System1, Inc.

Thank you for standing by, and welcome to the third quarter 2025 earnings conference call for System 1. Joining me today to discuss System 1's business and financial results are our co-founder and chief executive officer, Michael Blend, and our chief financial officer, Pritavesh 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, including 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 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. 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 System 1 on our Q3 earnings call. Q3 performance reflected solid execution across many of our strategic initiatives, including our ongoing push to integrate AI across our company and strong growth in our higher margin product segment. Our strong execution was offset by a previously anticipated disruption to one of our primary monetization sources, Google. Specifically, in Q3, Google reduced monetization on its AdSense for Domains product, which we refer to as AFD, effectively sunsetting that product. AFD had historically been a significant part of our marketing business, and its effective deprecation had a negative impact on our own marketing and partner marketing business lines. While this Google volatility impacted results across our marketing segment, our core operations remained strong and we continued to deliver healthy profitability. Revenue for the quarter was approximately $62 million, with adjusted gross profit of $36 million and adjusted EBITDA of $9.9 million, each down 4% year-over-year as we navigated the marketing volatility. Without the Google disruption, we would have shown significant growth in both gross profit and our bottom line. The product segment continues to show strong year-over-year growth, with revenue increasing 8% from Q3 2024. Our Startpage, MapQuest, and Coupon Follow teams continue to introduce new features that extend our product reach and boost engagement, contributing to a 23% year-over-year growth in sessions. Now, as I mentioned, our marketing business had a volatile quarter as we were no longer monetizing traffic through Google's AFD product as of the end of Q3. While we had anticipated Google's transition away from AFD and had been focusing our efforts on Google's replacement product, the AFD transition did occur sooner than we expected. While the timing was not ideal, it now allows our team to focus fully on Google's related search on content product, which we refer to as RSOC. We are the market leader in RSOC and believe it represents a much larger and more durable opportunity than our legacy Google business. We continue to make great progress on the technology front. We're very excited at the pace that we are developing and releasing platform features and new products. And regarding AI-powered agentic coding specifically, we are seeing increasing efficiency gains and are planning to launch some new products specifically addressing the AI space. More to come on that in the future. Now let's go into more details on our product segment, which continues to post strong year-over-year gains. Product revenue was $22.5 million, and adjusted gross profit was $21.2 million, up 8% and 6% year-over-year, respectively. Sessions increased 23% year-over-year and were up 12% sequentially, reflecting continued consumer adoption of Starpage, MapQuest, and Coupon Follow. While we saw a significant increase in total sessions, revenue and gross profit fell sequentially due to a decrease in revenue per session. This decrease was driven by some weakness in advertiser demand most acutely in our coupon follow-up business, where certain advertisers pulled back due to tariff uncertainty. RPS fell 16% from Q2, driving a 6% sequential revenue decrease. On the product development front, we had significant releases across each of our major products, which I wanted to spend some time highlighting. CouponFollow, our promo code and couponing service, continues to execute on its plan for international expansion. In Q3, we launched language-specific sites in both Germany and France, following a previous launch in Poland. We see international as a large opportunity for overall growth, given most of our current CouponFollow business is currently domestic. CouponFollow also continues to grow the distribution footprint of our promo code browser extension called Sently, and our cashback shopping business line via expanded partnerships. Moving on to MapQuest, the team has been quickly pushing out product enhancements to our consumer mapping offering that competes with Google Maps and Apple Maps. In Q3, we launched completely redesigned and re-architected apps for both iOS and Android. In addition to a UI refresh, new features included easier to read map styles and CarPlay support for iOS. In addition to core mapping improvements to our existing user base, MapQuest is adding new social features designed to attract a younger demographic. One example is building mapping features for younger users who increasingly use social media videos for things like restaurant recommendations or retail reviews. Users can now watch a video on TikTok or Reels and then import that video into MapQuest. MapQuest then uses AI to parse the video, extract any addresses, such as retail stores or restaurants, and then automatically build a customized map of favorites for the user. We're very excited at the pace of innovation in MapQuest and expect to see user features released at an increased cadence going forward. Startpage, our private search engine, also released a new AI-focused product in Q3, a new private AI chat product that we call Vanish. Vanish is a mobile app that offers access to chat, GBT, cloud, and perplexity through Startpage's signature privacy proxy layer. Users' IP addresses, queries, and conversations are not logged, and conversations remain private. We believe Vanish meets an increasingly important consumer need, which is maintaining privacy while using AI to address increasingly private issues like healthcare and legal matters. These updates on our products business have a common theme, which is significant investment in strengthening our core businesses. Coupon follow-up map question start page are strategic assets, all having differentiated positions in large addressable markets with strong and defensible modes. And their growth is inherently more predictable than the marketing business. As a result, we plan to increase our investment in these products throughout the rest of the year and into 2026. Our specific focus is on acquiring more direct users who aren't one-and-done users sourced from SEO or at risk for AI-related disruption. The more people we have directly using our products, the less dependent we are on any third-party distribution platforms. In addition, we will continue to use our strategic assets as starting points to develop new products in the search, shopping, and geolocation spaces. We're going to be aggressive in using agentic coding to build and release new products, use our marketing expertise to quickly measure consumer demand, kill products when we don't see enough demand, and rapidly scale them when we do. Rather than make expensive all or nothing bets, our goal is to essentially build an assembly line to rapidly roll out new products and then put real investments when we identify the winners. Now let's go into more detail on our marketing segment, which includes both O&O and partner marketing-driven businesses. There's no way to sugarcoat it. Marketing had a difficult quarter. Marketing revenue came in at $39 million, down 43% year-over-year and down 28% sequentially. Advertising spend was down 54% from Q3 2024 and down 37% sequentially. Adjusted gross profit was $16.6 million, down 14% year-over-year and down 15% sequentially. The sequential decline was driven by lower traffic acquisition costs, as tax from both our O&O and partner business declined. Google's effective wind-down of its AFD product has impacted both our O&O and partner marketing businesses. Our efforts to move business to Google's new RSOC product have been going really well, but AFD still represented a meaningful portion of our marketing business. For example, in Q2 of 25, AFD still made up 27% of total marketing revenue. As we complete the transition away from AFD, our own business has been focused on scaling advertising campaigns and has started exploring new initiatives using non-Google monetization. Our partner marketing business continues to remain focused on adding quality partners, and in Q3, we had approximately 180 active partners. On a positive note, we now believe our transition to Google's new RSOC product is nearly complete. It has been very difficult navigating the last two years with Google, and you have seen that in almost continually declining revenue across our marketing business. Now that the transition is over, we can focus on getting back into growth mode. While we expect some near term volatility with our stock as Google continues to make product changes, we anticipate greater stability heading into 2026. We believe we're well positioned to return this segment to growth in the coming quarters. I did want to cover one more point on traffic quality, which is an issue we take very seriously. Earlier this year, we identified that traffic we had sourced from a large advertising partner included significant invalid or non-human activity. After an internal review and an independent third-party verification, we requested reimbursement for this traffic from the advertising partner. But we are still in active discussions with them as of now the partner has not agreed to our requests. We intend to vigorously pursue our claim against the advertising partner, as well as the technology platform which brokered the invalid traffic. We will use all possible means, including potential legal action. This type of traffic pollutes the overall advertising ecosystem. System One remains committed to enforcing the highest standards of traffic quality across all of our traffic sources and advertising partners. Looking ahead to 2026, We are focused on accelerating growth in our product segment through product expansion and a robust pipeline of new launches. The marketing businesses will continue to diversify, supported by a platform built for automation and scalability. For example, we recently launched new initiatives to source traffic from premium publishers, lead generation partners, and social media influencers. And we are actively working to scale each of these new channels. Our overall progress is masked a bit by the decline in our marketing business. That said, our teams are executing well, and we believe we're well positioned for the medium and long term. Our products businesses continue to perform, and we believe that we are at a trough in the marketing business. We continue to believe that we are undervalued and will continue to invest in opportunities that we believe can provide significant upside. System One's leadership team remains fully aligned with our shareholders, And as a group, we remain one of the company's largest shareholders. As System 1 continues our transition back to growth mode, we appreciate your continued support. With that, I'll hand it over to Triti to go over our financials. Take it away, Triti.

