDPR around privacy. And then also just companies themselves taking the initiative there.
So I know Google has kind of walked back the cookie tracking or removing cookies. But that momentum is still there. And on the plus side, I think within those constraints, we're seeing a lot of new advertising models, a lot of innovation on the smaller side, which is really kind of driving the market forward.
Yeah, so with pretty intense competition in the digital advertising space across mobile, CTV, social influencer marketing, I guess what initiatives do you focus on to capture market share? And what would you say gives you an edge over some of your competitors?
Yep. So probably the biggest edge for us over our competitors, and I didn't mention this earlier when I was talking about the business, was we have a pretty large network of owned and operated properties ourselves. So we have over 40 properties, some you may have heard of, like HowStuffWorks, Startpage, MapQuest, and also CouponFollow, which might be the largest kind of online couponing site in the U.S. right now. So we have a large amount of first-party data. And that's also magnified by the amount of marketing spend that we're putting into the market as well. So those two things give us a pretty nice data advantage with our network. It allows us to spend profitably at scale.
And then that coupled with just our platform and how much of it has been specifically over the last two to three years automated and algorithmically driven lets us scale very quickly.
Got it. Got it. So Meta started to implement more stringent restrictions on the usage of sensitive, lower-funnel conversion data by certain health and wellness advertisers. Do you expect these changes to impact the efficiency of your advertising spend across those verticals? And if so, what are some of the ways you're maybe looking to mitigate the impact?
Yep. So it's really early. I think you mentioned, too, kind of January 1 is when they started doing it. For us, actually, we don't use cookies or any personal information in any of the advertising that we do. And so we're primarily contextual, even on Facebook or on Meta, excuse me. So for us, really little to no impact. And again, data is early. But from what we've seen, it's actually been an opportunity for us. So there definitely has been some disaggregation of spend in those verticals, specifically on Meta, that we see in terms of what we're paying for traffic. But again, for us, and we've been, sometimes it's better to be lucky than smart. But we've been lucky in that we've kind of gone away from PII in terms of, and cookies in any of our advertising so far.
Got it. So sticking with social here for a minute, is there anything you can share with regards to how significant our channel TikTok is for your platform? And what are your thoughts on the potential impact on your business should a ban be implemented?
Yeah. So this is another one where, again, I'd say we've been lucky rather than smart. So for us, domestically, TikTok is not a big source of traffic. It's gathering a large share of kind of passive voices. People feel like they need to be on TikTok in the U.S. And so I'd say kind of the spend there maybe is a little bit more than maybe ROI-driven in the U.S. So it's just been expensive. It's actually been a pretty big driver of international growth for us. So we haven't talked about TikTok specifically. But international has been a growth driver in general. So in Q3 of 2024, it was roughly 35% of our revenue versus 25% of the year prior. So again, we're lucky in that I think so far that the ban wouldn't impact us domestically.
Got it. So why don't we stay on the topic of regulation and touch on the multiple trials that are happening with Google now? So we've seen the recommendation from the DOJ involving the divestiture of Chrome among other recommended actions. What do you think is the likely outcome of these trials? And how do you see those outcomes impacting both your platform and the broader ecosystem?
Yeah. I'm not a lawyer. So I'll footnote anything I say with that. But I think if you think about the likely outcomes, I think they generally will fall into two buckets. So structural. So are they forced to divest Chrome or some of the other ad tools in their platform? I think that can really be kind of a be careful what you wish for type scenario. So one of the advantages of Chrome to publishers and advertisers alike is that it's very integrated into the ad stack. And so regardless of potential anti-competitive or alleged anti-competitive behavior, publishers are able to save a lot of money by the fact that that's all tightly integrated. And then secondly, how do you force Google to divest something like Chrome? Who's a buyer for that? And are you just creating another monopoly in another browser somewhere else?
So I think devil's in the details there. And then behavioral modification. So some of the stuff that's been floated has been more transparency in data, pricing and auctions, search data, and whatnot. We think while those would be probably pretty hard to enforce, would be good for the overall ecosystem in general. Our view is the more competition, the better in general. And that's one of the benefits of the RAMP platform is we can plug into wherever the users are and wherever the monetization is. I think all that being said, just by nature of the trial process, what'll be kind of definitely an appeals process for whatever the decision is, we're talking medium to long term at best.
In the interim, and I think historically, Google has been a great partner for us and looking forward to continue to work and innovate with them in the space.
Yeah. That makes sense. So, you mentioned first-party data, and it's becoming increasingly important in the digital ad ecosystem. How does this play a role in the position that you sit in?
Yeah. It's definitely a competitive advantage for us. And I think I mentioned before kind of our large owned and operated footprint. Again, we've been lucky with the acquisitions that we've done in terms of the thesis on the synergies. But certainly now having that large pool of data, being able to drive traffic to them is a pretty big competitive advantage and moat for us. And so that first-party data internally within our own walled garden, coupled with the contextual kind of targeting that we do, we think really sets us up well in the long term in terms of wherever privacy trends go, wherever regulatory trends go, we feel like we're set up to succeed certainly in the short term and definitely in the medium and the long term.
