Alight, Inc.

Thank you for standing by and welcome to the first quarter 2025 earnings conference call for System 1. Joining me today to discuss System 1's business and financial results are co-founder and Chief Executive Officer Michael Blend and Chief Financial Officer Trinvesh Kadambi. A recording of this conference call will be available on our investor relations website shortly after this call has ended. I'd like to take this opportunity to remind you that during the call, we will be making certain forward-looking statements. This includes statements relating to the operating performance of our business, future financial results and guidance, strategy, long-term growth, and overall future prospects. We may also make statements regarding regulatory or compliance matters. These statements are subject to known and unknown risks and uncertainties that could cause our actual results to differ materially from those projected or implied during this call. In particular, those described in our risk factors included in our annual report on Form 10-K for fiscal year 2024, filed on March 10th, as well as the current uncertainty and unpredictability in our business, the markets, and the global economy generally. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on management's assumptions and beliefs as of the date hereof, and System 1 disclaims any obligation to update any forward-looking statements except as required by law. 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 exclude results from total security. Information regarding our non-GAAP financial measures, including a reconciliation of our non-GAAP financial measures, termed 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 System 1 on our Q1 earnings call. I'm happy to share that our team executed really well in Q1 and delivered another solid quarter. Revenue, as well as our key operating metrics, gross profit and EBITDA, were all above the high end of our guidance range. First quarter revenue was approximately $75 million, and adjusted gross profit was $41.5 million, which is a 33% year-over-year increase. Adjusted EBITDA came in at $12.1 million, up from just $400,000 in the prior year quarter. These year-over-year comps are good indicators of the progress we have made over the last year, driven by strong execution and a lot of very hard work by our team. Our owned and operated products continue to perform well with revenue increasing 51% year-over-year. As a reminder, our primary O&O products include Coupon Follow in the Discount Shopping vertical, Start Page in Private Search, and MapQuest in Mapping. Each of these are among the leaders in their respective category, and we have good momentum across our entire portfolio. Our marketing-driven businesses continue to be impacted by the Google-related product changes we mentioned last quarter. Although so far, we have done a very good job navigating the ongoing volatility. While overall marketing-driven revenue is down on an annual basis, margins are up significantly, and our network business in particular continues to do well. On the technology front at System One, we continue to lean in heavily on AI-powered automation driven by agentic coding. We are incorporating agentic coding across the entire company and are using it to increase scale, accelerate product development, and streamline many of our business operations. Overall, it's a really exciting time to be in technology if you're pushing heavily into agentic coding, as System 1 is. If you had asked me 18 months ago what our biggest obstacle to growth was, I would have said the difficulty of finding enough engineering and product resources to develop our technology. Now with agentic coding, productivity is through the roof, and the biggest challenge is picking the right ideas to go after. Let's go into more detail on our owned and operated segment, which includes both our marketing-driven businesses and our owned and operated products. Total owned and operated revenue came in at $58 million, reflecting a 16% year-over-year decline and a 10% decrease sequentially. This decline was driven by a 34% annual revenue decrease in our marketing businesses, which was primarily due to a decline in a non-core low gross margin business segment. The marketing decline was partially offset by a 51% increase in our owned and operated products line. Adjusted gross profit was $28 million, up 24% year-over-year and down 13% sequentially from Q4. The sequential decline primarily was driven by seasonality coming off a seasonally strong fourth quarter for shopping. Sessions across our own properties totaled $1.3 billion, down 32% from Q4, but up 6% year-over-year. Our year-over-year growth reflects increased scale of marketing campaigns running through our Rant platform, as well as growth in our owned and operated properties. International markets remain a key focus for us, with international revenue representing 30% of total owned and operated revenue, up slightly from 29% in Q1 of 2024. A bright spot in our marketing-driven business is the increased scale of our marketing campaigns. In Q1, we launched over 41,000 marketing campaigns, up five times year over year, and up from 22,000 in Q4. We continue to make large strides on advertising campaign automation, and we're focused on leveraging AI to dramatically increase the scale we operate on in the marketing side. Moving on to our O&O products, the group continues to perform