System1, Inc.

Hello, my name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the System 1 Q1 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session, and instructions will be provided at that time. I would now like to turn the conference over to Kyle Ostgaard, Vice President of Finance. You may begin.

Thank you for standing by. and welcome to the first quarter of 2024 conference call for System 1. Joining me today to discuss System 1's business and financial results are our co-founder and CEO, Michael Lund, and our Chief Financial Officer, Tritesh Kadabi. 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, including our annual report on Form 10-K for the fiscal year 2023, filed on March 15th, 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 day 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 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 1's co-founder and chief executive officer, Michael Huynh.

Thanks, Kyle. Good afternoon, everyone, and thanks for joining us on our Q1 System 1 earnings call. Let's get right into our quarterly performance. I'm happy to announce that System 1 was able to deliver financial results which exceeded our earlier guidance. System 1 delivered $85 million of revenue and $31 million of gross profit. Adjusted EBITDA was $423,000. Owned and operated revenue was $69 million, down 35% year-over-year and down 13% from last quarter. This was driven by a 12% sequential decline in advertising spend. We generated over 1.2 billion sessions, an 18% year-over-year increase, and a 14% quarter-over-quarter increase. Spread was approximately 2 cents per session. International revenue continued to remain a highlight with international revenue representing approximately 29% of owned and operated revenue. This was up from 25% of owned and operated revenue in Q4 of 2023. Now, overall, Q1 was somewhat choppy, but ended on a positive note. The overall advertising marketplace started off a bit weak in January and improved as the quarter progressed. This pattern was expected to match what we see in a typical Q1. Our Q1 volatility was driven primarily by our Google relationship, which as a reminder is our largest revenue source. We saw significant volatility from Google during the quarter. Their sell side pricing moved around more than typical. And the Google product team introduced new features at a very rapid pace with minimal advance notice to us. Longer term, this is a good thing for System 1. We work closely with Google to integrate new features into our tech stack, and the product improvements almost always lead to increased revenues for System 1. In the short term, however, the rapid fire of Google changes caused quite a bit of volatility in the overall Google partner ecosystem. Unfortunately, things have begun to stabilize with Google. The last couple weeks of Q1 were particularly strong, and these favorable trends have continued through the early weeks of Q2. If Google pricing and product rollout stay consistent, we expect all of our marketing-driven businesses lines to benefit. Partner network revenue was $16 million, and gross profit was $11 million. Revenue increased 5% year over year, but was down 5% sequentially, as we expected due to typical seasonality. Sessions were 1 billion up 134% year-over-year and 32% sequentially as traffic from existing partners increased along with new partners joining the network. Partner network RPS declined 55% year-over-year and 28% quarter-over-quarter driven by the same marketplace headwinds that impacted our owned and operated business. The marketplace headwinds we faced in our O and O business namely narrowing RPS spreads and volatility in sell-side pricing, were shared by our partners as well. But notwithstanding that, our partner network business continued to perform through solid execution as well as what we believe is the attractiveness of our RANT platform. Key metrics evidencing this include in Q1 of 24, total active partners grew 5% from Q4 to over 250 total partners. Average revenue per partner decreased sequentially by 9% due to Q1 seasonality and choppiness in the marketplace. Remember, when partners join our ramp platform, there's a timeframe during which they begin to scale up with us. This is a function of the partner getting more familiar with our platform, as well as our constant evaluation and monitoring of their traffic quality. We consider a platform partner to be a scaled partner. when they're generating at least $50,000 of revenue per quarter on-ramp. At the end of Q1, we had 57 scale partners compared to 50 scale partners in Q1 of 23, representing a 14% growth rate. Moreover, as I mentioned previously, our partners are using us more and for more sessions. It is our hope that as the advertising market continues to improve, the combination of our growth in number of scale partners and the increase in the number of sessions will accelerate the growth of our partner network business. Moving to our organic businesses, they had a good quarter on several fronts. First, we saw a significant increase in organic traffic to MapQuest and Coupon Follow that began in March and should continue through Q2. These increases were driven primarily by favorable changes in the Google search algorithms. We've been working very hard to improve the customer experience on these sites in the hope our Google rankings would improve. Unfortunately, our efforts have begun paying off with increased traffic that directly drives corresponding increases in revenue. We also saw the launch of several key business development partnerships with our Star Page and Coupon Follower properties that we expect to begin paying dividends as the year progresses. Going forward, we are focused in a few key areas. First, we are continuing to invest in our RAMP platform. AI has materially improved our ability to scale our buy-side capabilities, and we plan to open up our buy-side to partners who currently use us primarily for sell-side monetization. Second, our organic properties will keep focusing on their on-site experiences, we'll be launching new and improved apps, and we'll be integrating additional distribution partnerships. Third, we're planning to start expanding our subscription business by rolling out more internally developed subscription products. And finally, we have been back to exploring the M&A market again as the digital market stabilized and pricing has started to get a bit more rational. Overall, I'm very pleased with our execution in Q1, especially with respect to product enhancements on RAMP focused on AI-driven automation. We're executing with focus and we are shipping products faster than ever. Our execution is starting to show up in our performance, and I'm increasingly confident we are moving back into growth mode. I also am happy to have Chuck Orsini rejoin System Wayne in an official capacity as our president and COO. Chuck and I co-founded System Wayne, and Chuck was our original CEO. He has driven much of our execution in the last year, and I'm happy to have him back in an official capacity. As I mentioned, every quarter, System 1 management has much of our network worth in System 1 shares. We're highly aligned with our longer-term shareholders. Management is in this for the long haul, and we welcome investors who want to come along for the ride. I'll now hand things off to Triti to discuss our quarterly results in more detail, as well as our Q2 guidance.