System1, Inc. Price & Performance (SST)

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 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 One's Co Founder and Chief Executive Officer, Michael Blend. Thanks, Kyle. Good afternoon, everyone, and thank you for joining System1 on our Q4 twenty twenty four earnings call. We wrapped up the year with solid execution across the business. For the fourth quarter, System One delivered $76,000,000 in revenue and $45,000,000 in gross profit. Adjusted EBITDA came in at $17,900,000 which was a 79% year over year increase. It is good to see our financial performance starting to reflect all the hard work and progress Although we performed well overall, our strong results were primarily driven by our owned and operated products, with revenue increasing 30% sequentially from Q3 and 60% compared to Q4 last year.

Our products like Starpage, MapQuest and Coupon follow so higher engagement benefiting from improvements in SEO, user experience and product expansion. In contrast, our marketing driven businesses continue to be negatively affected by fluctuations in our Google related business. As I discussed during my remarks last quarter, we continue to see ongoing volatility due to changes enacted by Google in their search partner network. These changes have the longer term goal of improving average quality to the Google Partner Network. However, in the short term, they continue to cost significant volatility and lower payments by Google to Google partners like System1. As Google pays out less for traffic, System1 one makes corresponding adjustments to the amount we pay for traffic in order to ensure our marketing businesses remain profitable. Consequently, lower monetization from Google caused our advertising spend to decline 26% sequentially. Now Google has been implementing wrap rapid fire changes to its search partner network products over the last eighteen to twenty four months and frankly keeping up with these changes has been a challenging process for our team. That said, we remain steadfast in our Google partnership. We've continued to invest heavily in our ramp platform and we have strategically positioned ourselves for in the Google network ultimately rebounds.

On the technology front, our investment in AI powered automation within ramp has yielded very promising results. It's been increasing efficiency and scale across all of our marketing operations. In 2025, we are strengthening our focus on AI integrations across all facets of ramp and our overall organization and we expect to see continued improved efficiency. Now let's go into more detail on our owned and operated segment, which includes both our marketing driven businesses and our owned and operated properties. Total owned and operated revenue reached $65,000,000 reflecting a 19% year over year decline and a 9% sequential decrease This decline was driven by 40% year over year revenue decline in our businesses offset by a 60% increase in our owned and operated products. While revenue declined, adjusted gross profit was up at $32,000,000 This marks a 20% year over year increase in a 21% sequential rise from the third quarter. The gross profit expansion despite a revenue decline highlights our ability to drive efficiency and margin growth within this segment as well as the higher gross profit margins of our owned and operated products. Sessions across our owned and operated but up 79% year over year. Our year over year growth reflects the increased scale of campaigns being run on ramp as well as growth in our owned and operated products.

International markets remain a key driver with international revenue representing 36% of total owned and operated revenue up from 26% in Q4 twenty twenty three. In Q4, we launched over 22,000 marketing campaigns, a 5% a five times year over year increase. This huge increase in marketing campaigns simply would not have been possible prior to our embrace of AI. Our medium term goal for scaling marketing campaign launch is 130,000 per quarter for launching a new marketing campaign every minute of every day around the clock. As I mentioned, while we are confident in Ram's ability to scale, we are being limited by fluctuations in the Google SPM performance. One recent change made by Google is worth highlighting. As it helps explain how Google changes directly impact our business. A few weeks ago, System1 One was informed by Google that they plan to automatically opt out advertisers on a rolling basis from participating in their AdSense for Domain's product known as AFP beginning later this month. The practical effect of Google's pending change is that AFT monetization is likely to materially decline making it significantly more difficult to profitably send acquired traffic to AFD powered websites. This AFD change will be both a short term negative and medium term positive for System one.

In the short term, both our owned and operated and part network lines do substantial AFD related business. And we expect that business to decline as Google rolls out this change on its AFD product. On the flip side, Google is making this change to AFD to encourage adopt which is known in the industry as BARSOC. Our company is well positioned to navigate this transition to RSOK as SystemWind has been allocating significant resources into our RSOK efforts for both owned and operated and network partners over the last twenty four months. System1 is a leading partner with Google in this new and exciting product. So what we believe System One is among the best position in the market to navigate this change from AFD to RSOC, Google's decision to opt out advertisers from AFD will likely cause significant business and product disruption. We are rapidly shifting our remaining owned and operated and partnered network AFD businesses over to the newer R sub product while also keeping pace with rapid changes Google is making to RSOP as it continues to roll out this product offering.

