Q3 2024 Reddit Inc Earnings Call
Good afternoon. My name is Rob and I will be your conference operator today.
At this time, I would like to welcome everyone to Reddits third quarter 2024 earnings call.
All lines have been placed on mute to prevent any background noise.
After this speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number 1 on your telephone keypad. If you would like to withdraw your questions, simply press star 1 again. Thank you. Have a now-liced turn the call over to Jesse Rose, head of investor relations. You may begin your conference.
Jesse Rose: Good afternoon everyone. Welcome to Reddit's third quarter, 2024 earnings conference call. Joining me today, or Steve Huffman, Reddit's co-founder and CEO, Jen Wong, Reddit CEO, and Druvallero, Reddit's CFO.
Jesse Rose: Before we get started, the lighter remind you that our remarks today will include forward-looking statements.
Jesse Rose: Actual results may vary materially from those consecrated by these forward-looking statements.
Jesse Rose: Information concerning risks on certainties and other factors that could cause these results to differ is included in our SEC filings.
Jesse Rose: These former looking statements represent our outlook only as of the date of this call.
Jesse Rose: We entered take no obligation to revise or update any forward-looking statement.
Jesse Rose: During this call we will discuss both Gap and Non-Gap Financial Measures, Reconciliation of Gap to Non-Gap Financial Measures is set forth in our letter to shareholders.
Speaker Change: Our third quarter letter to shareholders and accompanying earnings press release are available on our investor relations website, investor.redditink.com and investor relations subreddit rslrdt. And now I'll turn the call over to Steve.
Steve Huffman: Thanks Jeffie
Steve Huffman: Hey everyone, thank you for joining and welcome to our third quarter earnings call. I'm excited to share that Q3 was a landmark quarter for Reddit. We averaged over 97 million DAUQ and increased up 47% from last year. And for the first time, we exceeded 100 million DAUQ a few times during the quarter, which has been a longstanding milestone for it.
Steve Huffman: A Q-few revenue grew 68% year over year and proud to announce that we also achieved gap profitability.
Steve Huffman: Reddit influence continues to grow across the broader Internet. In 2024 so far, the word reddit was the sixth most Google word in the United States. I'm just going that when people are looking for answers, advice or community, they seek out reddit specifically.
Steve Huffman: We saw this play out in real time when the White House came to Reddit to share critical information during the recent hurricanes. They used our Reddit Pro tools to identify the right communities to reach people affected by these events. In fact, thousands of businesses are now using Reddit Pro, including the MLB and NFL. We're using it to share exclusive content with communities. We continue to see more businesses and organizations come to Reddit to find their audience.
Steve Huffman: We remain focused on making Reddit the best place on the Internet for conversations and community, which means, quite simply, we are continuously improving the user experience by making discovery easier, making the platform faster and smarter, enabling seamless contribution and simplifying moderation.
Steve Huffman: A few highlights from the quarter include our conversation pages, conversation page views exceeded 90 billion, growing 40% year-over-year in Q3 as users are getting into the conversations faster and more often.
Steve Huffman: We refreshed the Ask Me Anything, or AMA, product, which led to a five-fold increase in the number of AMAs created in the new format, and we launched better tools for posting that have both increased posts and reduced moderator removals, which makes for a better experience for everybody.
Steve Huffman: And as for growing beyond the United States, our efforts here are proving successful. International DAU grew 44% year-over-year, led by 53% growth in our focus markets, most notably in France, India, and the Philippines.
Steve Huffman: This year, we started using AI to translate Reddit's corpus into other languages, making it more accessible for non-English speakers to enjoy in their native languages.
Steve Huffman: After promising results with French in the first half of this year, we expanded our coverage to include Spanish, Portuguese, Italian, and German.
Steve Huffman: This quarter, machine translation drove four times more users than last quarter, and based on the success we've seen so far, we plan to expand machine translation to over 30 countries through 2025.
Steve Huffman: Looking ahead, improving the search experience on Reddit is a key part of our strategy. We want to ensure that all users have the best experience possible.
Steve Huffman: This includes users coming to Reddit from external search, and those searching directly on Reddit, who are looking for recommendations on what to buy, what to watch, or what products or services are the best.
Steve Huffman: Continuing to look to 2025 and beyond, we'll seek opportunities to accelerate our roadmap, whether through new product developments, global expansion, or growing our ads business, all while maintaining our commitment to scaling profitably and ensuring that Reddit continues to be the go-to place for conversations and community on the internet.
Steve Huffman: Thank you again for being a part of this exciting journey with us. I'll now hand it over to Jennifer.
Jennifer: Thanks Steve. Hello everyone. It was a strong quarter for Reddit as our unique proposition and core platform improvements are driving differentiated growth. Total revenue in 2.3 grew 68% year over year to $348.4 million.
Jennifer: The advertising business grew 56% year-over-year to $315.1 million, driven by strong growth across objectives, channels, verticals, and geographies.
Jennifer: Let me discuss my discuss our ad revenue drivers in more detail.
