System1 (SYS1): Unrecognised Growth Potential?

anon,

The points above are annoying rather than fundamental. I still believe S1 is a promising, and quite specific, investment thesis, which is different to broader advertising agencies. The missing piece for me at the moment is customer perception and market size. Hopefully, I can get some more feedback on this over the next few weeks.

MTIOC

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Hi Maynard
Firstly, congratulations for spotting SYS1 as a potential multibagger at an early stage.
I have reviewed your excellent and in-depth write-ups here and at your blog site.
I guess the key question that makes all other considerations pale into insignificance is this.

  • Is this company morphing into a scalable near pure data products platform business with a much smaller traditional marketing consultancy?

In this context, your graph showing the projected revenues split between data products and consultancy is telling.
The recent Q-on-Q data products growth is impressive, albeit from a very small base. Will it continue to show near exponential growth?

The company seems to tick a number of boxes

  • the addressable ads market size is enormous
  • a very credible CEO who appears to be focussed in fulfilling this strategy
  • the profile of a platform business with high margins, strong operational gearing and strong cashflows
  • a knowledge database accumulated over many years
  • from what I have seen of their products, I think this business model is scalable

My verdict? It’s on my list to buy at the next suitable entry point.

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Hello MTIOC,

It’s such a competitive market that SYS1 operates in - I used to work for one of the major players in a previous life.

This may be a good place to start researching - hope it helps:

https://craft.co/gfk/competitors

(right arrow to see SYS1 on this web-page. You may have to create a free account to view this page).

Will they ever get to £1bn market cap? - not a chance in my opinion - in all likelihood, if they do have a competitive advantage, they would be purchased before they are a threat to their bigger rivals, or their key staff and methodology will be poached. That’s the way this slightly dysfunctional industry works, unfortunately.

Still, a buy-out wouldn’t necessarily be a bad thing!

I note Kantar also offer idea-screening

Good luck with it!

Regards,

anon

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Also, this Quora thread seems relevant:

(5) What is the difference between all the market research agencies (Nielsen, Kantar, Ipsos, GFK, etc.)? - Quora

I think the second answer has it right, and SYS1 is a niche player in a huge market and that isn’t to say a niche isn’t a good thing! I’m unsure if SYS1 moves out of the neuroscience space it would be successful. They’ve kind of nailed their colours to the mast with the company’s name.

What you are not including in your list is smaller players that focus on a niche such as social media listening or online communities or neuroscience and ones that are present in less countries than the top 10 multinationals.

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Apologies if this has already been posted here, but I found this real world example in AdWeek about how SYS1 helped GSK to increase sales of Voltaren by using emotional tracking.

link here

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Just fyi, if you hold. A US company appears to be passing off on the System1 brand.

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Thanks anon.

Here is the S-4 flotation prospectus for System1 Inc:

https://www.sec.gov/Archives/edgar/data/1805833/000119312521318521/d198034ds4.htm

The relevant legal text:

"We have received correspondence from counsel for a United Kingdom-based marketing research company and its United States subsidiary (collectively, the “Demanding Group”) alleging trademark infringement based on our use of the “SYSTEM1” trade name and mark in the United States, and alleged use of the “SYSTEM1” trade name and mark in the United Kingdom.

The correspondence demanded that we cease and desist from using the “SYSTEM1” name and mark, and made reference to potential legal action if we do not comply with that demand.

While we were engaged in active discussions and correspondence with the Demanding Group to resolve the matter, the Demanding Group filed a lawsuit in the United States District Court for the Southern District of New York on September 27, 2021 (the “Infringement Suit”) alleging (i) trademark infringement, (ii) false designation of origin, (iii) unfair competition and (iv) certain violations of New York business laws, seeking, among other things, an injunction, disgorgement of profits, actual damages and attorneys’ fees and costs.

We believe that the Demanding Group’s infringement and other allegations and claims set forth in the Infringement Suit may be subject to a laches defense, among other defenses, and we intend to vigorously defend our rights in the Infringement Suit.

No lawsuit has been filed in the United Kingdom, and we do not believe that our activities infringe any rights of the Demanding Group in the United Kingdom because, among other defenses, we do not offer services to customers using the SYSTEM1 name and mark in the United Kingdom."

I am not a legal expert, but SYS1 may well have a good case having operated under the System1 brand (in the US and globally) since 2017.