Now ultimately, we welcome this disruption to the Google Search partner network It is aimed at weeding out bad actor from the ecosystem and ultimately is going to benefit the technology driven companies for a focus on high quality consumer and advertiser experiences. While we expect the stormy weather will continue for a bit longer, we're looking forward to the sunny days ahead where we can return our focus on scaling our Google business back up. With that, let's move on to some highlights from our products group. Which as I mentioned is on a seller run. First, let's go ahead and start with coupon follow. Our leading couponing and promo code service. Coupon follow had a very strong holiday shopping season and a great four quarter. With the site continuing to to perform well following Google search algorithm updates in 2024. Our focus on a high quality user experience and delivering verified real time promotional codes continues to pay off. Organic sessions rose more than 20% sequentially from Q3 and sessions were up 129% year over year. In addition to our growth in site traffic, our browser We have a very nice flywheel going with coupon follow. As our usage increases, we get better signals on which promo codes currently working for users.

That enables a higher quality experience for users because the promo codes that the users try actually work. This in turn brings in users and more users and more data and so on. And as coupon follow continues to scale, we're able to land more direct deals with brands which in turn improves the accuracy and deals found on coupon follow. In 2025, we're going to address [indiscernible] on providing a better experience for both consumers and merchants. Now I'm going to move on to start page. Our privacy focused search engine. Startpage continues to gain traction as global concerns around online privacy and data security showed no signs of letting up. The regulations at GDS in Europe and evolving U. S. Privacy laws place greater emphasis emphasis on consumer data protection 20% year over year as more users seek private search And in addition, the Startpage private browser apps we launched last year already have more than 200,000 downloads across both Android and iOS. As usage and revenues grow on Startpage, as more mainstream users seek private search engines, Our 2025 is going to be about continuing to add the bells and whistles these these users expect. When they switch from Google or Bing or DuckDuckGo over to Startpage.

We also intend to make AI integration a major focus in Startpage in 2025. And lastly, let's talk about MadQuest, everybody's favorite, oh that still exists Internet service. Well, I'm happy to let you know that MapQuest is back. MapQuest continues to experience strong engagement with user sessions growing more than 45% year over year. The demand for alternative mapping and navigation solutions remain strong, especially as users seek more privacy conscious and feature rich alternatives to dominant platforms. Our team has revitalized MaudeQuest by introducing new functionality enhancing our mobile experience optimizing local mapping capabilities. [indiscernible] offering users intent control over their location data And all these efforts are paying off the renewed MapQuest recently went viral all over social media and MapQuest was called out in segments on CNN and Stephen Colbert. Now, move on to our partner network, performance. Partner network revenue was $11,000,000 and adjusted gross profit was $14,000,000 up 10% both year over year and sequentially. Our partner network results included an accounting revenue adjustment which lowered both revenue and COGS and had no impact on gross profit. We will be excluding the adjustment as we make comparisons to prior periods and report business metrics.

Without the adjustment revenue was $18,000,000 which represents an 8% year over year increase. In Q4, average revenue per partner decreased 6% versus the third quarter while active and scale partners increased. Total active partners increased 6% from Q3 to over 300 partners. At the end of Q4, we had 65 scaled partners a 12% increase from the third quarter. As a reminder, we consider our platform customer to be a scaled partner when they are generating at least $50,000 of revenue per quarter on ramp. Now similar to our owned and operated business, our partner network team has had to navigate the rapidly changing Google landscape. The team has done a great job handling the volatility and we are very well positioned as we ship business over to the new Google RSOC product. Looking forward to the rest of 2025, we remain cautious [indiscernible] Our owned and operated products continue to demonstrate strong fundamentals, and I'm excited to see us expand in our core platforms in couponing, private search and mapping. And on the marketing side, our investments in AI driven optimizations are positioned positioned as well for future growth. I'm very glad we made the early decision to invest heavily in the new Google ARSOP product.