Jennifer: We saw strong year-over-year growth and impressions from higher user growth, more efficient ad load, and expansion of conversation placement ads, while pricing was mostly consistent with the prior year. Revenue across the funnel accelerated year-over-year.
Jennifer: We continue to deliver more value to our customers by improving ad performance, particularly in the middle and lower funnel, which is two-thirds of our roadmap.
Jennifer: Performance revenue from mid and lower funnel objectives drove more than half the growth in the quarter and accounted for about 60% of total advertising revenue.
Jennifer: We more than doubled the number of clicks this quarter as we continue to enhance our lower funnel capabilities.
Jennifer: We saw continued momentum across channels.
Jennifer: The scaled business, including mid-market and SMB customers, grew over 80% year-over-year and continues to be an area of investment. This was largely driven by managed clients where we provide service.
Jennifer: We saw strength across verticals led by auto, consumer goods, financial services, and pharmaceuticals, all adding new clients and lines of business in Q3. And total international revenue grew 57% year-over-year as we saw strength in the EMEA markets across both large and mid-sized customers.
Speaker Change: In our ad stack, we continue to focus on number one, driving performance of our ad solutions across the funnel, two, improving usability for our advertisers and productivity for our Salesforce, and three, offering our advertisers Reddit-unique solutions and creatives.
Speaker Change: I'll discuss our progress in each. So first, driving performance of our ad solutions.
Speaker Change: We continue to invest in delivery formats and measurement and optimization products across the funnel. We saw nearly 50% growth in the number of conversions in Q3 versus Q2 and advertisers are adopting our automation tools including auto bidding.
Speaker Change: We continue to drive CAPI adoption and expand our partner ecosystem. We saw over two times more advertisers adopt CAPI this quarter versus Q2.
Speaker Change: We also expanded our ads API offering and ecosystem with the launch of our custom audience API, which allows advertisers to target their audience from their customer data platforms on Reddit. Our partnerships with Helium, MParticle, and ActionIQ now include both CAPI and custom audience capabilities.
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Speaker Change: We're seeing over 90% adoption of this feature across lower funnel campaigns.
Speaker Change: and AI driven workflows for our sales force to extract product insights from customer interactions and streamline sales support with an AI powered knowledge base.
Speaker Change: We also continue investing in brand safety and recently launched pre-bid protection with IAS, which will expand our partnership to include brand safety and viewability reporting in the coming months.
Speaker Change: and third, offering our advertisers Reddit unique solutions and creatives. In Q3, we launched a refreshed design of our Reddit unique ads product, Conversation Ads, driving double-digit improvements in conversion rates.
Speaker Change: We continue to test ad placements within the commons as we expand inventory and improve performance on this surface in the near term We anticipate this this could reach up to mid-single digit of total impressions
Speaker Change: Next I'll shift to our data licensing business.
Speaker Change: We continue to address the data licensing opportunity and are in contact with a small set of potential partners.
Speaker Change: Other revenue was $33.2 million in Q3, driven by data licensing partnerships we signed earlier in the year.
Speaker Change: In Q3, we entered into a new partnership with Meltwater, a media and social intelligence company. Meltwater accesses Reddit's content through our data API, which allows our customers to uncover brand insights, monitor industry trends, and tap into the discussions happening on the platform.
Speaker Change: Looking ahead, the landscape continues to evolve, and we have limited visibility into the timing of additional partnerships.
Speaker Change: We are focused on ensuring the end customers of our partners continue to see value in their content and meeting uptime and delivery expectations for our existing data partners.
Speaker Change: Overall, this was another strong quarter for Reddit and we are pleased with the traction we're seeing in the business.
Speaker Change: I want to mention a recent key addition to our sales leadership team, Mike Romoff, our new Chief Revenue Officer.
Speaker Change: Mike is a proven leader and brings a strong track record of sales, partnerships, and operational leadership from Google and LinkedIn. Mike will lead all of our sales and sales support functions reporting directly to me.
Speaker Change: With Mike on board, our strategy remains the same, to help customers grow their businesses on Reddit through our full-funnel solution built on our leadership in contextual and interest-based advertising.
Speaker Change: Looking ahead to Q4, the current industry environment feels stable and we are benefiting from structural improvements we have made to the core ad business that has sustained differentiated growth over the past quarters.
Speaker Change: We are monitoring for any potential impact from the upcoming elections, and we remain focused on our strategies and execution.
Speaker Change: Thank you all for joining for your continued support. Now I'll turn the call over to Drew. Thank you, Jen, and good afternoon, everyone.
Drew: If three points make a trend, the business trends remain strong for Reddit in the third quarter, as we continue to deliver on our key financial goal, namely, scale profitably.
Drew: The main financial headline for Q3 is likely that Reddit reached break-even on a gap basis, which has been an important internal goal. Net income was $30 million, up $40 million sequentially.
Drew: Let me outline three areas where the company really shined.
Drew: First, accelerating revenue growth to 68%.
Drew: Second, strong gross margins of 90% and strong adjusted EBITDA margins of 27%.
Drew: and third, strong free cash flow of $70 million.
Drew: Let me expand a bit on each.