That makes sense. So it feels like the market is sort of warming back up both in terms of consolidation as well as fundraising and perhaps new offerings. How does this impact your approach to corporate strategies and investment priorities?
Yeah. I mean, we've definitely seen I think everyone has kind of seen kind of the M&A markets warming up a little bit. I think some of the election results have opened some of that up as well. For us, I think we've always been in market, looking to take advantage of certain situations. And one of the things that we've been focused on over the last kind of 18 months and will continue to be a focus through 2025 is really rationalizing our operating expense and the way our P&L is structured, both from an operations perspective to allow us to if there's an opportunity to acquire, do so, and integrate them quickly. So to have kind of the flexibility in our organization to do that. And then also just creating kind of expense capacity to take on something should it arise.
That makes sense. I want to ask you about AI, the topic that everyone's talking about these days. How is AI impacting how you're doing business? And where do you see the impact the most? Is it kind of on the product side and the revenue side or on the cost optimization side?
Yeah. I think for us, it starts on the product side. So specifically, it's a multiplier effect on the ability of our engineers and kind of how much one engineer can do, one team of engineers can do with an AI assist. And then for us, in terms of scale, one of the nice things about our model is our OPEX is pretty much fixed. And RAMP is set up to grow. It can handle kind of four to five times the volume that it does right now before there's anything extensive that needs to be done. And so one of the things that AI has done specifically on campaign creation for customer acquisition. So we can take one campaign.
We can replicate it across different customer acquisition channels, different creative, different editorial, and really kind of now manage hundreds of thousands of campaigns with one buyer in our network versus before that might have been limited to 100 or 1,000 campaigns. So definitely on scale, our ability to kind of test and ramp up our customer acquisition operations. And then definitely in terms of just how we're able to the productivity on our OPEX side on personnel.
That makes sense. I have another question on AI here. And then we'll talk about your operating model. But before I do that, I just want to see if there are any questions from the audience if anyone wants to ask a question? Go ahead.
You said it's going to take years for kind of Google to go through the trial process. But could more competition actually be a good thing for you guys? I mean, if more players are in the market, doesn't that mean that more will be able to use your services? Or how do you kind of view that?
Yeah. I think that's right. And so our view, and I don't know if everyone could hear the question, is more competition better for us in the marketplace? I think definitely yes. And so from our perspective, we found kind of volatility in the marketplace within kind of so long as macro advertising demand is stable, if there are reallocations of where that spend goes from advertisers across different players, that's been really good for us. It creates more kind of opportunities in terms of pricing, in terms of what we can acquire traffic at and then monetize it. So absolutely, yes. Thanks for the question.
Any other questions? All right. So another question on AI for you. So in addition to enhancing your targeting and creative capabilities, as you highlighted, is there any opportunity to leverage AI to improve your efficiency in qualifying consumers on your own websites?
Yeah. I think we're still scratching the surface of it on the monetization front. So I think there's really kind of twofold. One is on pure monetization when the consumer kind of hits our owned and operated page and we're kind of deciding what offer to show them using AI for dynamic landing pages. Dynamic content is something that we haven't really scratched the surface on, but we think could be a big opportunity. I think the other big thing with AI is on compliance and fraud detection. So what always happens in online advertising is as the technology gets better, so does the fraud. And so one of the things we're highly focused on and what we think is also another competitive advantage for us is compliance and fraud detection.
So I would say you can't get as big as we've gotten with Google if you're not doing a good job on delivering quality consumers to advertisers because the auction won't let you grow otherwise. So that's, I think, a big opportunity for us as well.
That makes sense. So let's spend a couple of minutes talking about your operating model broadly. How should investors think about long-term growth of the business relative to the digital advertising space? And how would you rank key growth drivers over the next few years?
Yeah. So I think at a high level, kind of the floor of the growth rate should be kind of growth in online advertising in general. So we'll grow with the consumers and with spend. So we've had the benefit of a lot of tailwinds historically from traditional advertising, call it TV and radio, moving to online. And then within online, we've been highly focused on the performance advertising piece, which has traditionally been kind of the largest growing and the best ROI for consumers. I think AI is going to have a lot to say about that. So there are definitely new channels that are growing. You mentioned CTV earlier. Social is obviously huge. And then I think we're still in the very early innings of how AI will work.
But I think we're highly confident that kind of as one, performance advertising and search advertising will still be a large piece of the pie. And we'll continue to grow along with that. But certainly as monetization channels within AI grow, we expect to participate in that at what should be the same growth rate as AI growth. CTV has been one we haven't really scratched the surface on yet. I think from a product perspective, CTV is just not there in terms of attribution and just really measuring kind of ROI on a by-click basis. But I think that's going to come maybe the end of this year, early 2026. And when it is, I think RAMP is ready to play in that space as well.
Got it. What's your view on M&A as one of the growth drivers?
