System1, Inc. Q2 FY2024 earnings call

• System1 delivered $95 million of revenue and $39 million of gross profit in Q2 2024, exceeding the high end of guidance. Adjusted EBITDA was $9.9 million, 42% higher than the high end of guidance range.
• Owned and operated business: Total owned and operated revenue $77M, flat Y/Y, up 12% Q/Q. Adjusted gross profit $27M, up 22% Q/Q, flat Y/Y. Driven by 7% sequential growth in advertising spend and 21% Q/Q uptick in revenue from owned and operated products. Generated over 2 billion sessions on owned and operated properties, 145% Y/Y increase and 66% Q/Q increase. International growth: international revenue ~36% of owned and operated revenue, up from 29% Q1.
• Partner Network business: Revenue $17M, down 12% Y/Y, up 8% Q/Q. Adjusted gross profit $13M, down 9% Y/Y, up 24% Q/Q. Total sessions $2B, up 203% Y/Y and 33% Q/Q.
• Key initiatives: Continuing to invest in RAMP platform in 3 areas - AI integration, opening buy-side platform to partners, launching new products. AI enables scale in advertising campaigns. Opening buy-side platform to partners to help them scale. Integrating new monetization products into RAMP, starting with Google-related search on content.
• Owned and operated products: CouponFollow benefited from Google search algorithm update, saw significant increase in site traffic and revenue. MapQuest saw 10% Y/Y increase in organic visits. Startpage launched private browser app with over 50,000 downloads and positive user feedback.

Owned and operated business: Total owned and operated revenue was $77 million, flat year-over-year and up 12% from last quarter. Adjusted gross profit was $27 million, up 22% from last quarter and flat year-over-year. International revenue represented approximately 36% of owned and operated revenue, up from 29% in the first quarter. Partner Network business: Revenue was $17 million, down 12% year-over-year but up 8% sequentially. Adjusted gross profit was $13 million, down 9% year-over-year but up 24% sequentially. Total sessions were $2 billion, up 203% year-over-year and 33% sequentially.

• Q3 revenue estimated between $86 million and $88 million, roughly flat Y/Y at midpoint.
• Q3 adjusted gross profit estimated between $36 million and $38 million, flat Y/Y at midpoint with 150 bps of gross margin expansion.
• Q3 adjusted EBITDA estimated between $8 million and $10 million, up 11% Y/Y at midpoint.

Q: Are you guys seeing anything that's giving you pause in the marketplace as you look towards the forward guidance? And given all of the initiatives, what kind of contribution should we be expecting or over what time frame?

A: Tridi said Q2 was in line with expectations, no immediate pause seen. Michael mentioned new initiatives like opening buy-side platform to partners, shopping and subscription product efforts, with no significant contribution modeled in 2024 but expecting progress in back half of 2024 into 2025.

Q: How will the decision by Google not to deprecate third-party cookies impact CPMs going forward?

A: Michael said they're not anticipating much change. Google's delay in cookie deprecation was expected, and the new solution is getting competitive monetization-wise but technically complex to implement.

Q: Particular GEOS and verticals where System1 has had success in international and how it will contribute to growth in '25?

A: Michael said they've had success in programmatic markets with TikTok and Pengo across almost all international markets (Asia, South America, some in Europe). If current trends continue, international business will see rapid growth, contributing more to overall revenue in 2025 and beyond.