well and is heavily focused on expanding the reach of our couponing, mapping, and private search services. Let's move on to some highlights in those products. I'll start with Coupon Follow, which continues to be a top couponing and promo code service in Google's organic rankings. In the first quarter, Coupon Follow's user sessions were up over 160% year-over-year, driven by our best-in-class experience for both consumers and merchants. We have a great flywheel going on with Coupon Follow. Its traffic ramps on Coupon Follow were able to capture more data on consumer demand, We then leverage that data into better merchant deals that in turn improve the overall consumer experience the next time our customers come back. Now let's turn to Startpage, which as a reminder is our privacy-centric search engine that competes with DuckDuckGo. In Q1, Startpage user sessions grew 11% year-over-year and 7% sequentially as we ride increased consumer demand for greater privacy. The private browser apps we launched in late 2024 have continued to gain traction as we integrate search widgets like mapping that improve the overall search experience. And lastly, let's talk about MapQuest, which is having a brand and business resurgence. MapQuest has had some really fun viral moments recently with mentions on CNN and the Stephen Colbert Show driven by our Gulf of Mexico naming generator. MapQuest continues to grow user sessions with Q1 sessions up over 30% year-over-year. The MapQuest team has been focused on enhancing our mobile apps, adding new mapping functionality, and introducing new products. Now let's switch gears to our Partner Network. Partner Network revenue was $70 million up 4% year-over-year and 1% sequentially after adjusting to the added period revenue adjustments made last quarter. Adjusted gross profit was $15 million, up 37% year-over-year and 4% sequentially. Partner network results were positively impacted by the in-period recognition of some previously withheld being partner revenue related to invalid traffic that our partners sent to us. In Q1, total active partners decreased 14% from Q4 to around 265 partners. The total number of partners was partially offset by 7% quarter-over-quarter increase in average revenue per partner. In Q4, we had 54 scale partners, a 17% decrease from the fourth quarter. We consider a platform customer to be a scale partner when they are generating at least $50,000 of revenue per quarter on-ramp. The sequential decrease in active partners was impacted by our push to move partners to Google's new RSOC product for monetization. And on this front, the team did a great job in Q1, significantly increasing the number of partners monetizing with our stock. Looking ahead to the rest of 2025, we remain cautiously optimistic. Our owned and operated products continue to show strong fundamentals. We've been making large strides on the AI technology front, and we're putting ourselves in position to capitalize on the marketing side as we begin to see a little more stability. Our biggest challenge over the next couple of quarters continues to be related to volatility with Google, which, as you know, is our biggest revenue partner. Last quarter, we announced that Google informed us of their plan to automatically opt out advertisers from AdSense for domains monetization, which is known as AFD. While this has created some uncertainty for us, we have not yet seen material impact to our performance or revenue from that policy change. That being said, we do anticipate Google's continued shift away from AFD to their newer RSOC product is going to continue to cause volatility that we'll have to manage and navigate over the next few quarters. As a result of this uncertainty, as well as broader volatility in online advertising demand and the potential impact of evolving tariff policies, we do not plan to provide financial guidance for the second quarter of 2025. But most importantly, we remain well-positioned regardless of how these shifts evolve. We're continuing to benefit from our longstanding AFD partnership while also leaning into the momentum behind RSOC. As RSOC continues to gain traction, we're seeing new opportunities to diversify and grow alongside Google with their evolving monetization strategy. Overall, I would say our System 1 team is executing very well across the board. We have quickly made the transition to become an AI-first product and engineering organization, and we can see this paying off in faster execution that is also beginning to show up in our financials. As Treaty will detail below, we aren't yet prepared to give full-year guidance as we plan to wait to see how the Google product transition shakes out. That being said, once we get through the Google volatility over the next couple of quarters, I believe we're really well positioned for the medium and long term here at System 1. To close, I want to reiterate, as I always do, System 1's leadership team remains fully aligned with our shareholders, and as a group, we remain one of the company's largest shareholder bases. As one example, I, through my family foundation, recently purchased 4.5 million shares of SST, and I believe strongly in the company's future. As System 1 continues our transition back to growth mode, We appreciate your continued support and we look forward to delivering long-term value to our shareholders. With that, I'll hand things over to Triti to go over our financials.

