System1 Inc (SST) 2025 Q3 法說會逐字稿

Thank you for standing by and welcome to the third quarter of 2025 earnings conference call for System1 Inc. Joining me today to discuss System1's business and financial results are our co-founder and Chief Executive Officer Michael Blend and our Chief Financial Officer Tridevesh Kaabi. The 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 10K 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 managements, assumptions, and beliefs as of the date hereof, and System One 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 subjective 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 System1 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 at 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 has historically been a significant part of our marketing business, and its effective deprecation had a negative impact on our OO marketing and partner marketing business lines. While this Google volatility impacted results are across our marketing segment, our core operations remain strong, and we continue to deliver healthy profitability.

Revenue for the quarter was approximately $62 million with adjusted gross profit of $36 million and adjusted EBITDA $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 start page 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 corridor. We were no longer monetizing traffic through Google's AFD product as of the end of Q3.

Well, we had anticipated Google's transition away from AFD and have been focusing on our efforts on Google's replacement product. The AFD transition did occur sooner than we expected. While the timing was not ideal and now allows our team to focus fully on Google's related search on content product which we refer to as our stock.

We are the market leader in our stock 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 a Agenta 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 by year, respectively. Sessions increased 23% year every year and we're up 12% sequentially, reflecting continued consumer adoption of Star Page, 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. Coupon follow 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 coupon file business is currently domestic. Coupon follow also continues to grow the distribution footprint of our promo code browser extension called Saintly, and our cashback shopping business line be 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 rearchitected 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 are increasingly use social media videos for things like restaurant recommendations or retail reviews. Users can now watch a video on TikToker 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 favourites for the user. We're very excited at the pace of innovation at MapQuest and expect to see user features released at an increased cadence going forward.

Start Page, 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 Start Page'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 health care 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 MapQuest and Star 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 Agenta 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 ONO and partner marketing driven businesses. There's no way to sugarcoat it. Mary 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 with $16.6 million, down 14% year over year and down 15% sequentially.

The sequential decline was driven by lower traffic acquisition costs as tacked from both our ONO and partner business declined. Google's effective wind down of its AFD product has impacted both our ONO and partner marketing businesses. Our efforts to move business to Google's new Arto product have been going really well, but AP still represented a meaningful portion of our marketing business. For example, in Q2 of 25, AFD is 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-G Google monetization. A partner marketing business continues to remain focused on adding quality partners, and in Q3 we have approximately 180 active partners.

On a positive note, we now believe our transition to Google's new [Arsock] product is nearly complete. It has been very difficult navigating the last 2 years with Google, and you've 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 the 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 we will continue to invest in opportunities that we believe can provide significant upside. System1's leadership team remains fully aligned with our shareholders, and as a group, we remain one of the company's largest shareholders.

As System1 continues our transition back to growth mode, we appreciate your continued support.

With that, I'll hand it over to Tridi to go over our financials. Take it away Tridi.

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 GAAP 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 by year and down 12% sequentially. Product segment profit was $21.2 million, up 6% year to 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 by 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 modernization 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 modernization channel to reduce marketing segment revenue and adjust the gross profit in future periods. The contribution of AFD to our financial results 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 own and operated nor our partner lines on the AFD monetization channel going forward. Got out of the way, let's discuss the marketing segment profit, which is $16.6 million, down 14% year by year and down 15% sequentially. The year over year decline was driven by a 24% year over year decrease in tax, partially offset by an increase in return on tax or [RTA]. [RTA] 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 RSO.

On the operating expenses and adjusted even. In Q3, operating expenses net of addbacks were $26.2 million, down 4% year by year and down 10%. We remain focused on expanding operating leverage and making disciplined investments growth. Adjusted EBIDTA was 9.9 million in Q3, down 4% year by 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 930, 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 Q425 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.

(Operator Instructions) Tom Forte, Maxim Group.

Great, Michael and Tridi, 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 being in a way similar that we 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, essentially outperformed the Bing network historically. What we have been seeing over the last, I would say 2 or 3 quarters is performance on the Bing side is starting to improve.

And as we're seeing monetization go up on the being side, we've been shifting a little bit more of our efforts over there. So we do retain a pretty strong partnership with being, we had mentioned on our earlier remarks that you know the kind of the majority of our efforts on the marketing side are working with Google's new AR stock product, but we do have some business going with being. And Yahoo as well, which operate out of the same network and we would love to increase our business with with both those companies.

Great, thanks, Michael. And for my second and final question, in your earnings released you mentioned StartPage.com's efforts with chat GPT and cloud rather, 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, yeah, so just to reiterate, so on the start page side we've got a new product called Vanish which is essentially private AI and you know we 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 Vanish 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 Claude, 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 vanished 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 give 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, Tredi. Yeah.

Thanks Thomas. I appreciate it.

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

Alright, well, thanks everybody for joining us on our our earnings call. We look forward to presenting hopefully some good results on our next earning call and speak to you in about 3 months. Happy Thanksgiving.

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