Although System1 Inc does own the https://system1.com/ domain, and I am pretty sure SYS1 would have noted the ownership of that domain before plumping for https://system1group.com/.

System1 Inc will not be short of funds following its US flotation (presentation here):

The company has already paid $55m to cover transaction fees and expenses. So perhaps System1 Inc will pay a handsome amount to SYS1 to settle the case?

Although that outcome may not be ideal if two ‘System1’ companies then exist in the States involved in digital marketing in some way. System1’s business model is very different to that of SYS1 though:

The flipside is System1 Inc has a lot more money than SYS1 to contest a protracted legal battle.

Another issue is whether ‘System1’ is actually SYS1’s (or System1 Inc’s) to own, as the term was devised/popularised by Daniel Kahneman.

Maynard

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SYS1 claims the case is “compelling” through the RNS:

"The Company takes the protection of its unique intellectual property very seriously and believes such ongoing and expanding use by the Opposing Party is likely to cause significant confusion with System1 Group PLC and its registered marks and, moreover, constitutes intentional infringement, in violation of relevant US federal and state trademark laws as well as trademark laws in the UK, the EU and other countries.

The Board believes that the Company’s case against the Opposing Party is compelling and will issue further updates in due course. A summary of the Company’s registered trademarks is attached to this release."

Here are the trademarks registered in the US:

U.S. Registration No. 5,362,152 for “SYSTEM1 RESEARCH”

U.S. Registration No. 5,488,953 for “SYSTEM1 GROUP”

U.S. Registration No. 5,870,379 for “SYSTEM1 MARKETING”

U.S. Registration No. 5,870,950 for “SYSTEM1 AD RATINGS”

So nothing for “SYSTEM1” in the US, even though SYS1 does have such trademarks in the UK and EU:

EU Registration No. 018400922 for “SYSTEM1”

UK Registration No. 00003596520 for “SYSTEM1”

The obvious question then is who owns the “SYSTEM1” trademark in the US?

I can’t quite see the “compelling” case myself, and perhaps the best outcome for SYS1 is System1 Inc pays off SYS1 handsomely just to go away.

Maynard

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Hi,

System 1 PLC do own the US ‘System1’ trademark.

Trademark Electronic Search System (TESS) (uspto.gov)

It’s a bit strange they missed it off the list.

Hey ho.

Regards,

anon

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Filing Date 7th September 2021???

How does that compare to the filing date of the other TM’s?

2017, 2019

Cheers anon,

Seems slightly bizarre that they didn’t register SYSTEM1 earlier - presume it was an afterthought once they got wind of SYSTEM1 LLC?

Yes. Since 2017, System1 LLC had an application on the ‘System1’ trademark, which they either couldn’t get or allowed to lapse and abandoned in Apr19.

Presumably SYS1 sensibly thought it a good idea to apply this year, maybe after this dispute started up.

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I was surprised by today’s announcement that Stefan Barden is reverting to his advisory role and the founder is stepping back to CEO. Are there indications that it was “planned” as per RNS? May be I am cynical, but I suspect either personal differences with the founder or a philosophical clash (e.g. hard headed systematic/KPI driven manager and the marketeers). May be I have misread this, but I will be watching closely. I will try to go to next shareholder event to get more of a feel for the team.

Hi MTIOC,

Must admit I had to check whether the reversion was planned or not.

The latest RNS said:

System1 Group plc (AIM: SYS1) today announces that, as planned, Stefan Barden will step down as CEO and from the board of directors on 31 January and revert to his previous role as an adviser to the board of directors on strategy and technology.

The appointment RNS said (June 2020):

System1 Group plc (AIM: SYS1) today announces that it has appointed Stefan Barden to the board of directors of the Company as an executive director with immediate effect. From November 2018, Stefan has been an adviser to the board of directors on strategy and technology, and has recently taken on the executive role of chief operating officer to assist the Company through its next phase of development. He will return to the advisory role when this is complete, expected to be in around a year.

But this RNS said (March 2021):

System1 Group plc, the advertising effectiveness agency, (AIM: SYS1) announces that, in line with the continued evolution of the Company, John Kearon, previously Chief Executive Officer, has today assumed the title of ‘Founder and Executive President’ and Stefan Barden, previously Chief Operating Officer, the title of ‘Chief Executive Officer’.

Their internal responsibilities are unaffected, with John leading the Company direction, product development and external facing parts of the business, and Stefan leading the Company’s organisation, technical development and operational parts of the business. No board changes are expected to arise as a result of this development. Stefan will remain an executive director rather than reverting to the purely advisory role indicated last year.

