Thank you for standing by, and welcome to the Third Quarter 2022 Conference Call and Webcast for System1. Joining me today to discuss System1’s business and financial results are our Co-founder and CEO, Michael Blend; and our Chief Financial Officer, Tridivesh Kidambi. A recording of this conference call will be available on our Investor Relations website shortly after this call is ended. I’d like to take this opportunity to remind you that during the call, we will be making 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 included in the registration statement on form S-1 filed on April 13, 2022, in our form 10-K for the fiscal year 2021, filed on March 31, 2022, in our form 10-Q for the second quarter of 2022, filed on August 15, 2022, and our Form 10-Q for the third quarter of 2022, 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 assumptions and beliefs as of the date hereof and System1 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 – the gross profit and adjusted EBITDA. These non-GAAP measures should be considered in addition to and not as a substitute for or an isolation from our GAAP results. Information regarding our non-GAAP financial results including a reconciliation of our historical GAAP to non-GAAP results may be found on our Investor Relations website. I would now like to turn the conference call over to System1’s Co-Founder and Chief Executive Officer, Michael Blend.

Thanks, Kyle. Good afternoon, everyone, and thank you for joining us for our Q3 earnings call. Together with me is Tridi Kidambi, System1’s longtime CFO. Before we dive into our business performance, I wanted to give a quick recap of our year-to-date. In January, our entry into the public markets was an exciting time for System1. We joined forces with the excellent team at protected and the first half of the year we got off to the start we expected. EBIT as much of the technology market started a decline our advertising and subscription businesses were exceeding our already high expectations. Our performance through June gave us the confidence that 2022 was going to be another banner growth year for System1. In hindsight, we probably should have been a bit more guarded. Since January, the NASDAQ is down more than 30% in technology stocks in particular, have had a rough 2022. We’ve also seen some difficult macroeconomic conditions that are affecting the digital advertising markets they – we operate in. These conditions have made our early life as a public company bumpier than we hoped and expected when we went public. It’s not easy to ignore the outside noise, but our team is saying heads down focused on the business and playing for the longer-term. We are disappointed with how the back half of 2022 is looking, but we also weather in the storm of a difficult market. So let’s get onto our quarterly update. On the operating front, we continue to focus on our priorities that will enable us to significantly scale over the next few years. In Q3, we may considerable progress upgrading our RAMP platform, launching new subscription products, integrating recent acquisitions, and pushing into new marketing areas. Some of these efforts, particular increased marketing as we…

Thanks, Michael. As previously mentioned, the headwinds we saw early in Q3 have persisted significantly longer than we had hoped, which has impacted our results versus guidance. However, given the investments we have made thus far and the progress we’ve made with our RAMP migration, we feel we are in a strong position to grow significantly when the advertising markets rebound. One quick note, as I talk about year-over-year results for the prior year, I will be combining the results of System1 and Protected for 2021 periods to provide an apples-to-apples comparison of our results. Let’s move on to Q3 results. Revenue was $201 million as compared to $210 million last year, a 4% year-over-year decrease. The year-over-year decrease was driven by owned and operated advertising, which was down 10%, partially offset by an increase in network revenue of 13% and an increase in subscription revenue of 16%. Adjusted gross profit was $63 million, an increase of 9% compared to last year’s adjusted gross profit of $58 million. Revenue less advertising spend for the owned and operated advertising segment grew approximately 12%, 13% for the partner network segment and 5% for the subscription segment. Revenue and adjusted profit were lower than expected for the owned and operated advertising segments. In our previous guidance, we had forecasted spending approximately $115 million in advertising during the quarter. However, as a result of reduced consumer demand and specifically less available user sessions for us to acquire, we only deployed $106 million of advertising spend. Reflective of lower overall advertising demand, we saw revenue per session at $0.14 down $0.02 sequentially and down $0.05 year-over-year. Similarly, our acquisition cost per session was $0.10, also down $0.02 sequentially and down $0.05 year-over-year. Even in this environment, RAMP still identified and acquired over 1 billion sessions…

Thank you, Tridi. We will now go to live Q&A. The first question is from Tom Forte with D.A. Davidson. Tom, go ahead with your question.

Great. So thanks for all the details. I want to start with what I think is probably like a silver lining type question. So, historically, strategic M&A has been one thing you’ve done very well. I would imagine that there’s a lot of attractively priced opportunities today. Can you talk about how you think about the landscape for potential strategic M&A?