To close, I want to reiterate as I always do, System One's leadership team remains fully aligned with our shareholders, and as a group we remain one of the company's largest shareholder bases. As we continue our transition back to growth mode, we very much appreciate your continued support and we look forward to delivering long term value. With that, I'll hand it over to Trudy to go over our financials and provide Q1 guidance. Take it away, Triti. Overall, we are pleased with our fourth quarter financial results. With the highlight being our $17,900,000 of adjusted EBITDA. Representing year over year growth of 79% quarter over quarter growth of 73%. For the year, we generated $38,600,000 of adjusted EBITDA, representing year over year growth of 32% and demonstrating our ability to grow through a challenged marketplace. Now, let's dive into our operating results. Q4 revenue was $75,600,000 representing a 21% year over year decrease and sequential decline of 15%. Own and operated advertising revenue was $64,700,000 down 19% year over year and 9% sequentially. The decrease in revenue is directly related to an $11,600,000 sequential decline in advertising spend. Within the owned and operated advertising segment, our O and O products business generated $27,100,000 of revenue, up 60% year over year and 30% sequentially.

As to be expected in a seasonally strong Q4. Our fourth quarter RPS was $0.03 and in line with the third quarter, and CPS was $0.017 down 20% from $0.021 in the third quarter As we lowered our advertising spend, we were able to shift towards lower CPS traffic source. Overall, RPS and CPS were both down significantly year over year as throughout the year we have called certain acquisition channels that had both higher RPS and higher CPS. RPS was down 55% year over year and CPS was down 65% year over year. The spread between RPS and CPS in Q4 was $0.17 or 98% margin, compared to $1.3 or 59% in Q3. Network revenue was $10,900,000 but adjusted for our net revenue adjustment was $18,000,000 which was up 8% year over year and in line with Q3. Total sessions were $1,900,000,000 up 46% year over year and down 20% sequentially. Partner Network RPS after adjusting for the out of period revenue adjustment decreased 26% year over year but increased 24% quarter over quarter. Adjusted gross profit was 44,700,000.0 up 19% year over year and sequentially. Revenue less advertising spend for our 0021% sequentially to $32,000,000 Revenue less advertising spend for our O and O products was $25,600,000 up 62% year over year and 27% sequentially.

Network revenue less agency fees was 14,400,000.0 up 10% year over year and sequentially. Total sessions processed by ramp in the most recent quarter was $3,800,000,000 up 61% year over year and down 14% sequentially. On to operating expenses and EBITDA. In Q4, operating expenses net of Advax was $26,800,000 down $500,000 quarter over quarter and down $700,000 year over year. We continue to focus on reducing OpEx to create operating leverage. Adjusted EBITDA was $17,900,000 in Q4 versus $10,000,000 in the same quarter last year.

Representing a 79% year over year increase. With respect to liquidity, we ended the quarter with CAD63.6 million of unrestricted cash on our balance sheet and an outstanding balance of $280,000,000 of term loan debt under our credit agreement. Our net consolidated leverage at quarter end was approximately 5.6 times. Now on to Q1 guidance. We are estimating Q1 revenue to come in between $69,000,000 and $71,000,000 down 18% year over year at the midpoint. Despite the revenue decline guidance, we are estimating adjusted gross profit to grow 25% year over year at the midpoint, and come in between $38,000,000 and $40,000,000 We estimate Q1 adjusted EBITDA to come in between $9,000,000 and 11,000,000 up over $9,500,000 year over year at the midpoint. The adjusted EBITDA guidance also assumes a benefit from the reversal of the majority of the prior period partner payment balances related to fraudulent traffic on our network from Q2 of last year. For the reasons outlined by Michael during his remarks, specifically around Google volatility, will not be providing full year guidance at this time. As we mentioned during our last earnings call, have continued to see significant volatility in our marketing driven businesses. Due to ongoing sell side product and policy updates.