Take it away, Triti. Thanks, Michael. We are pleased with our first quarter financial results as we were above the high range of guidance on revenue, adjusted gross profit, and adjusted EBITDA. The $12.1 million of adjusted EBITDA in the first quarter represents significant year-over-year growth. and highlights the high level of execution by our team across all of our businesses, which has resulted in both year-over-year gross profit growth and ongoing G&A efficiencies, resulting in reductions to operating expenses. Let's get into the details. Q1 revenue was $74.5 million, representing a 12% year-over-year decrease and a sequential decline of 1%. Own and operated advertising revenue is $57.9 million, down 16% year-over-year and 10% sequentially. The year-over-year decrease is driven by a 35% decrease in advertising spend, which is the result of a mixed shift change between our marketing-driven business lines and our owned and operated product lines. Owned and operated product revenue is $22.3 million, representing 38% of total owned and operated advertising revenue, compared to 21% of total revenue in Q1 of 2014. The sequential decline was largely attributable to an expected decrease in owned and operated product revenue, as Q4 is a seasonally strong quarter for our owned and operated product businesses. Network revenue was $16.6 million and was buttressed by the benefit of a contra-revenue charge related to the reversal of certain prior period network partner rev share payments that was related to invalid traffic sent by some of our network partners in Q2 of 24th. Revenue was up 1% sequentially, excluding the gross to net accounting revenue adjustment made in Q4. Adjusted gross profit was $41.5 million, up 33% year-over-year and down 7% sequentially, primarily due to typical Q4 to Q1 seasonality. Revenue-less ad spend for our own and operated advertising segment was $27.8 million, representing a 24% year-over-year increase and a 13% decline sequentially. Revenue-less ad spend for owned and operated products was $21 million, up 53% year-over-year, and down 18% sequentially, with a quarter-over-quarter decline driven by seasonality. Network revenue-less agency fees was $15 million, up 37% year-over-year, and up 4% sequentially. First quarter owned and operated advertising sessions were $1.3 billion, up 6% year-over-year, and down 32% sequentially. RPS was 4.5 cents, an increase of 32% from the fourth quarter, and CPS was 2.3 cents, up 36% sequentially, with a sequential increase resulting largely from a combination of mixed shift changes in our percentage of international traffic and the networks we advertise on. The spread between RPS and CPS was 92%, compared to 98% in Q4, 48% in Q1 and 24. Network partner sessions were 1.7 billion, up 11% year-over-year, and down 8% sequentially. Partner network RPS decreased 6% year-over-year and increased 10% sequentially after addressing for the out-of-period revenue adjustment in Q4. Total sessions processed by RAMP in the most recent quarter was $3 billion, up 9% year-over-year and down 20% sequentially. On to operating expenses and adjusted EBITDA. In Q1, OpEx net of ad backs were $29.4 million, down 5% year-over-year and up 10% sequentially. The quarter-over-quarter increase was expected and was impacted by non-wage-related employee costs. Q1 of 25 marks the seventh straight quarter of year-over-year declines in OpEx, and we will continue to focus on reducing costs in order to create greater operating leverage. Adjusted EBITDA was $12.1 million in Q1 versus just $400,000 in the same quarter last year. Q1 represented the fourth consecutive quarter of year-over-year increases in adjusted EBITDA. With respect to liquidity, we ended the quarter with $43.9 million of unrestricted cash on our balance sheet. Our $20 million use of cash in the quarter was primarily driven by a $13 million cash payment related to the coupon follow acquisition earn out, as well as a $4.4 million outflow related to the payment of our 2024 annual bonuses, which were approved and paid in Q1 of this year. As of March 31st, we had an outstanding balance of $275 million of term loan debt under our credit agreement. and our net consolidated leverage at quarter end was approximately 4.6 times. We also have $50 million of availability under our revolver as of the end of Q1. As Michael mentioned, due to evolving dynamics and announced changes in Google's AdSense for Domains marketplace, along with the broader market uncertainty tied to advertising demand and other potential macro headwinds, we are currently not in a position to provide financial guidance for Q2 at 25 or the balance of the year. We believe it is prudent at this time to wait for greater clarity on these items before offering financial projections. But in the interim, we remain focused on executing efficiently in this dynamic environment. We remain confident in the fundamentals of our overall business. Own and operated products are performing well and provide a strong financial foundation. Our focus on cost reduction is evident in the numbers, and we remain focused on driving OpEx savings. The volatility in our marketing-driven businesses has hindered our ability in the near term to sustainably grow those businesses. However, we are confident in the power of our ramp platform and our ability to leverage new technologies such as AI and agentic coding to create a long-term competitive advantage. Thanks for joining us today.