Yes. Sure, Tom. Thanks for joining Tom. Yes. So we’re continuing to be out there in the market looking at opportunities and we’re seeing a lot of interesting things. We don’t have anything to report now. We’re also trying to be very disciplined as we always have and we’re really waiting for pricing to adjust a little bit in the M&A market. We haven’t seen that just yet. I think the last three to five months have been a little bit of a shock to the system and the digital advertising markets that we play in. And as we’re going out and looking for companies to acquire, they haven’t yet come around to the pricing that we think is more reasonable in this market. It’ll happen, Tom.

All right. And then from my follow-up, I like to think a lot about how – when the pandemic first started in April of 2020, digital advertising went negative, but then when we realized the economy was holding up reasonably well, digital advertising rebounded very significantly. So how should we think about the things that you’re monitoring when looking for rebound and digital advertising and then how quickly will it rebound hit your performance?

Yes, sure. So if you go back to COVID was probably the last big shift we saw in digital advertising, that happened almost overnight. And we – our system adjusted – I would say, down. So we lower pricing as cost per – revenue per session goes down. And then as it rebounded, I don’t know if people can go back a couple years, 2.5 years ago things are bound pretty quickly, and then our system snapped out really quickly as well. Same thing will happen this time. This is actually a little bit more of a sustained, I would say, leveling off in digital advertising then we saw the started COVID. At that point in 2020, things snapped back pretty quickly. Right now, what we’re seeing is, things have essentially leveled off more than we would’ve expected and particularly in Q3 and Q4, which is where typically we would expect markets to start ripping upwards pretty quickly as you’re hitting into the holiday buying season. We just haven’t seen that yet. The holiday shopping will for sure be kicking in a little bit more strongly here around the Thanksgiving, and we hope to see an uptake then, but we haven’t seen the expected moves in the markets that we’ve seen really the past 10 years we’ve been in operation.

Thank you. And then my last question is, I wanted to know if there was anything interesting happening on a category basis. So it seems like travel in particular has been very strong. The beauty of your models are well diversified, so you’re not overdependent on financial services with mortgages being more difficult things like that. But yes, is there anything interesting going on in the category basis? What categories are helping and what categories might be hurting you?

Yes, for sure. So some of the larger categories that are pretty profitable for us, like finance, jobs, the general health category, those have been a little bit negatively impacted. And you’re seeing that show up in some of our marketing numbers. Those other categories like travel as is up substantially year-over-year, auto has I think flat is slightly up. So we haven’t really seen auto negatively impacted the way that some of the other categories have been. So the – our system’s moving around, finding the categories we should be in, it just happens right now, some of those categories have been a little bit of the lower revenue and lower performing categories then we would typically see a shopping, I would say, is an area where we would’ve expected to see a little bit more of a balance right now. Again, fast forward a couple weeks, when Thanksgiving rolls around, we might see more of a bump, but it’s been a little bit slower to accelerate than we typically we see in a Q4.

Great. Thanks for taking my questions, Michael.

Thanks, Tom, Appreciate it.

The next question comes from Shweta Khajuria with Evercore ISI. Shweta?

Thank you. Tridi, could you please talk to how you’re thinking about expense management next year and just at a high level how you’re thinking about guardrails for growth and margins? Thank you.

Sure. Thanks for the question, Shweta, thanks for joining. So with respect to headcount, just to echo kind of the comments on the prepared remarks, again, a lot of the OpEx growth that we’ve seen this year has been driven by first year public company expenses, everything from legal, insurance, audit fees, also OpEx acquired from the businesses that we acquired around CouponFollow, RoadWarrior, et cetera, and then also investment in RAMP. As we think about going forward in 2023 and beyond, we don’t expect and are not planning for any real significant increases in OpEx off of our current run rate. So we believe a lot of those are one time step ups, both in terms of the investment in RAMP as well as public company costs. So just from a margin perspective and an EBITDA perspective, we’d expect gross profit to a high degree to float directly down to EBITDA going forward. Specifically, as we think about what we hope is kind of inevitable rebound in the advertising markets. In terms of guardrails around gross profit margins specifically that’s certainly something we spend a lot of time thinking about and planning towards. I think even just the real testament to RAMP and the business that we built, we still saw actually an expansion in our spread between RPS and CPS on the O&O side this past quarter, maintaining that $0.04 spread and actually going up a little bit if you go out to the decimals to 38%. So again, those are things we’re constantly looking at as we think about RAMP, as we think about how we’re operating in the market. And at the same time, on the subscription side, we’re continuing to really be able to harvest the subscribers that we’ve acquired in the past. And that model in terms of really high flow through renewal revenue has also been helping us from a margin perspective. It’s why still we’re able to kind of maintain 46% EBITDA margins on gross profit even in Q3 with what we saw in the macro admin side.

