Q3 2025 System1 Inc Earnings Call

Speaker #1: Thank you for standing by and welcome to the third Quarter 2020 Earnings Conference call for system one . Joining me today to discuss System One's business and financial results are a co-founder and Chief Executive Officer , Michael Blend .

Speaker #1: And our Chief Financial Officer Tridivesh Kidambi . The recording of this conference call will be available on our Investor Relations website shortly after this call is ended .

Speaker #1: 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 .

Speaker #1: 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 .

Speaker #1: In particular , those described in our Risk factors , including our Annual Report on Form 10-K for fiscal year 2020 . Four filed on March 10th , as well as the current uncertainty and unpredictability in our business .

Speaker #1: 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 .

Speaker #1: 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 .

Speaker #1: 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 .

Speaker #1: I would now like to turn the conference call over to System1, Inc. co-founder and Chief Executive Officer , Michael Blend . Thanks , Kyle .

Speaker #2: 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 products segment .

Speaker #2: Our strong execution was offset by a previously anticipated disruption that 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 .

Speaker #2: 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 marketing and partner marketing business lines .

Speaker #2: While this Google volatility impacted results are costs , our marketing segment , our core operations remain strong and we continue to deliver healthy profitability .

Speaker #2: 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 .

Speaker #2: As we navigated the marketing volatility . Without the Google disruption , we would have shown significant growth in both gross profit and our bottom line .

Speaker #2: The product segment continues to show strong year over year growth , with revenue increasing 8% from Q3 2020 . For 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 .

Speaker #2: Now , as I mentioned , our marketing business had a volatile quarter as we were no longer monetizing traffic through Google's AfD product .

Speaker #2: As of the end of Q3 . While we had anticipated Google's transition away from AfD and have been focusing on efforts on Google's replacement product , the AfD transition did occur sooner than we expected .

Speaker #2: 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 our stock .

Speaker #2: We are the market leader in stock and believe it represents a much larger and more durable opportunity than our legacy Google business.

Speaker #2: 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 genetic coding , specifically , we are seeing increasing efficiency gains and are planning to launch some new products specifically addressing the AI space .

Speaker #2: 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 .

Speaker #2: 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 Startpage .

Speaker #2: MapQuest and coupon . Follow . While we saw significant increase in total sessions , revenue and gross profit fell sequentially due to a decrease in revenue per session .

Speaker #2: This decrease was driven by some weakness in advertiser demand . Most acutely in our coupon follow business where certain advertisers pulled back due to tariff uncertainty .

Speaker #2: Rrps 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 .

Speaker #2: Coupon . Follow our promo code and couponing service continues to execute on its plan for international expansion and Q3 . We launched language specific sites in both Germany and France following a previous launch in Poland .

Speaker #2: We see international as a large opportunity for overall growth given most of our current coupon followed businesses . Currently , domestic coupon follow also continues to grow .

Speaker #2: The distribution footprint of our promo code browser extension called Sintel , 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 .

Speaker #2: 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 .

Speaker #2: One example is building mapping features for younger users for 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 .

Speaker #2: 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 .

Speaker #2: We're very excited at the pace of innovation at MapQuest , and expect to see user features released at an increased cadence going forward .

Speaker #2: 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 .

Speaker #2: Vanish is a mobile app that offers access to ChatGPT called and perplexity through Start Pages signature privacy proxy layer users IP addresses , queries and conversations are not logged and conversations remain private .

Speaker #2: 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 .

Speaker #2: These updates on our products business have a common theme , which is significant investment in strengthening our core businesses . Coupon follow up MapQuest 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 .

Speaker #2: 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 .

Speaker #2: 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 into search , shopping and geolocation spaces .

Speaker #2: We're going to be aggressive in using a genetic 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 .

Speaker #2: 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 .

Speaker #2: When we identify the winners . Now let's go into more detail on our marketing segment , which includes both O and O and partner marketing driven businesses .

Speaker #2: 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 .

Speaker #2: 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 .

Speaker #2: The sequential decline was driven by a lower traffic acquisition costs , as tax from both our O and O and partner business declined .

Speaker #2: Google's effective wind down of its AfD product has impacted both our O and O , and partner marketing businesses . Our efforts to move business to Google's new R SoC product have been going really well , but you still represented a meaningful portion of our marketing business .

Speaker #2: 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 .

Speaker #2: 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 product is nearly complete.

Speaker #2: 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 .

Speaker #2: 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 .

Speaker #2: 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 .

Speaker #2: Earlier this year , we identified the traffic we had sourced from a large advertising partner , included significant , invalid or non activity .