Drew: First, revenues grew 68% year-over-year, a meaningful acceleration from 54% in Q2 and 48% in Q1.
Drew: driven by a ramp in ad revenue, which grew 56% year over year in Q3, up 15 percentage points sequentially.
Drew: Let me summarize three key drivers for revenue acceleration. First, overall, the investments in new ad products and the additional resources for our sales team are working well and we're seeing solid early traction with our customers.
Drew: Second, we saw strong gains and ad impressions which continue to fuel our growth all year long.
Drew: Pricing growth for Q3 was about flat year-over-year.
Drew: Whereas for the first half of the year, it was slightly down year over year.
Drew: A contributor to pricing was improved ad performance and value delivery for advertisers.
Drew: as cost per click declined while click-through rates increased.
Drew: Third, across our channel portfolio we saw broad strength. More than half our verticals grew over 50% year-over-year with some growing more than a hundred percent.
Drew: While revenues were accelerating, total adjusted cost growth continues to be modest, up 19% in Q3, less than one-third the rate of revenue growth.
Drew: Q3 growth and total adjusted costs was sequentially higher than the 11% in Q2, reflecting in part the growth investments fueling the revenue acceleration in Q3.
Drew: Total adjusted costs were $254 million, up $13 million sequentially, but down as a percentage of revenue from 86% last quarter to 73% this quarter.
Drew: Our adjusted cost of revenue remained deficient with gross margins exceeding 90% for Q3 of 280 BIPs year-over-year. We saw tailwinds from incremental revenue growth coupled with cloud hosting efficiencies.
Drew: Adjusted operating expenses were up 17% year-over-year in Q3, slightly higher sequentially, driven primarily by rising people costs and machine translation costs.
Drew: People cost for hiring Q3, driven by our yearly merit cycle, and hiring. Total headcount was up 4% sequentially and 7% year-over-year, slightly higher than last quarter due to the seasonal build from college graduate hiring from our engineering teams.
Drew: In the quarter, we launched machine translation in five countries with potentially 30 more on the roadmap.
Drew: Our translation efforts to date have been cost-efficient, as the translation cost for each language was less than a million dollars per language this quarter, and total spend was less than 1% of revenue.
Drew: We'll continue to test how much content to translate.
Drew: With strong revenue growth and modest cost growth, it's not surprising the financials continue to reflect in a very positive way. Q3 adjusted EBITDA was $94 million, a 27% adjusted EBITDA margin.
Drew: That's nearly double our Q2 margin of 14%.
Drew: Adjusted EBITDA was 101 million higher than prior year, driven in large part by a 72% flow-through on incremental revenues, marking the fourth time in the last five quarters over 70%.
Drew: That's solid cost leverage.
Drew: Now, a key focus is to turn profitability into cash flow. Operating cash flow was $72 million, a $79 million positive change from a year ago. For the first three quarters of the year, operating cash flow was $132 million.
Drew: Our CapEx remains very light, less than $2 million in the quarter and less than 1% of revenue.
Drew: Pre-cash flow for Q3 was $70 million and $127 million to date. Pre-cash flow was 20% of revenue for Q3.
Speaker Change: Unknown Speaker, which is great to see.
Speaker Change: Cash in the Balance Sheet ended at $1.74 billion, up $46 million sequentially.
Speaker Change: In Q3, Reddit executed a net settlement for the tax withholding for employee shares invested in the quarter.
Speaker Change: Overall reddit net settled 1.2 million shares at a cost of 66 million.
Speaker Change: This strategy helped to lower dilution for employee vesting in the quarter.
Speaker Change: Relatedly, the total number of fully diluted shares outstanding in Q3 was $206 million, up 0.7% sequentially, and 1.3% for the year, excluding the IPO.
Speaker Change: We're pacing well against our medium-term goal of 2-3% dilution for the year.
Speaker Change: Stock-based compensation in Q3 was $83 million, about 24% of revenue in line with peers at this scale.
Speaker Change: In the quarter, net income was $30 million or $0.18 per basic share and $0.16 per diluted share.
Speaker Change: This was a positive change from the prior year where both basic and diluted earnings per share were negative 13 cents.
Speaker Change: As we look ahead, we'll share our internal thoughts on revenue and adjusted EBITDA for the fourth quarter, where we have the greatest visibility.
Speaker Change: In the fourth quarter, we estimate revenue in the range of $385 million to $400 million, representing 54 to 60 percent year-over-year revenue growth, with a midpoint of 57.
Speaker Change: Adjusted EBITDA in the range of $110 to $125 million, representing a 30% adjusted EBITDA margin at the midpoint.
Speaker Change: Let me close with this thought on areas for financial focus. In the near term, historically, Q4 has been our largest revenue quarter of the year, so we're focused on execution.
Speaker Change: And financially, we are focused on turning differentiated revenue growth, high margins and low capex into meaningful cash flow generation.
Speaker Change: Let me turn the call back over to Steve.
Steve Huffman: Thank you, Drew. Okay, we're going to start with a few questions from our community that were asked in the RDDT subreddit. To the folks who are in that subreddit asking questions, thank you. There's a ton of great questions in there.