Thanks, Shweta. The next question will come from Dan Kurnos with Benchmark. Dan, go ahead.

There we go, sorry. So Michael, having ownership of CouponFollow, I’d love to kind of get your perspective because there’s been – it’s funny listening to guys like Group M to say retail media is the next greatest thing and all the dollars are shifting there. It’s a sexy thing right now, but it’s maybe not biggest dollars. I’d love to hear from your perspective, as you view – we saw the weakness in sort of Google networks. And there’s kind of a narrative out there around sort of the intermediaries versus the direct to the digital native brands in organic Amazon and eBay obviously both spending a bunch of money to provide sort of they should be the starting focal point for search now too. So how do you view kind of the ecosystem spend? Is there a shift in spend to some of those categories? Obviously, monetizable queries are just paying out. So like when things come back, do you anticipate those budgets coming back? And your ability to continue acting as a screen, do you think that there’s any change to kind of the ecosystem from the dollar shift that we’ve seen out there?

Yes. So I guess that’s really a two-part question. So we wouldn’t anticipate Google doing anything, but continuing to stay very strong in digital marketing. It’s the best advertising machine ever invented. And we think people will – advertisers will continue to spend as much money as they possibly can profitably on Google. I think your question though also really addresses are we getting direct advertiser demand on to CouponFollow the shopping site that we own. The answer is yes. Yes, we’re having definitely advertisers and retailers come and want to spend as much as they can on CouponFollow. And so we’re getting a ton of direct advertisers there. People want to work directly with us to send shoppers directly to their site. The issue that we’re seeing here in Q4 is that shopping demand from the consumer side, the supply really hasn’t kicked in as substantially as we would like to have seen. Again, so shopping is one of the verticals that we thought would be a little bit stronger here in Q4, and we just haven’t seen it yet. So I guess, if you fast forward, absolutely. As the market normalizes a bit and consumers want to buy more things they typically do, we’re going to have the direct advertiser demand there, waiting for more consumers to come in.

Got it. And then just – it’s funny, you and I have kind of talked about this in the past. But just as we think about the strength of your platform benefiting from market disruptions. It sounds like we’re seeing a huge shift away from brand towards performance. Pretty much everyone has kind of said that going into next year. You guys have obviously been incredibly strong in performance. We’re seeing a little bit of downward pressure on pricing across several verticals and kind of ad buckets or industries or categories. And so your ability to kind of maybe reach in a little bit and take some market share. I just kind of love to hear if there are any particular area where you guys think there’s some opportunity. I’m not sure CTV is washed out enough yet, but just love to hear kind of thoughts.

Yes. I mean, look, so what’s been pretty interesting, and this is the way our platform always works is market conditions change. We really shift with it. So even in – it’s – the digital advertising market is – it’s not having the best back half of 2022. And as pricing has come down, we’ve been able to go and find the categories where we can maintain profitability. As Tridi mentioned, our session counts actually pretty good in Q3 and here looking at Q4. So we have been able to find the pockets and the verticals where there is consumer demand. Right now we’re – what we’re seeing is some of those verticals are some of the lower paying, lower revenue verticals. So while we can maintain our margin, the actual dollars that we can put to use, we’re just not putting as many marketing dollars to use as we’d like. And so obviously, it seems revert, which they always do digital marketing goes through cycles, and this is particularly not a great one as digital marketing reverse and the economy reverts will be ripping up along with it. And then one thing that is happening, when you look at the – remember we’ve got the subscription business as well, which is doing quite well, and as you – as we see the overall, advertising market to press a little bit on both the buy and the sell side. So prices are coming down a little bit, when we’re buying traffic and we’re making a little bit less when we’re selling the traffic, that’s actually allowed our subscription business to move up in the ad auction is a way to think about it because the amount of revenue we make on a session into our subscription business hasn’t changed. So as pricing comes down, we’re able to actually get – buy more – than more marketing dollars on subscription. And so that one in particular has taken up a lot of the slack that the advertising market has given it. And so we’re seeing subscriber growth and new subscriber acquisitions go up materially as the digital advertising market is depressed.

Got it. Super helpful. Thanks guys.

Yes. Thanks, Dan. Thanks for joining.

Thank you.

The next question, we’re going to go back to Tom Forte with D.A. Davidson. Go ahead, Tom.

Great. Three more for me. So you talked about and I’m sure that 2.0 is probably not the right number, but we’ll call it RAMP 2.0 versus RAMP 1.0. Can you quantify the potential benefits, higher sales, better margins, both?

