Thank you for standing by. My name is Joe, and I will be your conference operator today. At this time, I would like to welcome everyone to the System1 Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Kyle Ostgaard, Vice President of Finance. You may begin.

Thank you for standing by, and welcome to the second quarter 2024 conference call for System1. Joining me today to discuss System1's business and financial results are Co-Founder and CEO, Michael Blend; and our Chief Financial Officer, Tridivesh Kidambi. 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 make 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 included in our annual report on Form 10-K for the fiscal year 2023 filed on March 15 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 management's 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 EBITDA and adjusted gross profit. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from our GAAP results. Historical performance and future estimates provided during this call exclude results from total security. 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 System1's Co-Founder, Chief Executive Officer, Michael Blend.

Thanks, Kyle. Good afternoon, everyone, and thanks for joining us on our Q2 2024 System1 Earnings Call. We have a positive update for you today. I'm happy to announce that System1 delivered financial results, which exceeded the high end of guidance across our key financial metrics. System1 delivered $95 million of revenue and $39 million of gross profit. Adjusted EBITDA was $9.9 million, which was 42% higher than the high end of our guidance range. These strong results were driven by the positive returns from the continued investment in our RAMP platform, very strong international growth, significant progress in our owned and operated products and a tight focus on reducing OpEx. Let's get into some of the financial details. I want to start with our 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. Our quarterly growth was driven by 7% sequential growth in advertising spend as well as a 21% quarter-over-quarter uptick in revenue from our owned and operated products. We generated over 2 billion sessions on our owned and operated properties, 145% year-over-year increase and a 66% quarter-over-quarter increase. Spread was approximately $0.015 per session. Revenue per session was down nearly 60% year-over-year. The decline was driven by lower cost per click rates in the United States as well as a bigger mix shift towards international markets, which naturally have lower monetization rates in the United States. Now international growth continues to be a highlight with international revenue representing approximately 36% of owned and operated revenue. This is up from 29% in the first quarter. Our continued international growth demonstrates the power of RAMP's use of AI to very efficiently create content and…

Thanks, Michael. We are pleased with our second quarter performance and sequential growth trends highlighted by quarter-over-quarter adjusted gross profit growth of 24% and $9.9 million of adjusted EBITDA versus $400,000 in Q1. While the year-over-year metrics remain challenged due to the sequential step downs we saw in overall advertising demand going from Q2 to Q3 of last year, we significantly narrowed our year-over-year declines across key financial metrics and even grew adjusted EBITDA, which was driven by our cost-cutting initiatives over the past several quarters with operating expenses down 16% year-over-year. Now on to our specific operating results. Q2 revenue was $94.6 million, representing a 2% year-over-year decline and sequential increase of 11%. Revenue was $4.6 million above the top end of our Q2 revenue guidance that we provided in May. Owned and operated revenue was $77.4 million, flat year-over-year and up 12% sequentially. Network revenue was $17.2 million, down 12% year-over-year, but up 8% sequentially. Adjusted gross profit was $38.8 million, down 4% year-over-year but up 24% sequentially. We significantly narrowed our year-over-year decline, which was 18% in Q1. Adjusted gross profit was above the high end of guidance by $3.8 million. Revenue less advertising spend for our owned and operated advertising segment grew 22% sequentially to $27.4 million Network revenue less agency fees was up 24% to $13.5 million versus the prior quarter. Owned and operated cost per session and revenue per session were both down $0.02 sequentially to $0.02 and $0.04, respectively. On the Network Advertising Business, RPS was $0.01 per session. Most importantly, total sessions processed by RAMP in the most recent quarter was $4.06 billion, up 47% sequentially and 171% year-over-year. As Michael mentioned during his remarks, these RPS and CPM trends were primarily driven by growth in lower RPS and CPS international traffic…

Thank you, Tridi. We are now going to open the line for some questions.

Thank you. The floor is now open for questions. [Operator Instructions] Your first question comes from the line of Daniel Kurnos of Benchmark Company. Your line is open.

Thanks. Good afternoon, guys. Nice progress. There's actually a lot to unpack here, but maybe we'll just start with some simplistic questions and just ask Tridi following up on your commentary around historical seasonality. 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, Michael, that you outlined, what kind of contribution should we be expecting or over what time frame, whether it's back half of this year into '25, just help us at least get the framework of how you're thinking about some of the new initiatives contributing to the P&L.