However, our core product utilities such as private search, mapping and couponing provide a strong foundation that allow us to navigate these challenges effectively. Looking ahead, 2025 presents an opportunity to further scale these products. Driving consistent user acquisition and engagement By continuing to attract and retain users through differentiated high value services, we not only mitigate market fluctuations, but also create sustained monetization up opportunities. Additionally, our ramp platform remains instrumental in generating gross profit in EBITDA. As we refine our AI driven strategies to optimize traffic quality and advertising yield, AI driven advancements to our platform and processes will also allow us to optimize our operating expenses throughout the year. Our ability to balance growth in owned and operated, with a disciplined approach to our marketing businesses will be a key focus in the year ahead. Thank you for joining us today.

Thank you, Trudy. We're now going to open the line for some questions. The first question comes from Tom Forte with Maxim Group. Go ahead, Tom.

Great. So first off, Michael and Trudy, I hope you and your colleagues okay when it comes to the California wildfires.

Second, congrats on the improvement in the adjusted EBITDA for both the fourth quarter and full year. So I have three questions, I'll go one at a time. Michael, as experts on AI and one of the early users of the technology, to advance your business, Would love your thoughts on DeepSeq and in general your ability to invest in ramp at much lower CapEx than your tech peers.

Thanks, Tom. Thanks for joining and for the questions. Good to see you. So I would say as far as DeepSeat goes, I don't have a specific opinion about what they're doing except that it's been very nice to see that DeepSeq along with a lot of some of the other open source providers as well as just general competition in the AI marketplace is really bringing cost down substantially for us. What we're seeing is that price the price to use these tools has been coming down really every couple of weeks or so. And we're also seeing advances in a lot of the CodeAssist tools that we're building where we've been quite heavy users of AI and talk about that in just a second. But what we're seeing is like every two weeks, people are leapfrogging the other products. And so the the level of pace at which these tools are developing is pretty extraordinary. The way that AI is specifically affecting our business [indiscernible] a couple of different ways. So first of all, as we've discussed, I think on our last few quarterly earnings calls, AI is really perfectly built for a lot of the marketing that we do.

So just tactically doing things like producing better ads, using AI machine learning to do things like really rapidly change bid pricing, on our advertising, but also produce better taglines, make better advertisements, better content Our entire advertising flow has been improved. So on the first side, you've got AI really helping our operations. Which has been good. But what I would say more recently is, what we're seeing are some really dramatic changes in the way that we're able to do product and engineering at our company. What we're seeing is that as engineers and product folks are adopting AI AI tools, we're seeing like two to four time improvements in efficiency and productivity. From our team. So we made the decision relatively early as the Code Assist tool has been coming out and maturing to really go full force into them. Are we able to do that given the size of our company and the how adaptive our engineering and product teams are So we're seeing just really great efficiency improvements, but also on the want to wrap up on the business side. Some really cool things are happening as well. We're pushing our not only the product engineers, but also our entire company to adopt these tools And so what we're seeing are people on the business side that have never developed code, never written line of software in their lives are actually turning out products themselves.

One interesting thing that we had kind of fun thing a few weeks ago One of our business heads on the MapQuest side, for instance, up with an idea for just an interesting fungal product one night a few weeks ago worked on it that night, built it himself. The next morning, I worked with one of our engineers to productize it. And I think about fourteen to fifteen hours from business concept had a product launched. And few days later, that product was fun little viral product got featured on Steve Colbert and CNN. That kind of stuff would have never happened before without these Codasys tools where where someone can come up with a product and build them at a pace that we've really never seen before. So AI, at least at our company, is increasing our efficiency and productivity but it's also kind of unleashing creativity. Which is nice to see. Excellent. All right. So then my second question is the question I get most often from investors Can you talk about, at least at a high level, your balance sheet and your efforts to improve your capital structure. Including managing your debt.

Sure. Something we focus on quite carefully. Trudy, you want to go ahead and answer that question?