Thanks, Michael. As Michael made clear in his remarks, we experienced mixed results in the third quarter as continued volatility in the marketing segment offset solid execution across other areas of the business. Delivering these results, despite having one of our main monetization sources be effectively deprecated, underscores the strength of our diverse operations and the stability of our broader business. Let's get into the details. Q3 revenue was $61.6 million, representing a 31% year-over-year decrease and a sequential decrease of 21%. Marketing gap revenue was $39.1 million, down 43% year-over-year and down 28% sequentially. Products revenue was $22.5 million, up 8% year-over-year but down 6% sequentially. The sequential decline reflected softer monetization trends, which we view as more indicative of current market conditions than of execution. Adjusted gross profit was $36.1 million, down 4% year-over-year and down 12% sequentially. Product segment profit was $21.2 million, up 6% year-over-year but down 7% sequentially. Sessions increased 23% year-over-year and 12% sequentially, reflecting strong execution by our teams driving more users to our products. RPS declined 12% year-over-year and 16% sequentially to $0.04, reflecting lower monetization driven by reduced advertiser demand. Product segment profit represents 56% of total segment profit, up from 51% in the third quarter of 2024. Before diving further into gross profit trends for the marketing segment, I wanted to add some color with respect to the AFD modernization channel and the impact of these changes in our financial results. As previously disclosed on the company's earnings calls for the fourth quarter of 2024 and the first and second quarters of 2025, the company noted that Google had previously announced it was going to opt advertisers out of the AFD product on a rolling basis and indicated the possibility that the AFD monetization channel could be eventually discontinued as part of industry-wide changes to advertising and traffic quality requirements. For the six months ended June 30, 2025, the AFD monetization channel contributed approximately $94 million, or 39% of marketing platform revenue, $34 million, or 32% of marketing revenue, and generated approximately $12 million of gross profit, or 28% of marketing adjusted gross profit. The company expects the loss of this monetization channel to reduce marketing segment revenue and adjusted gross profit in future periods. The contribution of AFD to our financial results in Q3 was minimal, with only a $1.5 million of gross profit contribution. And as Michael noted during his remarks, as of today, we have no active marketing efforts, neither through our owned and operated nor our partner lines, on the AFD monetization channel going forward. That out of the way, let's discuss the marketing segment profit, which was $16.6 million, down 14% year-over-year and down 15% substantially. The year-over-year decline was driven by a 24% year-over-year decrease in TAC, partially offset by an increase in return on TAC, or RTAC. RTAC was up year-over-year, going from 118% to 120%. Total platform revenue for the marketing business was down 23% year-over-year, all driven by increased volatility and declines in the owned and operated marketing businesses. The partner network business was performing well prior to the AFD wind-down. We view this disruption as temporary and continue to remain confident that the partner business will recover quickly and resume the strong growth trajectory we saw earlier in the year as it completes the transition to ARSOC. On to operating expenses and adjusted EBITDA. In Q3, operating expenses net of add-backs were $26.2 million, down 4% year-over-year and down 10% substantially. We remain focused on expanding operating leverage and making disciplined investments growth. Adjusted EBITDA was $9.9 million in Q3, down 4% year-over-year and down 16% substantially. With respect to liquidity, we ended the quarter with $54.6 million of unrestricted cash on our balance sheet. As of 9-30, we had an outstanding balance of $265 million of term loan debt under our credit agreement, and our net consolidated leverage at quarter end was approximately 4.1 times. We also have $50 million of availability under our revolver as of the end of Q3, which is currently undrawn. We are not providing Q4-25 guidance at this time. That said, we believe the majority of the volatility tied to the Google Marketplace dynamics are behind us, and we anticipate being in a position to provide guidance again in the near future. The product segment is well positioned for continued growth, and the marketing businesses are expected to rebound as the Google Marketplace stabilizes. And as Michael discussed, new growth initiatives leveraging our platform and emerging technologies will drive further expansion of the business. Our consolidated platform continues to generate operating cash flows and coupled with our ongoing execution of cost saving initiatives around operating expenses, we will have ample liquidity to invest and execute against our strategic initiatives and deliver sustained long term growth and value for our stakeholders. Thank you for joining us today.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please raise your hand now. If you have dialed in to today's call, please press star 9 to raise your hand and star 6 to unmute. Please stand by while we compile the Q&A roster. Your first question comes from the line of Tom Forte with Maxim Group. Your line is open. Please go ahead.

