System1, Inc. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Michael Blend: Q1 execution was strong with revenue, gross profit, and EBITDA above guidance. Owned and operated products saw 51% Y/Y revenue growth. Marketing businesses were impacted by Google-related changes but margins improved. AI-powered automation via Agentic coding is driving productivity. O&O products (CouponFollow, Startpage, MapQuest) performed well, with CouponFollow user sessions up over 160% Y/Y, Startpage up 11% Y/Y, and MapQuest up over 30% Y/Y. Partner Network revenue was up, and the team made progress in moving partners to Google's RSOC product.
• Tridivesh Kidambi: Q1 revenue was $74.5 million, adjusted EBITDA $12.1 million (significant Y/Y growth). OpEx net of add-backs was $29.4 million, down 5% Y/Y but up 10% Q/Q. Liquidity: ended Q1 with $43.9 million unrestricted cash. Lack of Q2 guidance due to Google product transition uncertainty, online advertising demand volatility, and potential tariff policy impact.

Segment Performance

• Owned and Operated: Total owned and operated revenue was $58 million, a 16% year-over-year decline and 10% sequential decrease. This decline was driven by a 34% annual revenue decrease in marketing businesses, partially offset by a 51% increase in owned and operated products. Adjusted gross profit was $28 million, up 24% year-over-year but down 13% sequentially. Sessions across O&O properties totaled $1.3 billion, down 32% from Q4 but up 6% year-over-year. International revenue represented 30% of total owned and operated revenue, up slightly from Q1 2024.
• Partner Network: Revenue was $70 million, up 4% year-over-year and 1% sequentially. Adjusted gross profit was $15 million, up 37% year-over-year and 4% sequentially. Active partners decreased 14% from Q4, but average revenue per partner increased 7% quarter-over-quarter. The segment was positively impacted by the in-period recognition of previously withheld partner revenue related to invalid traffic.

Guidance

• System1 does not plan to provide financial guidance for the second quarter of 2025. This is due to evolving dynamics with Google's product changes, broader market uncertainty in online advertising demand, and potential impact of evolving tariff policies. Management is waiting for greater clarity on these items before offering financial projections.

Risks

• Google Product Changes: Volatility related to Google's shift from AFD to RSOC product for monetization, which continues to cause uncertainty.
• Online Advertising Demand: Broader volatility in online advertising demand poses risks.
• Tariff Policies: Potential impact of evolving tariff policies is a concern.

Question and Answer

Q: Tom Forte asked about the resiliency of digital advertising and how it compares to prior periods, and thoughts on advertiser verticals impacted by tariffs.

A: Michael Blend said typically in a downturn, performance marketing is a lagging indicator, so they may be last to see issues. He also mentioned they aren't seeing big effects in verticals affected by tariffs yet. Tridivesh Kidambi added that performance marketing with measurable ROI is often the last to be pulled by marketers.

Q: Daniel Kurnos inquired about productivity gains from Agentic coding, domestic vs international opportunities given market disruptions.

A: Michael Blend discussed how Agentic coding has led to 3x to 5x productivity gains in product development. On domestic vs international, he noted lower buy-side pricing from advertisers exiting the market helps domestically, and they're seeing good results internationally with TikTok and other platforms.