Speaker #2: After an internal review and an independent third party verification , we requested reimbursement for this traffic from the advertising partner . But we are still an active discussions with them .

Speaker #2: 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 .

Speaker #2: 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 .

Speaker #2: Looking ahead to 2026 , we are focused on accelerating growth in our product segment through product expansion and a robust pipeline of new launches .

Speaker #2: 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 .

Speaker #2: Our overall progress has 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 .

Speaker #2: 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.

Speaker #2: System one's leadership team remains fully aligned with our shareholders and as a group , we remain one of the company's largest shareholders . A system one continues our transition back to growth mode .

Speaker #2: We appreciate your continued support . With that , I'll hand it over to treaty to go over our financials . Take it away .

Speaker #2: Treaty . Thanks , Michael .

Speaker #3: 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 .

Speaker #3: 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 .

Speaker #3: 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% .

Speaker #3: 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 .

Speaker #3: 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 .

Speaker #3: 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 and driving more users to our products .

Speaker #3: RFPs 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 2020 .

Speaker #3: For before diving further into gross profit trends for the marketing segment , I wanted to add some color with respect to the AfD monetization channel and the impact of these changes on our financial results .

Speaker #3: 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 .

Speaker #3: As part of industry wide changes to advertising and traffic quality requirements . For the six months ended June 30th , 2025 , the AfD monetization channel contributed approximately $94 million , or 39% of marketing platform revenue .

Speaker #3: 34 million , or 32% of marketing revenue and generated approximately $12 million of gross profit , or 28% of marketing adjusted gross profit .

Speaker #3: 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 .

Speaker #3: 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 .

Speaker #3: 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% sequentially .

Speaker #3: 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 TAC .

Speaker #3: TAC 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 .

Speaker #3: 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 our SoC .

Speaker #3: On the operating expenses and adjusted EBITDA in Q3 , operating expenses , net of Advax , were 26.2 million , down 4% year over year and down 10% sequentially .

Speaker #3: We remain focused on expanding operating leverage and making disciplined investments in growth. Adjusted EBITDA was $9.9 million in Q3, down 4% year over year and down 16% sequentially.

Speaker #3: 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 .

Speaker #3: 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 .

Speaker #3: 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 .

Speaker #3: The product segment is well positioned for continued growth and the marketing businesses are expected to rebound as the global marketplace stabilizes . And as Michael discussed , new growth initiatives leveraging our platform and emerging technologies will drive further expansion in the business .

Speaker #3: 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 .

Speaker #3: Thank you for joining us today .

Speaker #4: Thank you . We will now begin the question and answer session . If you would like to ask a question , please raise your hand .

Speaker #4: Now . If you have dialed in to today's call , please press star nine to raise your hand and star six to unmute .

Speaker #4: 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 .

Speaker #4: Please go ahead .

Speaker #5: Great . Michael , and thanks for taking my questions . I have one question and one follow up . I'll go one at a time .

Speaker #5: 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 ?

Speaker #2: 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 that we work with Google .

Speaker #2: What we found in the past was that the reason why we've been such a large Google partner is that Google network , you know , essentially outperformed the Bing network historically .

Speaker #2: 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 .

Speaker #2: 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 .

Speaker #2: So we we do retain a pretty strong partnership with being 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 stock product .

Speaker #2: But we do have some business going with Bing and Yahoo as well , which operate out of the same network . And we would we would love to increase our business with with both those companies .

Speaker #5: Great . Thanks , Michael . And then for my second and final question . In your earnings release , you mentioned Startpage efforts with ChatGPT and cloud .

Speaker #5: 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 .

Speaker #2: 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 .

Speaker #2: And we're pretty excited about the product . We 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 that they're trying to get answers from , they get a little bit concerned about their questions kind of going out and feeding the LMS and just not being private .

Speaker #2: So we do think that 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 with really all of the models .

Speaker #2: So we've got business going . Jim and I , Claude , you know , ChatGPT to to rebuild our platform and get our products built quicker , specifically as it relates to AI .

Speaker #2: 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 would be leaning quite heavily on AI to to to give the answers .

Speaker #2: So we think there's a really nice opportunity on the consumer side , and we intend to capitalize on it .

Speaker #5: Great . Thanks , Michael . Thanks , Trudy .

Speaker #2: Yeah . Thanks , Tom . Appreciate it .

Speaker #4: Thank you for your questions . I will now turn the call back to Michael Blend CEO and co-founder for closing remarks .

Speaker #2: All right . Well , thanks , everybody , for joining us on our earnings call . We look forward to presenting , hopefully some good , good results on our on our next earnings call .

Speaker #2: And speak to you in about three months . Happy Thanksgiving .