Steve Huffman: I'm going to do two now, and then Jen, Drew, and I will do a bunch of others that we'll record later after our calls today. So, first question, with
Steve Huffman: White House having an official account now, Reddit be able to get more official accounts from government officials slash agencies for getting information out to people? What will Reddit be doing to help expand that process?
Steve Huffman: So big picture, we want businesses, brands, creators, people to be able to have an official presence on Reddit.
Steve Huffman: And so this is, you can see the beginnings of this work with our work with Reddit Pro and some of these official accounts.
Steve Huffman: I think prior to this.
Steve Huffman: communities themselves as a launching pad for getting into communities.
Steve Huffman: And so we want Reddit to be a space for everyone and we need it to be kind of well-labeled and intentional.
Steve Huffman: So we've got a lot of businesses in there already over the course of this year and seeing the White House Be on reddit. It's really exciting and particularly in the way they use reddit which was to reach people in local communities to give them timely Information and updates
Speaker Change: So thanks for that question. Next question.
Speaker Change: I guess most of us would be expecting Logged In to be outgrowing Logged Out, but Logged In is at 27%, while Logged Out is at 70%. Even the two-year stacks, the Logged Out DAU crushes.
Speaker Change: My questions are, what are the dynamics of those users? It would be good if you could have some color on a conversion of them, if they show intention on the Google queries, etc. And how much should we worry about Google diverting traffic in the future? Also, if you can comment on the famous essay, Google is dying and people are penning Reddit to the queries, it would be dope.
Speaker Change: Okay, thank you for the question. Look, we've long had, we've long had a, I think, symbiotic relation, symbiotic relationship with Google and the Google search platform specifically.
Speaker Change: So, I think if you look within the Google traffic, there's a couple of big classes of users that I think are important to recognize. So the first are people who go to Google with the intention of ending up on Reddit.
Speaker Change: So in that stat I mentioned in my opening remarks, we're seeing a lot of those users. Reddit is the sixth most searched word on Google in the U.S. this year, and so those are people literally typing the word Reddit into Google, so they know they're going to end up on it.
Speaker Change: they're using, in this case Google, to navigate bread.
Speaker Change: The second class of users is users who are running maybe a more general search on Google and then ending up on Reddit. Also valuable. So we think of these users as this is an opportunity to teach people that Reddit has the answers to their questions.
Speaker Change: And so in that case, it's a great source of new users and a great opportunity to kind of show a new audience What reddit is all about?
Speaker Change: It's true the algorithm does kind of come and go, giveth and taketh away, as you say, so you'll never hear us celebrate or
Speaker Change: complain about an algorithm change here. But at the end of the day, Reddit has great content, it has answers to questions, it has advice and perspectives that people are looking for, and that's what internet consumers want. Whether they're coming directly to Reddit or finding us through other means.
Speaker Change: Jennifer Wong, Unknown Executive, Andrew Vollero, Jennifer Wong
Speaker Change: Okay, now we'll turn it back over to Jesse in the audience. Great, thanks Steve, thanks Jen, Drew, really appreciate it. Rob, why don't we open the line for questions from the analysts that are on the line, please. Thanks, Rob.
Speaker Change: Certainly, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. Thank you. And your first question comes from a line of Benjamin Black from Deutsche Bank. Your line is open.
Benjamin Black: Great. Thank you. Thank you for taking my questions.
Benjamin Black: First one's really on search and it'd be great to get sort of a status update on your efforts to improve on platform search, you know, what
Benjamin Black: Incremental investments you need from here on out, you know, how could start to potentially improve DAU growth and
Benjamin Black: How do you think about sort of the pathway and timeline to monetization of search? And secondly, just quickly on machine translation,
Benjamin Black: Can you just double click a little bit on your early learning curve so far? Also, are you seeing growth in international content velocity and could that potentially also support user growth here domestically? Thank you very much.
Speaker Change: Thanks, Benjamin. Okay.
Speaker Change: First question is search.
Speaker Change: on platform search specifically. Yes, important part of our strategy and will be a focus investment for us heading into 2025.
Speaker Change: It kind of strikes at all of the things we care about. It helps new users find their home on Reddit. Even today, many new users in their first session run a search. So they're literally typing into a text box what they're interested in, what they're looking for. It helps core users navigate Reddit, answer their questions.
Speaker Change: and it's a monetization opportunity.
Speaker Change: Thank you.
Speaker Change: So it's one of the few products that kind of touches everything so we're working on this. It's an investment area in the 2025
Speaker Change: I think the timeline for monetization is first we think about the consumer product. So we're doing some heavy lifting on both the back end and the front end. You'll see movement on that between now and throughout the year. And I think when the product is in a more
Speaker Change: Cool. Stable configuration, then we can start working in monetization, which I think, you know, is of course a big opportunity. So first users, then the monetization, but it's one of our top investments heading into next year.
Speaker Change: Your second question on the scene translation, what are the early learnings? Well,
Speaker Change: The, this is a feature that has a lot of nice stories to it. So first, our primary objective.