Great, Michael and Triti, thanks for taking my questions. I have one question, one follow up. I'll go one at a time. So on its earnings call, Microsoft highlighted its market share gains for Bing. Can you talk about your efforts with Microsoft and if you're able to capitalize on Bing's market share gains?

Yeah, thanks, Tom. And thanks for joining. Good to speak with you. So we do work pretty closely with Bing in a way similar that we work with Google. What we found in the past was that, you know, the reason why we've been such a large Google partner is the Google network. you know, essentially outperformed the Bing network historically. What we have been seeing over the last, I would say, two or three quarters is performance on the Bing side is starting to improve. And as we're seeing monetization go up on the Bing side, we've been shifting a little bit more of our efforts over there. So we do retain a pretty strong partnership with Bing. We, you know, we had mentioned on our earlier remarks that, you know, the kind of the The majority of our efforts on the marketing side are working with Google's new Rstock product. But we do have some business going with Bing and Yahoo as well, which operate out of the same network. And we would love to increase our business with both those companies.

Great. Thanks, Michael. And for my second final question, in your earnings released, you mentioned Startpage.com's efforts with ChatGPT and Cloud, which I thought was quite impressive. I was curious to find out if there are other ways you're working with OpenAI and Anthropic.

Yeah, so just to reiterate, so on the Startpage side, we've got a new product called Vanish. which is essentially private AI. And we're pretty excited about the product. One thing we've been hearing from consumers is that people are very excited about using chatbots and using AI, but as they increasingly are using them for things like legal work and healthcare and kind of a lot of the private matters that they're trying to get answers from, they get a little bit concerned about their questions kind of going out and feeding the LLMs and just not being private. So we do think that a product like Vantage is going to potentially have some pretty good consumer acceptance. On a macro level, our company as a whole is working quite heavily with really all of the models. So we've got business going. Jim and I, Claude, you know, chat GBT to rebuild our platform and get our products built quicker. Specifically as it relates to AI-related products, we don't have anything... more than vanish to announce, but we do intend on, over the next year, rolling out several consumer-focused agents in specific verticals that will be leaning quite heavily on AI to get the answers. So we think there's a really nice opportunity on the consumer side, and we intend to capitalize on it.

Great. Thanks, Michael. Thanks, Trudy. Thanks, Tom. Appreciate it.

Thank you for your questions. I will now turn the call back to Michael Blend, CEO and co-founder, for closing remarks.

All right. Well, thanks, everybody, for joining us on our earnings call. We look forward to presenting, hopefully, some good results on our next earnings call and speak to you in about three months. Happy Thanksgiving.

This concludes today's call. Thank you for attending. You may now disconnect.