System1, Inc.

System One's business and financial results are our co-founder and CEO, Michael Bland, and our chief financial officer, Tritivesh 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 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. 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 registration statement on form s1 filed on april 13 2022 in our form 10k for the fiscal year 2022 filed on june 6 2023 and in our Form 10Q for the third quarter of 2023, filed on November 9th, 2023, as well as the current uncertainty and unpredictability in our business, the markets, and the global economy generally. You should not rely on forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as 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. 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 results, including a reconciliation of our historical GAAP to non-GAAP results, may be found on our investor relations website. I would now like to turn the conference call over to System 1's co-founder and chief executive officer, Michael Blund.

Thanks, Kyle. Good afternoon, everyone, and thanks for joining us on our Q3 System 1 earnings call. Our biggest news by far is our recently announced sale of our total security subscription business. The transaction was valued at approximately $340 million, including $240 million in cash. As part of this transaction, approximately 25% of our total outstanding shares were transferred back to the company. We completed this deal for two primary reasons. First, we are confident System 1 will be more successful focused exclusively on our advertising business. While there have been headwinds in digital marketing over the last year, We believe the overall market has been stabilizing in the back half of 2023, and we have continued confidence in our Ramp platform and our team. Our advertising business is positioned for nice growth in 2024, and this deal helps us better execute against our vision. For the second reason, the total security transaction improved our balance sheet and capital structure overall. The cash provides immediate and long-term financial flexibility and will support our continued investment in our advertising platform. Additionally, with a reduced share count, as our advertising business starts scaling again, the benefits from that growth are going to be spread across a much smaller shareholder base. Operationally, we don't expect any disruption to our advertising business as a result of this transaction. The subscription business was primarily a standalone business, is easily separable from our technology stack, and is located in a separate office in the UK. We wish the best of luck to the total security team and its new owners. Now let's talk about third quarter performance. System 1 delivered $88 million of revenue and $37 million of gross profit. Adjusted EBITDA was $8.1 million, which is up 33% quarter over quarter. The adjusted EBITDA growth was a result of lower operating expenses impacted by cost-cutting measures we have taken throughout the year. The operating expense savings offset a sequential decrease in gross profit. We continue to face some headwinds in our owned and operated business, which is impacting our ability to profitably deploy advertising spend. Owned and operated revenue was $66 million, down 14% from Q2, driven by a 15% sequential decline in advertising spend. We generated over 900 million sessions, up more than 100 million versus Q3, with a spread of over 2.5 cents per session. Our network advertising business generated $22 million for revenue and gross profit of $15 million, up 3% quarter over quarter. The network business continues to benefit from ramp platform upgrades made this year that have positioned us very well in the marketplace. We signed 90 new partners in Q3 with 40 of those going live within the quarter. Over the last 12 months, we have signed 275 new partners, including five of the top 10 highest grossing partners currently on our platform. As we continue to add new partners and expand revenue from our existing base, We expect the network advertising business to deliver solid growth and be a key part of our strategic plan going forward. Now, along with the sale of total security, our business highlights in the quarter include new partnerships for search monetization with Ecosha, which is one of the largest independent search engines. We also signed a confidential agreement to monetize Search for a large browser company, which we anticipate will be a nice contributor in 2024. On the product side, we announced key feature improvements in our Road Warrior Driving Direction app, and CouponFollow launched its Partner Network, whereby we will be providing our promo code technology to third parties. We also continue integrating AI throughout our Ramp platform and business processes. As I mentioned on our last earnings call, AI is enabling us to scale our advertising campaigns at a pace we haven't seen before. And it feels like we are just scratching the surface with our uses of AI. Looking back at the last 12 months, 2023 definitely was a challenging year for System 1. We dealt with an uncertain advertising market. We had liquidity challenges related to our high debt burden. And we spent several months evaluating the sale of our subscription business. In response to these challenges, I think we made the right decisions to set up our company for long-term success. We narrowed our business focus to our core competency in advertising. We made substantial reductions to our operating expenses. We continued to invest in our rent platform. And the total security sale brought in a large injection of cash to our balance sheet. Looking forward to 2024 and beyond, I believe System One is a rejuvenated company set up to return to solid growth. We have excellent technology, strong relationships with our network and advertising partners, and we are solidly profitable. And most importantly, we have a focused and highly motivated team all moving in the same direction. That said, While we are optimistic about 2024, I don't have a crystal ball about what the overall economic environment is going to look like. And after a very rocky 2023, I don't want to promise performance that we aren't confident we can meet or exceed. I encourage our shareholders to look at System 1 as a long-term investment and judge our success on an annual basis. I know that's what we do. What I can tell you is that, except for the last 18-month blip, your System 1 team has a long history of producing results that have generated great returns for our shareholders. And as I like to state, every quarter, management is highly aligned with you. We put in our own capital this year to provide the company with extra liquidity, and we currently own almost 40% of System 1 after the retirement of the 29 million shares. As a leaner and hyper-focused advertising business, we are ready for the next chapter of System 1. I'll now hand things off to Triti to discuss the quarterly results in more detail, as well as provide Q4 guidance. Take it away, Triti.