So it’s really on the buy and the sell side. Most of the work and the upgrades that we’ve done on our platform have been more focused on sell side. And so what we’re seeing is essentially better monetization per session, and we get enormous leverage out of that. We don’t have all of our traffic on our new platform. We’re trying to be very measured about it, and but we are starting to move more and more of it over. And what you’ll see is we can buy traffic for the same price. So our costs are the same. We make in some cases materially more on that traffic. It’s not across every traffic segment that we’re on. And so our algorithms – optimization algorithms are different, if we’re in France or Japan or the U.S. and it’s all – it’s different and different verticals as well, but as we’re seeing revenue procession go up, all of that money drops to the bottom line. And so we actually have pretty high hopes. As we’re moving more and more traffic and getting our optimization algorithms working better, that increases margin substantially. And then as we’re making more money on the sell side, so more procession, we actually can increase pricing on the buy side and get more sessions in the door. So that combination will allow us particularly as ad markets start normalizing, we should be ripping pretty nicely out of as ad markets normalize. And Tridi, do you want to add anything there?

No, I think that’s right. I mean, the other thing is also I think on international, there’s a really big advantage in terms of the way that the new RAMP platform is optimized specifically around speed. And that has a really big impact to Michael’s point, mainly on the sell side as well.

Yes. Yes, that’s right. Some of the simple things, Tom, we’re literally just making the whole platform operate faster, we’ll see a direct correlation to getting efficiencies in our buy and sell side. And so we literally have done things that putting servers closer to where our major traffic centers are things like that, that, that are helping quite a bit.

All right. So then Tridi, sort of – Tridi must to solve my next question. So on international expansion, I feel like you touched on it a couple times in your prepared remarks. Can you talk about that? And then I know you talked about the impact of the strong dollar as it pertains to your subscription business. Is there any impact on your ads business from a strong dollar?

Sure. So let me take those in order. So as a percentage of revenue, advertising revenue on our platform, international was 19% in Q3 that’s up over 18% in Q2 of this year, and 15% in Q3 of last year. So still growing strong slowed down a little bit. I think along with all of the macro headwinds in terms of what we had seen in the velocity of that percentage. Again, international still remains a very strong initiative for us. And again, not just – we think that should be 25% to 30% of our advertising business, while the entire pie continues to grow. With respect to FX, very little impact on the international side. So the platforms that we buy and monetize on primarily Google on the monetization side. And then Google and other large partners on the buy side primarily are denominated in dollars throughout. So we are buying and selling in dollars even though the traffic itself is international, so little exposure or very little exposure there for us.

All right. Then last question, and I’m trying to think of the perfect way to phrase this. The social networking environment right now is unique, when you think about what’s going on with kind of the individual companies. You are early in identifying TikTok and starting to leverage TikTok, but given what’s going on in social networking right now is it easier or more difficult for you to make money on social networking traffic right now?

We haven’t seen a big shift in terms of our ability to effectively buy traffic. I think our Facebook have to go look at the last month or two, it’s been up a bit or spend on Facebook. So we haven’t seen things really shift around much. And remember a lot of the social networks, particularly ones that are more mobile focused, which is really all of them. We’re the kind of advertisers that are not super adversely affected by the – by some of the changes in privacy that Apple rolled out. So we’re more search and intent based advertiser, which is – we have an advantage there. So we haven’t seen big – really think anything go up or down. What we have seen on TikTok is we don’t have huge scale on TikTok. We’ve been in there kind of experimenting and learning their system. We are recently starting to get some pretty substantial scale a little bit on the advertising side of the business, but our subscription business is starting to figure out some really interesting marketing techniques on TikTok. And what’s interesting about TikTok is, you’re creating the advertisements, which are more video based, sme of those advertisements are actually transportable over to some of the other video based platforms. So we’re optimistic that as those ad formats get a little bit more standardized, you can create one ad that you’re going to be able to use across all the various video based platforms.

Great. Thanks so much for taking both sets of my question.

Yes. Thanks, Tom.

I appreciate you joining.

At this time, there are no further questions. So we’ll turn it back to Michael Blend for closing remarks.

Okay. Well, thanks, everybody for joining our earning – Q3 earnings call. We are powering our way through what has been a somewhat difficult macro environment in digital advertising but we’re heads down and continuing to invest in our technology and our people. I like to say that our performance reflects the diversification of our business. I’m – we’re happy right now as the overall digital marketing macro environment looks a little bit weaker. We’re really glad to have this subscription business to be able to take advantage of that weaker environment. We are keeping a close eye on cost for next year, but no matter the market conditions for next year we intend on rewarding our shareholders with a lot of growth in 2023. So thanks for sticking with us. Thanks for joining, and I look forward to meeting some of you at our upcoming investor conferences in the next couple months. Thank you very much.