Speaker Change: was, Can we attract
Speaker Change: Can we translate English content into other languages? In this case, French has been our focus in the first half of this year as our first language. Can we attract French-speaking users in France on translated content? The answer is yes.
Speaker Change: And so, you know, following that simple learning, we're rolling out kind of a full immersive experience into five countries. And then we're also beginning to translate the larger corpus of Reddit into 30 languages over the course of next year. Machine translation
Speaker Change: is scaling. We drew four times as many users this quarter as we did last.
Speaker Change: So we'd like that. We'd like that trend.
Speaker Change: and the machine translation has some other positive externalities.
Speaker Change: One is that
Speaker Change: The translated content gets indexed into other search engines. And so we start to see new users from external search who are arriving on the translated pages.
Speaker Change: and we're starting to see a little bit of what you're asking about. Does that native language content get translated into English and show up for U.S. users? We're seeing some of that now. I think over time, you know, we'll see more and more of that. And I think that just speaks to one of the, I think,
Speaker Change: fun reasons to use Reddit, which is to get a view of the world through, you know, the lens of somebody else. And so machine translation, I think, from that point of view, is really helping us fulfill our mission of connecting people around the world. Thanks for the questions.
Speaker Change: I am Tracey Huffman. Thank you. I appreciate it. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye.
Speaker Change: Your next question comes from the line of Ron Josie from Citi. Your line is open.
Ron Josie: Great, thanks for taking the question. I want to ask two, please, and I guess this is for Jen and Drew. So I guess, Jen and Drew, I'm trying to understand the upside to revenue in the quarter. And I understand that impressions drove growth here. But talk to us more about maybe the mix between ad stack improvements. Jen, you mentioned a few newer products that are driving growth. But then also would love to hear your thoughts on newer advertiser demand.
Ron Josie: and others joined the platform. So that's question one. And then, Drew, more specifically, you highlighted operating leverage, again, over 70%, clearly achieving positive GAPOI, which is great to see. Talk to us about just how you view investments versus growth and whether we think we've turned the corner on profitability going forward. Thank you, guys.
Speaker Change: Yeah, I'll take the first part of it, which is sort of the growth drivers. It's a combination of the work we've done on go to market and the ad stack.
Speaker Change: So, first of all, some of the drivers were things like vertical diversification. Over half of our verticals are growing more than 60% year-over-year, like media entertainment, pharma, tech, finance. These are areas where we made intentional investments to develop that capability in those client relationships to bring on new lines of business and new customers.
Speaker Change: Unknown Speaker ... ... ... ... ... ... ... ...
Speaker Change: So that's really go to market driven. Then there you have pieces that are really driven by the ad stack. So things like the lower funnel and the mid funnel objective growth in the lower funnel.
Speaker Change: You know, almost double year over year in terms of an objective. That's because we're delivering more conversion volume.
Speaker Change: Our revenue grows when advertisers, they find the outcomes at the volumes and prices that they want in our marketplace.
Speaker Change: And we're just able to deliver more conversion and traffic outcomes to advertisers. So that's been a significant growth driver in the quarter as you look at the mid and lower funnel. I mean, all objectives grew really nicely, but those two in particular.
Speaker Change: Each of these I think is contributing, contributing growth drivers. We are adding new advertisers, every quarter there are thousands new advertisers onto our platform. Now, it's not at the level that we think is possible. I think that TAM is.
Speaker Change: Those are obviously seeds that are planted for the future while we continue to grow our base book of business. So I think both for contributors.
Ron Josie: Ron, on the investment side of the world, I mean it's happening now. The great news about our business is it's a really easy one.
Ron Josie: to invest into. And because the ROI is quick, it's immediate, it's measurable. There's a bias here to invest.
Ron Josie: We're a young company.
Speaker Change: Unknown Speaker 90 gross margin.
Speaker Change: Transcripts provided by Transcription Outsourcing, LLC.
Speaker Change: on some of the investments that you're making. Where are we investing? We're investing in ad tech.
Speaker Change: Right, so there's a number of things that we've added from an ad tech perspective that makes sense. You can measure the products, you have direct visibility into how the customers access your platform and so you can see whether or not you're getting returns for that immediately.
Speaker Change: On the people side, we're adding people and channels and countries, easy to take a look at, we're opening up a couple of new markets, easy to take a look at that run a country P&L. So, you know, a simple example would also be the sports deals we talked about last quarter, that was an investment Jen and I made maybe six months ago.
Speaker Change: You know small investment put a team on the ground and you're able to tangibly produce meaningful licenses with some of the
Speaker Change: If I go back to Q3 of 23, we grew 5, 7, 9, 11, and this quarter, 19% year-over-year. So you're starting to see that come in.
Speaker Change: Again, we're just at a place where the investments are measurable, they're short term, and you can really see the payback. So really the questions we have are really about can the organization handle it and can we execute? It really isn't a difficult ROI decision because right now the returns are very, very strong, as you know, with the high gross margin flow through.