Thanks, Michael. Thank you, everyone, for joining us today. I wanted to start by echoing Michael's comments on the total security transaction. The transaction sets us up both for greater success now and in the future. We received $240 million of gross cash in the deal, and since the close of the deal on November 30th, we have used a portion of that cash to repay all of our unsecured and related party debts, and have also paid down the entire balance of our $50 million secured revolver, 100% of which remains available to us if needed. In addition to ensuring that our liquidity and working capital needs are addressed, the primary use of the remaining cash will be to de-labor the company in the most effective way possible. And we will and are exploring all available options to do so, including accretive M&A. Outside of the cash proceeds, the buyers are assuming approximately $67 million of intercompany debt owed by System 1 to Total Security. And the transaction also included a waiver of $60 million in potential earn-out payments due to the Total Security management team. And the transfer of approximately 29.1 million shares of System 1's Class A common stock back to the company. which was then subsequently retired. Those shares transferred to System 1 represented approximately 25% of the company's shares outstanding. In addition to the reasons Michael mentioned, earlier around focusing on the advertising business and simplifying the overall business the liquidity provided by the transaction affords us the opportunity to continue to make investments into the core business and our ramp platform we will continue to be focused on investments that benefit both the owned and operated and the network advertising businesses while continuing to maintain our historical discipline and measured approach to investment and capital allocation decisions. Before moving on to a discussion of our Q3 results and guidance, I wanted to remind you that I will be speaking to results with respect to the remaining business only, excluding results from total security. Now on to Q3 results. Q3 revenue was $88 million as compared to $177 million last year, a 44% decrease year-over-year. The year-over-year decrease was driven by the owned and operated advertising business, which was down 54%, while network advertising revenue was up 63%. Adjusted growth profit was $37 million, down 18% year-over-year. Revenue-less advertising spend for the owned and operated advertising segment declined 36% to $24 million. Network revenue less agency fees was up 49% to $15.3 million versus $10.3 million last year. Continuing a trend that we have been seeing throughout the year, both cost per session CPS and revenue per session RPS were down sequentially. In Q3, RPS was down $0.02 sequentially to $0.07 per session, while CPS was down a penny to $0.05 versus $0.07 last quarter. Our spread between revenue per session and cost per session was a little under $0.03. On the network advertising business, RPS remained flat at $0.03 per session. Operating expenses net of add-backs were $29.1 million, down 3% year-over-year, which reflects the impact from cost reductions we have made throughout the year. As a reminder, while we have been making changes throughout the year, the most significant of the cost-cutting measures we undertook occurred in early September. Q4 will be the first period in which we see a full quarter of those reductions in the quarter. Adjusted EBITDA was $8.1 million versus $15.8 million last year, down 49% year-over-year and representing a 22% margin on gross profit. Now on to Q4 guidance. We expect to see a continuation of the RPS and CPS trends we have seen all year, with RPS and CPS either flat or declining in tandem, and RAMP maintaining our spread around $0.03 on a per session basis. We expect our network advertising business to continue to deliver significant year-over-year growth in Q4, with gross profit up approximately 29% versus last year. We are estimating Q4 revenue to come in between $93 million and $96 million, representing a 33% year-over-year decline at the midpoint. We are estimating gross profit to come in between $35 million and $37 million, representing a 16% decline year-over-year at the midpoint. We are estimating adjusted EBITDA to come in between $7.5 million and $9.5 million. Our EBITDA guidance reflects a 5% sequential growth at the midpoint quarter-over-quarter, as well as the fourth consecutive quarter of EBITDA growth for the business. With respect to liquidity, as of today, we have approximately $140 million of cash and $370 million of debt under our secure term loan. While our recent financial performance has been negatively impacted by market conditions, we continue to feel bullish about the future and the future opportunities that come along with it. With the recent investments we have made in the platform, cost-saving measures taken this year, and those to come in the future, primarily in the OPEX areas, specifically G&A as a result of our smaller footprint from the total security disposition, as well as the overall financial flexibility created from the total security transaction, We believe we are set up for success.