Sure. Hey, Tom, how are you doing? Thanks for being here. Thanks for the question. So So obviously, we think about our balance sheet and capital structure a fair amount. In August of this past year, we did some work around our corporate restructuring. That aligned our corporate structure with how we actually manage the business and think about our own and operated business specifically between the advertising and the products businesses. That being said, as I mentioned in my prepared remarks, our net leverage at the end of the year 5.6x which frankly is higher than we'd like it to be higher than our lenders would like it to be. And definitely higher than we thought than we thought it would be, when we started down the path a couple of years ago. That being said, for all the reasons that we talked about in our prepared remarks, what Michael just mentioned around AI, we feel very bullish about the prospects of the business to continue to grow. And for us to grow into a net leverage position and that when we're comfortable with and specifically we still have about two point five years left on the term of our credit agreement.

And we believe we'll be in a strong position to refinance that when we get there.

Great. So then my last question, that was very helpful, Trudy. I appreciate that. Michael, can you remind me of how periods of heavy political advertising spending impact your business model like we had essentially all '24 And now that we're on the other side of the presidential election, can I assume it's a much easier operating environment for you?

Yeah. Good question, Tom. So we're a little contra to a lot of the advertising businesses out there where in Q4 when political was pretty hot, what that does for us is it affects the buy side. So it drives up pricing a bit for us when we're buying our advertising. So we actually are happy that the political [indiscernible] And for us, the buy side opens up a bit. And we see pricing come down a little bit. So it's a good question. But as I said, it's a and as you mentioned, the political season being behind us is a favorable thing for [indiscernible] Great. Thanks for taking my questions.

Thanks, John.

Appreciate it. The next question is from Dan Kurnos with Benchmark.

Dan, go ahead.

Great, thanks. Good afternoon, guys. Michael, there's a lot to unpack.

In here. So maybe at the expense of potentially getting a little deeper in the weeds on the RSOK shift, I'm just curious maybe at a higher level for investors, how well you're positioned? You already talked about investing in the [indiscernible] premium publishers and some of the agencies about this. And it'll be interesting to see when this happens because I don't think they're going to be ready, but can you just talk about your readiness and kind of where you still need to invest? Obviously, it's going to create some havoc in the marketplace, which was going to happen with the cookie deprecation. We're getting this instead. So maybe just kind of talk through what you're seeing and where you guys are positioning yourselves as we make this pretty big shift?

Yes, sure, Dana, also good to see you. So it's a little bit in the weeds for people, but because Google such a major part of our business on the revenue side, probably worth expanding a little bit So essentially, just to reiterate from my earlier remarks, Google's got a few different products few different advertising products that we use and people in kind of the Google Partner ecosystem use to monetize their traffic. And one of them historically was a product called AFD, Another one is a product called AFS. And then related to AFS is a product called RSOK, And I don't know, eighteen months ago or Google introduced this new product called R SOC. And it was a pretty small product at the time, not one that had a lot of revenue on it. Google was putting a fair amount of focus on it internally. And so we made the decision at System1 one to really invest pretty heavily in it.

I think we made the right decision because fast forward eighteen months, Google has been informed us and informed the advertising market that we would expect that the AFD product that they offer over time is going to be a much less important product for Google and that they're going to be shifting a lot of their emphasis into having Google partners such as ourselves promote the RSOK product. Which stands for related search on content. [indiscernible] As I said, we've been putting a lot of our product and engineering efforts behind this, a lot of our marketing efforts behind our SOC. And we think we're quite well positioned. We believe we're the market leader in this product or at least certainly we're one of the market leaders in the product. And so in the short term, we expect to see some bumpiness as that as AFD, the revenue that we generate from AFD kind of begins shifting over more heavily to RSOK, But over the medium to long term, we're actually quite supportive of it. Our stock, we think, is a a really good product for consumers and for advertisers. And it happens to be one that we're quite well positioned for here.

System One. So we're happy to see the shift, happening a little bit more quickly than I think anybody in the market would have expected. But we think that we're in the right position for it. I think you're on mute, Dan.

