System1

30 November 2024
By Maynard Paton

FY 2024 results summary for System1 (SYS1):

• The positive transition to data services continues, with a new “performance culture” delivering FY platform revenue up 43%, the highest reported FY profit for seven years and a reinstated annual dividend.

• SYS1’s “unique selling proposition of predictiveness” keeps winning ad-testing clients, plaudits and attention, but remains frustratingly under-exploited for innovation testing that offers a 5x addressable market.

• The bumper 87% gross margin, record £208k revenue per employee and near-£10m cash position were counterbalanced by one-off profit gains, mediocre bank interest and hefty bonuses obscuring margin progress.

• The board’s true growth ambitions will be revealed through a revised LTIP, and I would trust the award-winning directors to retain the scheme’s £45m-£88m revenue range and reinstate a profit ‘underpin’.

• A tantalising illustrative projection of revenue doubling to £60m should be very achievable given SYS1’s “3 Reasons to Believe“, and would support an adjusted Ebitda of £18m — and possible £16 share price — if the group’s margin target is met.

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23 June 2024
By Maynard Paton

H1 2024 results and Capital Markets Day (CMD) summary for System1 (SYS1):

• A positive H1, with platform revenue up 44%, greater workforce productivity and improved cash generation leading to better-than-expected Q3/Q4 statements and the upcoming reappearance of the dividend.

• H1 progress was not perfect, and drawbacks included questionable adjustments, revenue per client seemingly stagnating and services beyond ad-testing — which offer much larger addressable markets — still losing sales and still requiring product revamps.

• Despite the higher H1 revenue, direct costs declined a remarkable 17% to deliver a record 88% gross margin. But significant bonuses limited the Ebitda margin to 13% — somewhat below the “at scale” target of 30%.

• The subsequent CMD disclosed founder/executive John Kearon is now evaluating “long-term strategic opportunities“, which raises questions about his “relentless execution” of his own platform plan.

• The CMD also provided a £17.5m illustrative Ebitda projection, which supports a possible £15 share price and reinforces my speculation that SYS1 could/should become a bid target.

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15 September 2023
By Maynard Paton

FY 2023 results summary for System1 (SYS1):

• A much stronger H2 versus the unsatisfactory H1, with disgruntled shareholders and proposed board changes prompting management to lift Q4 Data/Data-led revenue by a bumper 81%.

• New partnerships and customer wins support the H1 strategic review, although partnership revenue and customer numbers remain frustratingly inconsistent and unclear. 

• Progress at Test Your Idea/Brand continues to be slow, with rival Zappi taking market share and an upcoming marketing course raising fresh doubts about management’s Data-platform focus.

• Vague signs of favourable ‘operational gearing’ may now be emerging, although regular adjustments and capitalised IT still complicate reported earnings.  

• A deeply divided shareholder base and languishing share price may leave the door open for corporate activity, with global market-research groups hopefully able to recognise significant sales/cost benefits. I continue to hold.

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09 March 2023
By Maynard Paton

Results summary for System1 (SYS1):

• H1 2023 revenue falling 15% to FY 2012 levels and underlying cash losses running at £2m-plus raised further doubts about SYS1’s services, marketing, pricing and expenditure.

• Despite encompassing “all strategic options” and the board’s composition, a three-month strategic review simply “validated” SYS1’s existing plans with a greater focus on the United States. 

• A management presentation revealed the transition to automated Data services still requires old-style consultancy work, and overlooked questions about partnerships, cash flow and expenses.

• The unsatisfactory H1, underwhelming strategic review and frustrating Q&A were thankfully followed by two former executives proposing very welcome board changes.

• Fresh executive leadership seems needed to maximise SYS1’s “superb, proven suite of products” and re-establish worthwhile levels of profit. I support the proposed board changes and continue to hold.

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24 September 2022
By Maynard Paton

Results summary for System1 (SYS1):

• A disappointing FY 2022 performance, with a Q4 sales warning alongside greater costs leading to a small H2 loss.

• SYS1’s ‘Reasons to Believe’ have been diluted, and hint at reduced long-term expectations following the disappearance of a £100m revenue ambition.

• The transition to new data and consultancy services continues, with such income representing 51% of total revenue for FY 2022 and possibly 70% for Q1 2023.

• A fresh non-exec reveals the agitated shareholder who has initiated a strategic review, which in turn led to the sensible cancellation of a tender offer.

• Net cash represents 31% of the market cap, with long-term multi-bagger potential presently obscured by weak legacy services and costs running ahead of new-product revenue. I continue to hold. 

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02 March 2022
By Maynard Paton

Results summary for System1 (SYS1):

• An acceptable H1 performance, albeit with profit lower than I had anticipated due to greater costs associated with the transition to Data services.

• Data services continue to advance, representing 36% of total revenue for H1 and reaching 43% for the subsequent Q3.

• UK revenue jumping 33% in part through an influx of new Data clients suggests the partnership with ITV is working.

• A Q4 sales warning relating to old-style Consultancy activities emphasised management’s upbeat ambitions are susceptible to mishaps.

• Net cash now represents 25% of the market cap, with long-term multi-bagger upside still obtainable if LTIP revenue targets are met and healthy ‘platform’ margins are delivered. I continue to hold. 

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07 September 2021
By Maynard Paton

Results summary for System1 (SYS1):

• A better-than-expected H2 accompanied some bold management commentary that cited an eventual £1 billion market cap. 

• The acceleration towards ‘scalable’ data products continues, with ‘disruptive’ pricing and partnerships with ITV and LinkedIn spearheading the transition.  

• Downgraded option targets and upgraded director pay looked awkward given the optimistic narrative and receipt of government pandemic support.

• Greater net cash, a mooted share buyback and a 21% adjusted H2 margin suggest the accounts have recuperated from their pandemic nadir.

• Despite extra growth investment limiting near-term earnings progress, long-term multi-bagger upside may still be obtainable. I continue to hold. 

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11 December 2020
By Maynard Paton

Results summary for System1 (SYS1):

• A pandemic-disrupted first half, albeit with headline numbers that disguised a remarkable return to profitability during Q2.

• Revenue improvements within the Communications and UK segments suggest the tie-up with ITV is working.

• A bold pricing structure, greater ambition clarity and even improved film-making may explain why adidas has become a client.

• The accounts are in reasonable shape, with significant net cash, positive cash generation and perhaps a decent profit margin following various cost savings.

• Extrapolating the Q2 profit leads to a lowly 8x multiple and intriguing recovery/upside possibilities. I have bought more shares.

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17 July 2020
By Maynard Paton

Results summary for System1 (SYS1):

• Somewhat academic annual figures that showed pre-AdRatings profit down 27% due to weak trading prior to Covid-19.

• The pandemic has since caused demand for SYS1’s services to drop 38% and created pre-tax losses.

• AdRatings continues to generate minimal revenue at significant cost, although the tie-up with ITV suggests the fledgling service has some inherent value.

• SYS1 bizarrely remains very poor at marketing its own services. A flagship company film commences with references to 18th century German literature. 

• A £3.9m cash buffer ought to keep SYS1 afloat as it moves towards more reliable revenue sources. Valuation in the meantime remains anyone’s guess. I continue to hold.

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