Speaker Change: Due to time constraints, we ask that you please limit yourself to one question only. Your next question comes from a line of Rich Greenfield from Light Shed Partners. Your line is open.
Rich Greenfield: tempted to ask one question with 27 parts, but I'll contain myself. Sorry, I just couldn't resist. As we think of, you know, this sort of follows up on what Drew was saying, but I think Jen's probably the person I should direct this at. As we think about sort of the ARPU growth,
Rich Greenfield: it's obviously a lot far more measured and slower. It's solid overall, but it's obviously a lot slower than what you're seeing in terms of user growth. And I guess the question is, is how much is the ARPU growth being pressured by the rapid growth in users and in turn, the number of impressions that you're actually getting on the platform? And maybe the way of thinking about this and why we're asking is
Speaker Change: like the absolute level of monetization per user still feels very low relative to where I think you should be right now given the level of engagement.
Speaker Change: just trying to understand the puts and takes as we think about what will drive dramatically faster ARPU growth. Does user growth actually have to slow for that to happen or can you actually get to both happening at the same time if that makes sense?
Speaker Change: Yeah, thanks for the question, Rich. Just, you know, we've always said this. We don't we don't manage to ARPU. It's just, you know, it's an output, right? It's an output of revenue, users, and user mix.
Speaker Change: These are mixed being things like what geographies the users are in the mix of logged in and logged out So all those are sort of you know drivers of our approval. We don't manage to it
Speaker Change: Look, our revenue growth, like I said before, it's driven by advertisers finding the outcomes they want, the volumes and prices they want.
Speaker Change: and we have really differentiated revenue growth and we feel really good about that. We also have really differentiated user growth.
Speaker Change: which we feel really good about. And, you know, like we said, we don't focus on R2 quarter to quarter.
Speaker Change: Transcripts provided by Transcription Outsourcing, LLC.
Speaker Change: The bedrock of our inventory is logged in users.
Speaker Change: and we do continue to grow the value of our most valuable users who are those logged in users and there's been very steady growth in those logged in users and
Speaker Change: Our next question comes from a line of Andrew Boone from JMP Securities. Your line is open.
Andrew Boone: Hi guys, thanks for taking the question. I wanted to talk about data sales a little bit from here. How do we think about the puts and takes of that category of groups? Understood there's limited visibility, but can you help us understand kind of the guardrails of where this could go? Thanks so much.
Andrew Boone: Okay.
Speaker Change: Okay, I'll take it.
Speaker Change: Look, we are, you know, we're in the market. So there's basically kind of a
Speaker Change: Call like barbell of customers. So we've got the big customers on the training side Where we're still in conversations with folks, but there's a limited number of deals there and then there's more customers You know, that would be smaller deals. We've done a number of deals there that are less training and more
Speaker Change: You know, real-time access to information on Reddit, social listening, financial services, you know, those would be the customers we're targeting there.
Speaker Change: Look, we're still I think it's still early days for us here. We've built the kind of enterprise level kind of API's to support this business. It's
Speaker Change: It's I'd say for us it's a nice to have business and we'll keep these conversations going.
Speaker Change: But if we're thinking about the future of Reddit, it's really our ads business, it's search, it's more of our kind of on-platform initiatives. But I think that the story here, it's Reddit's data is extremely valuable.
Speaker Change: is extremely valuable for a lot of players in the market, including to ourselves. And so, and as I was saying in my opening remarks, Internet consumers broadly are trying to find
Speaker Change: Reddit's content for various reasons. And so, look, we're open and we're open for business. And I think finding the right balance between making this information accessible and building our own products on top of it is how we think about this.
Speaker Change: Your next question comes from the line of Naved Khan from Be Riley Securities. Your line is open.
Speaker Change: Great. Thanks a lot.
Speaker Change: I think, you know, look, we're we're testing ads in comments right now. I think we're still early in both, honestly, the design of that page from a consumer experience point of view, where I think there's a lot of opportunity and thinking happening, because it's such a high intent page where people are searching for information. And I think we're early in designing the ad format that is appropriate for the different sections of that page, the powerful of the post, which we launched,
Speaker Change: a couple years ago and the ads in common. So I think there's a lot of opportunity there. You know, that's about, that's a minority of our inventory today, but is growing in terms of engagement.
Speaker Change: So I do think that that's an opportunity, but we move both of those things in tandem.
Speaker Change: and I think there's a lot more actually that we want to do with that page in terms of the experience.
Speaker Change: and the ad experience will follow that. So there's headroom there. Again, we don't look at, we are interested in designing ad formats, but ad load is not a lever that we focus on.
Speaker Change: We're really focused on designing formats and making sure we're delivering performance against the increasing users that we've seen onto the platform. So our inventory really grows with that reach.
Speaker Change: Our next question comes from a line of Eric Sheridan from Goldman Sachs. Your line is open.
Eric Sheridan: Thanks so much for taking the question. Maybe following up on that last answer and asking one of Jen. Jen, when you think about scaling, performance, measurement, attribution, and garnering more direct response advertising budgets, not in 2024, but over the medium to longer term, what do you see as some of the key investments or unlocks that you're still trying to solve for to continue to progress the budget conversation with the broader advertising community that would have the output or the yield of building additional revenue scale in the years ahead? Thanks so much.