Yeah, so I think for System1, we've traditionally been an M&A-heavy company. We've done, I think, nine or 10 acquisitions in our history from founding in 2013. We've been pretty successful, so one of the nice things about our platform and the way that we're organized is it's very easy to plug in new technologies, whether it's specifically monetization capabilities or customer acquisition capabilities as well, so I think nothing on the horizon yet, but I think as the M&A markets ramp up a little bit, that'll be something we'll be looking at, so I think both we have a flexible balance sheet at this point, so we can be active kind of on a small scale, and then certainly things that are transformational, we're always willing to take a look at.
I think you have a pretty broad exposure to a lot of different verticals. So as you look at your verticals, are there any parts of the business that you think could be growing faster or slower? I mean, obviously, there are changes with health that are happening now. But it looks like that's not going to impact you that much. Just any color from the vertical exposure.
Yeah. Not really. So we've really kind of outsourced our sales process, if you will, to Google and Microsoft. So generally, where the larger online advertising spend is distributed across verticals, that's generally kind of replicated in what we see on our side. I think for us, it's probably around channels. So I would think kind of, as I mentioned, as the CTV product matures, that's probably kind of a nice growth engine for us in the medium term. I think AI just in general is moving faster than any other channels that we've seen. So I suspect kind of however that monetization matures and grows, it'll probably be quicker than that. I'd imagine some component of AI on the monetization side ends up being a big piece of what we do probably as early as the end of this year, if not 2026.
Got it. That makes sense. And how should we think about the near-term and long-term margin profile of the business? And what's the trade-off between growth and profitability for you?
Yeah. No. Great question. So I think, for example, in Q3 of this year, our Adjusted EBITDA as a percentage of gross profit, which we think is the right kind of margin metric to look at with respect to the efficacy of RAMP, was around 27%. I mentioned kind of we've been looking at and kind of doing a lot of work on the OPEX side to make ourselves more efficient. I think in the long term, that margin profile going into the high 30s, I'd say in the medium term is kind of what we target. And that then allows us, we think gives us enough room to invest for whatever the new channels are, continue to invest in features on RAMP while also kind of harvesting cash flow. So the nice thing about our business is kind of in a steady state as gross profit grows.
There's a very high flow-through rate from gross profit down to Adjusted EBITDA. And that's something we take pride in. It's something that we've, as a business, have delivered operating cash flows going forward. So that's kind of how we think about it.
Is there an opportunity for you to expand gross margins from these levels?
Yeah. I think so. So again, that's really where, again, we're just scratching the surface on what AI can do for us on a productivity standpoint. But really, for us, on an OPEX perspective, we think about being able to sustain and maintain kind of, call it two to three extra gross profit right now with our current OPEX levels, at which point historically we've needed to make some large investments on the OPEX side to kind of up-level our ability to scale above that. I think AI really kind of lessens the need to do that going forward. And then on the monetization side, as we think about gross margins, kind of the profitability of the traffic that we acquire, we're not very highly focused on the gross margin there. So for us, it's really about generating gross profit growth.
So even if it's a lower spread, we'll always kind of take that spread to get more volume on traffic.
That makes sense. I want to pause here and see if there are any other questions from the audience. All right. So as we think about the broader digital advertising space, if you had to highlight one thing in the space that investors should keep an eye on or perhaps something that maybe investors don't fully appreciate in terms of growth drivers, what would that be?
Yeah. That's a good question. I think I go back to kind of fraud and compliance. And so I think as online advertising is growing, as AI is getting better at replicating human behavior, I think that's going to be a really big piece of the pie. And ultimately, advertisers are getting better and better about measuring ROI and wanting to see kind of a real return on their investment. And ultimately, it's going to come down to, I spent a dollar, how much did I get for that dollar from either kind of an in-session spend or a subscription? And so I think fraud detection and compliance, it's kind of always a footnote or the last slide of a deck for anyone that's out there. But I think it's going to be huge as, again, specifically as AI is getting better and better at replicating people.
Got it. I think we have just a minute or so left, and I think we have a question here.
I just wanted to ask about the growth relative to the ad market. What's the best way to think about the algorithm for growth?
Yeah. So the question was how to think about kind of System1 growth versus the ad market. So generally, well, I'll take a step back. I think depending on what data you're looking at, kind of online advertising in general, I've seen anywhere from kind of 6%-7% growth a year to you can be more optimistic and say kind of a CAGR of 15% over the next 8- 10 years. I think we would expect to index above that, call it 2%-3% kind of on the medium and long-term basis. So ultimately, our thesis is still kind of performance and ROI-driven spend is where ultimately advertisers will go. And that'll grow a little bit faster than I think overall online advertising.
I think we have a minute or so to wrap up. Is there anything that we didn't discuss, anything that you'd like to highlight for investors, maybe anything that some investors maybe don't fully appreciate about your story or the business?
Yeah. No. I mean, I think we covered a lot of it. The one thing I'll say is System1 is still very kind of our employees and our management is still the largest holders of the business, and we're highly committed and highly aligned with our investors to grow, and so I think that's a feature, not a bug, of who we are and what we do, and we have a long track record of delivering results for our investors and hope to continue to do so in the near term and the long term.
All right. Well, with that, we're out of time. Thank you so much for joining us. And thank you all for coming.
Thanks, everyone.