There we go. Sorry about that. Tricky in the back end here. So no, Michael, super helpful. Appreciate it. And I can confirm you guys are definitely leading the charge on our SOC at least based on my conversations. So we'll see how that plays out. But to what you guys guided in Q1, like let's just call it revenue ex TAC, which is basically what it is. Is you've guided it up pretty strongly. And I know that's a lot of that's due to your O and O properties, but can you guys just talk through I mean, the spread is huge in Q4. You guys crushed it on spread. And I'm just curious how you guys are thinking about your ability to grow in this uneven environment adjusted gross profit, revenue ex tax, whatever you want to call I'll start with that. Treaty and then I'll take over if you want. Yes. No, I mean, again, we are guiding to some growth this year. Again, it comes down to we've seen a little bit of stability in the marketplace here to start the year. And when we see stability, that's good for us. That's kind of what ramp is built is built to take advantage of.

So sitting here kind of again in the third month of the quarter, we feel pretty good about our guidance and how the quarter is going to end up and it's a function of ramp working the way that it's supposed to work. And yes, I mean, there isn't much more to say other than its execution.

Yes. I would say that in general, as we've kind of mentioned on our earlier remarks, the organic products are doing quite well. We're seeing nice growth there. And we probably would have a little bit more confidence about the overall year if we weren't faced with this product transition on the Google side. So we're really waiting to see how that plays out and, you know, think back half of the year, we're going to have a lot more confidence in what numbers are going to look like. For now, we feel good. And, you know, we're we're coming off 2024, I think, was a year in which we started turning the corner and we're I think starting to feel increasingly confident about '25.

I know Michael you would be mad at me if I didn't ask you my standard international question. So it was obviously a good quarter for international. It's clearly moving ahead. We continue to hear actually some pretty good things at APAC. Europe's kind of coming back up a little bit, although we maybe hit a little bit of a bump now. It seems like a real greenfield opportunity for you guys. I know you kind of keep pushing me off saying, hey, we're attacking it. 36% now. How are you thinking about the TAM there? And how do you think about that contributing to growth this year?

Well, I mean, we're I think we're making pretty good progress. Year over year, you're seeing an increasing percentage of our revenue coming internationally. So we're feeling really good. Our efforts are are pretty focused We're split domestic and international, our internal efforts, but one thing that our AI tools have enabled us to do is very quickly move doing things like translation, making sure images are better, advertising copies better internationally has become much, much easier for us. And we also have, we think, some growth on in our our shopping vertical with coupon follow has very little international presence. Maccrest has almost no international presence. So if you look on the organic product side, those are a couple areas where we could be going in and out we're not going to slow down TAM is obviously huge domestically, but we've got a huge TAM international as well. And what I suspect is that you're going to continue seeing an increasing percentage of our gross profit from international.

Got it. And I'll bug you with one more and I'll take the rest offline. Maybe just for Trudy, you called out items in Q1 just around the adjusted EBITDA margin. How should we just think about the trajectory for adjusted EBITDA margin this year? Should we be up? If you're calling for some growth in adjusted gross profit, and I know the there's no crystal ball here, but just how do we think about your ability to generate incremental leverage [indiscernible] going forward?

Yes. So I would expect kind of the bulk of our gross profit to flow through down to adjusted EBITDA. So as I mentioned, we're continuing to look at OpEx, be very maniacal about making sure kind of every dollar we spend we're getting a good ROI on it. And so we would expect that our gross profit growth throughout the year should flow down at a very high flow through, which should lead to expanded EBITDA margins as a percentage of gross profit.

Yes. I would reiterate to that what we're seeing from our team is the going back to the question Tom had, the ability of our team [indiscernible] and [indiscernible] on the engineering and product and business side, a lot of it driven by the new AI related products that we've been using is pretty impressive. And so would expect that we're going to be able to continue with around our current OpEx levels execute better roll out more products quicker, with relatively stable OpEx. So you're going to see you should see as our gross profit expands a lot of leverage from that.

Got it. Super helpful. Thank you for the color guys and it was a lot of fun playing with the Gulf Of America on MapQuest.

I'm glad you enjoyed it.

We had a few hundred thousand other people enjoy that as well. Well, I think it's all of our questions, I believe. I want to thank everybody for joining us this quarter. We look forward to chatting with you next quarter where we hope to have some good news then. Thank you very much.