Speaker Change: Yeah, thanks, Eric. It's a number of things. So end to end for performance, you know, we're still continuing on our CAPI drive. It's really important. Measurement is incredibly, incredibly important to performance.
Speaker Change: That's proceeding really nicely, but it takes time. We want ideally 100% of our conversion revenue covered by, you know, a measurement like CAPI, but we're not there yet. So that's an IT, you know, driven process with our customers. But measurement's incredibly important.
Speaker Change: The second is automation simplicity. So I think we have now developed a product that is market competitive in terms of performance outcomes. That's great. We'll continue to chip away at that and improve performance for advertisers quarter over quarter and year over year. And that's what the market demands.
Speaker Change: and allow them to scale, especially with the increased reach of our users. That's great, but it has to be simple.
Speaker Change: but that will unlock more advertisers. The third is in the lower funnel.
Speaker Change: is shopping.
Speaker Change: Shopping is just a it's a different sub objective within the lower funnel performance. It requires catalog ingest its own machine learning models
Speaker Change: More complicated measurement. And, you know, we're building that capability, but it's a it's a longer journey to sort of birth that objective, something we believe in for Reddit. But that's also something that I think would bolster our lower funnel. So the three things.
Speaker Change: Your next question comes from a line of Rohit Kulkarni from Roth Capital Partners. Your line is open.
Speaker Change: Hey, thank you. A question about just how are you using Gen AI in your ad tech? Maybe talk about what
Speaker Change: impact have you already seen with advertising adoption along the lines of well
Speaker Change: Thanks for asking. So we started
Speaker Change: We launched a couple quarters ago a headline generator using Gen AI Where you know you can just put in the URL from your website, and it'll actually give you reddity headlines that actually drive improved ad performance
Speaker Change: and having Reddit-y type headlines in your ads really does make a difference in the ad resonance.
Speaker Change: So that's just an example of, I think, what's possible in terms of ad creative.
Speaker Change: We did acquire a company called Memorable AI. Their specialty is in understanding the components of creative.
Speaker Change: and how they drive performance, you know, might be the is it a hero image, the color of the image, the type of text, etc. So they drive the insight in how how to optimize creative
Speaker Change: We have an ability, we want to take that and integrate it into our ad stack, and the next step would be having those insights tied to a Gen-AI capability to actually do the work.
Speaker Change: based on those insights. So it's early in that we just acquired them and we're integrating them into our ad stack, but we do see a very fulsome and exciting roadmap related to ad creative in terms of Gen AI.
Speaker Change: The other automation that you'll see that is coming in the platform is good is going to really be around You know and ML with a little bit of AI on top in terms of the end-to-end performance That's taking steps out of the tool to make things easier to execute in terms of campaign setup and campaign optimization
Speaker Change: Your next question comes from the line of John Colantoni from Jeffries. Your line is open.
Speaker Change: Unknown Speaker 00.00.00
John Colantoni: Great. Thanks for taking my question. You talked last quarter about conversation ads creating some pricing headwinds.
John Colantoni: Can you talk about if conversation ads are still putting pressure on CPMs and also talk to the impact on pricing early adoption and sort of the reception of some of your newer premium conversation ads. Thanks.
John Colantoni: Sure
Speaker Change: Yeah, I would say that the the conversation placement compared to the feed
Speaker Change: still has.
Speaker Change: Unknown Speaker Less demand in in that placement because it's newer and we are testing ads and comments. So we'll be adding some ad load into that page.
Speaker Change: And obviously adoption for a new ad unit like that does take time. But there are ways that we've been growing that demand. So, for example, I mentioned earlier the multi-placement optimization, where
Speaker Change: especially when they're looking for a specific outcome that's helped increase demand fluidly across these two surfaces because what the advertiser really wants is the outcome.
Speaker Change: And they're sort of more indifferent to the placement. And so that's helping advertisers get acquainted with the performance in that unit where we can fluidly optimize for them and take some friction out and having to set up different ad groups, et cetera, and think about those two ad units. And we sort of adjust the creative and the optimization across both. So I do think that there is increased demand. We're seeing good increased demand against that unit. But of course, we're also seeing
Speaker Change: A lot of supply, as mentioned earlier, in terms of the engagement on that page. So they're moving in tandem. The good news is there's incredible opportunity on that page.
Speaker Change: That page is extremely contextual, extremely high intent. It is a high converting page with great outcomes. And we're still early in the ad formats and designing the ads for that page. So it's just incredible opportunity.
Speaker Change: Our next question comes from the line of Brian Nowak from Morgan Stanley. Your line is open.
Speaker Change: Thanks for taking my questions. I have two. The first one is to go back to Eric's earlier question about sort of 25 drivers.
Brian Nowak: Jenny, can you just sort of walk us through, we think through all the ad innovation that you're most excited about, which of the products have you sort of built the back-end tech stack for that are going to sort of roll out into 25 that you think could really be the next driver of performance and add budget growth for you guys?