Dan, this is Tridi. So yes, I get the easy question there. So short answer is no to your first question. So Q2 was in line with what we thought it would be. I think we mentioned in our last commentary back in May that we were seeing kind of the advertising markets behave as we would expect them to behave kind of sequentially coming off of Q1 that held through Q2 and knocking on with the first part of Q3 here. And we haven't seen anything that would give us pause or across any specific verticals or anything even given maybe the macro news that's kind of been around in the last week or so. And I'll turn it over to Michael Blend.

Yes. Thanks, Dan. So in terms of the new initiatives, so first of all, when Tridi talks about our Q3 guidance and also expecting the seasonal uptick in Q4, that would anticipate no contribution or very de minimis contribution from any of our new efforts. In terms of opening up the buy side to our partners, that's really ongoing right now. And we're going to start lighting the first partners on kind of as we speak. We're not modeling in any significant contribution in 2024, but we are highly confident that our buy-side platform is an improvement over -- for most of our partners, if not all of them, and we'll let them scale substantially beyond where they are now. For shopping, again, we are just getting into market with one of our new partners there on the kind of commerce side and have really, really, really early results. We're not anticipating scale on that in the second half of the year. If we do see it in Q4, that would be some kind of unanticipated upside for us. And then subscription, we do anticipate having at least one product in market in Q4. One of them -- our first one is pretty close to being complete and ready for testing. Again, just to reiterate, not modeling in any substantial contributions on any of these, but we will be a market in all three of those initiatives in the back half of the year.

That is super helpful and comprehensive. I appreciate that. Maybe I'll just follow-up quickly. It's probably more of a fun question, Michael. But now that Google has decided not to deprecate third-party cookies anymore and they have really no alternative solution in place at this point. It feels like the whole industry, I guess, breathes a bit of a sigh relief. So I'm just kind of curious how you think that will impact sort of CPMs going forward, what reactions you've seen if it changes anything now that privacy sandbox is kind of on hold for the foreseeable future?

Yes. So we're not anticipating much of a change. We were expecting that Q4, if they had fully rolled out the cookie deprecation the way they had talked about was going to be pretty volatile for a lot of people in market. Obviously, that's not going to happen now. But Dan, I know you and I talked about this in the past, we weren't really surprised to see Google take that stance and kind of indefinitely delay things. We've been hearing rumblings in the market. I've been hearing a lot of the testing that will be being done and they really simply hadn't been able to come up with a replacement that was that competitive with current cookie solutions. What we are hearing and what I think some of the testing is starting to show is that the solution that Google has come up with is starting to get fairly competitive on the monetization side. It's just technically pretty complex to implement. So again, like, I guess, it doesn't really affect our stance and what we think our business is going to do. We do think the industry as a whole, a lot of people were, I think, probably more concerned about the effects that they were letting on and I'm sure they're breathing like a bit of a sigh relief.

Last for me, Michael, I'll step aside. I always ask you about international, you always tell me it's on the come, and you highlighted it this quarter. So just love to hear if there's particular GEOS, you've been able to target particular verticals in international where you've had success. And how much you think that will be a contributing factor to what should be accelerating growth in the '25?

We're pretty bullish right now on international. We've had a lot of success in programmatic markets over the last couple of quarters. We've been scaling up, in particular, our relationship with TikTok and Pengo. Pengo is their programmatic network that's attached to the TikTok overall business. And we're seeing that across almost all international markets. We're seeing it in Asia, South America, a bit in Europe as well. So I would say that if current trends continue, we're going to continue to see pretty rapid growth in our international business, continuing to take overall more and more of a contribution to our overall revenue. And right now, if you ask me, I don't think those trends are going to slow down. We've been tuning our platform to focus more international. There's a lot of idiosyncratic things you have to do to really attack the programmatic market, particularly internationally. But we think we've got those things figured out, and we see a lot of growth ahead of us, and it's starting to kick in already. So not on the comp anymore. We're actually seeing it.

There are no further questions at this time. I will now turn the conference back over to Michael Blend for closing remarks.

Okay. Great. Well, thanks, everybody, for joining us today. As we tried to make clear in our remarks today, things are really starting to move in the right direction here at System1. Overall, our team is executing really well. Our major customers are pleased both on our partner side and also on our revenue side. And overall, we're seeing some decent stability in the digital advertising market, which is what we've been looking for over here for the last 1.5 years. And some things are looking pretty good. We're looking forward to have you join us again for Q3 earnings, and we are definitely hoping out some good news to report for you then as well. So thank you for joining.

This concludes today's conference call. You may now disconnect.