Not sure what to make of this. Mr Barden was set to have a year-long stint as a board exec, then became CEO and a permanent executive, but now has decided to return to the advisory role.

I get the impression Mr Barden was required to push through some tough changes, so had been appointed a board exec. I suppose the bull case from this latest RNS is the hard transitional work has now been completed and, nine months after saying Mr Barden would remain an exec, the company has transitioned so well that actually Mr Barden can return to being an advisor.

I don’t think a falling out has occurred. John Kearon spoke well of Mr Barden in casual AGM chat the other year, and I think the two knew each other before Mr Barden became an advisor. Also, Mr Barden has acquired a fair number of SYS1 shares with his own money and therefore appears committed to the cause.

Maynard

Maynard, thanks. It seems I was being a bit over suspicious and I think you’re right that if there had been a fall out he would not stay as a consultant. One to keep an eye on. MTIOC

Agree with Maynard, seems to have been brought in to do some heavy lifting during the transition.

Even his Sys1 bio suggests he doesn’t really want the day to day slog of heading up a company.

https://system1group.com/team/stefan-barden

Date revenue is still growing. A Q3 update published today:

System1, the marketing decision-making platform, intends to issue quarterly updates for Q1 and Q3 of each year based on unaudited numbers. These updates are intended to keep investors informed of the Company’s performance between the interim and final trading updates and results announcements. System1 today issues the following update on trading for the quarter ended December 2021 (Q3).

Revenue in Q3 rose 8% on the comparable period last year to £6.5m, and Data products represented 43% of the quarter’s revenue.

Year-to-date revenue to the end of Q3 was 17% higher than the prior year at £18.9m, and

Data revenue represented 39% of the year-to-date total (H1: 36%).

Period-end cash, net of borrowings, was £8.1m, compared with £6.5m at end-March 2021.

Profitability was in line with management’s expectations and reflected an increase in expenditure on people and platform as highlighted in the interim results announcement.

Data revenue at 43% gives £2.8m for this Q3, versus £2.6m for Q2. So a useful increase at the more attractive division as the business shifts away from old-style consultancy income. Consultancy revenue, which had dropped to £3.2m for Q2, rebounded to £3.7m.

SYS1 Q3 2022 chart

Net cash for the nine months has gained £1.6m, so annualised could be £2.1m. But H1 cash flow was bolstered by tax credits of £0.4m. So a bit tricky trying to establish an underlying cash flow number and what Q3/H2 profitability could be. The words “reflected an increase in expenditure on people and platform” may be suggesting more cash is being spent on expansion than had been anticipated. An in-depth look at SYS1’s H1 results and this Q3 update is the next job for my blog.

Maynard

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Share price down 14% first thing, now down 9.2%.

Trading statement ‘in line’ so would not warrant such a fall. Main reason appears to be a broker downgrade to ‘hold’ from Canaccord Genuity.

I like the company’s intention to provide quarterly updates in future.

Snazzy

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Hi,

AdRatings

The AdRatings intangible asset was written off during the 2020 year-end, because at the time there was not enough revenue to support the balance sheet asset value:

image

This certainly explains part of the drop in EBIT during 2020, from £2.1m to £0.4m, due to this £921k write-off.

Subsequently, the AdRatings development cost is now being expensed through the P&L, as a change of intangible asset policy.

But, this asks the question how much is being spent on AdRatings development in 2021 and the current year?

It would be useful to know this, to be able to adjust Profit and ROCE upwards, for what I consider to be mostly capital expenses.

Also, it would help to form a view on how invested in the data side of the business is, and how much is this growing (or reducing) annually, and to be able to calculate the non-development/operating margin of the data side of the business.

Revenue and Gross Profit (their definition being Revenue less external costs) are disclosed in the annual accounts, but not profit by operating segment.

Director incentives:

Director share awards are based on Gross Profit, so effectively incentivising the maximisation of revenue and minimising of external costs.

Possibly SYS1 is intentionally being made ready for a trade sale, whereby someone like S4C would purchase on a multiple of revenue and then reduce the ‘below the gross profit line’ costs post acquisition/merger? SYS1 would need to get revenue growing to get a decent valuation.

i.e. The two executive directors may be at an age whereby they are looking to exit in the next 5 to 10 years? (Having said that, Martin Sorrell is still going at 78 !)

image

anon

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