Speaker Change: And then the second one, Steve, can you just kind of walk us through your conceptual timeline about search, building search, and then starting to test monetization of search?
Jenny: Yeah, happy to talk about the AdSec. So for 25, I would say
Jenny: We're continuing on the same journey in terms of our strategy, right? We want to be a full funnel solution for advertisers. We want to deliver market competitive outcomes across brand and performance advertising. And I think we're doing that in the objectives that we have across.
Jenny: Brands, Impressions, Brand Lift, middle of the funnel for traffic and lower funnel in terms of key conversions, things like add to cart, purchase and app install.
Jenny: So there's more there. We're just at the beginning of that journey. There's more that we can do in terms of our modeling. There's more that we can do on measurement, like we can add modeling to measurement. There's a lot more that we can do to give more value and more scale to advertisers in those objectives. And remember that can all scale with user growth. So that's really nice position to be in.
Jenny: and we will deliver more efficient, it's still an efficiency-driven market, so we will still deliver more efficiency and return on ad spend to them next year, which will help them scale their work with us.
Jenny: In addition to that,
Jenny: and
Jenny: Brand has an opportunity to be a lot more automated and have a lot more selection in terms of the optimizations for advertisers, like optimizing for reach or lowest cost. The things that we've given to advertisers on the performance side that drive.
Jenny: Some automation for them, not end to end automation, but automation on the optimization to make it easy. We can do that in brand as well. And so that'll be something that we're investing in.
Jenny: The second is on the lower funnel. While we have a really nice foundation and conversions and app install, we want to build out shopping, as I mentioned before, that's just another capability in the lower funnel that I think can get advertisers another way to talk to customers. So that would be the second piece.
Speaker Change: Unknown Speaker Um,
Speaker Change: And the third, which I think we're now at the moment that we can do, which is the end-to-end automation. And, you know, you've seen this with Advantage Plus and Performance Max from Google. It really does make optimization campaign set up much simpler and scalable for advertisers.
Speaker Change: And the second is you need to build a certain amount of trust with your customers before you automate all of those activities so that they really understand what's happening at each step. I think we are there at that point. And so we've been investing in starting to put together these items into a more automated experience.
Speaker Change: So those are the three things that we've been starting to invest in in the background and think about as we go into 25 on top of the continuing roadmap from this year in terms of delivering the market competitive performance.
Speaker Change: Okay, and so then on the search side, we'll be doing a lot of heavy lifting for about 2025, so high-level roadmap, you know, modernizing our search products, so kind of bringing it up to table stakes, or what are table stakes in this era, so really good autocomplete.
Speaker Change: Beautiful Results Pages. We'll start working, integrating LLMs into
Speaker Change: into making our results more sophisticated and helping users navigate all the results that come back from Reddit.
Speaker Change: And there's a lot of back-end work as well, which is, you know, improving our own ability to do retrieval, getting more sophisticated, ranking ourselves.
Speaker Change: Unknown Executive, Andrew Vollero, Jennifer Wong
Speaker Change: and then creating more entry points in the search as well. So, you know, not just the search button on Reddit, but, for example, users who arrive to Reddit from external search, helping them kind of expand their queries and find more of what they're looking for. So all of that will be under heavy construction. We do a lot of testing, so you'll start to see this over the course of the next year. In terms of when we start monetization,
Speaker Change: We need to have some stability in the product, right? It's hard to monetize a product when the pixels are moving all over. So that's the simplest answer. I think most likely is...
Speaker Change: We'll find some products we'd like next year. That's when we'll begin planning. I wouldn't expect actual dollars to be coming in in 2025, but hopefully not too far after. So we'll follow the product. There's lots of exciting stuff coming. I think the opportunity is really big.
Speaker Change: And, you know, we're looking forward to getting there, but it is a multi-step process. But I think you'll be able to follow along with us each quarter as we go next year.
Speaker Change: Your next question comes from the line of Tom Champion from Piper Sandler. Your line is open.
Tom Champion: Good afternoon, Jen, maybe for you, your your comments on the market sound quite a bit better than maybe the last call. Curious if you agree, what were maybe the signposts that emerged during the quarter and just any early take on the market in 25. Thank you.
Speaker Change: Thanks for the question. Yeah, I'd say, okay.
Speaker Change: Probably when we last spoke, I had some caution about Q4 around the election.
Speaker Change: and what I would say is, I think the, it doesn't seem to be affecting bookings.
Speaker Change: I think there is caution around delivery timing, so there might be advertisers who are going to be a little quiet.
Speaker Change: for certain periods of time. But it doesn't seem to affect their interest in growing their business with us in Q4 and continuing their advertising. So I think that's where
Speaker Change: At least, you know, what we've seen so far.
Speaker Change: 25
Speaker Change: It's early, but I would say the signals are that it's stable, that it's, you know, they're probably some, you know, some optimism. I think most folks at the whole cause will say that they're going to be up in general unless there's been a major client or share shift.
Speaker Change: which I think is good and I think brand advertising has been really healthy.
Speaker Change: and we've seen strength across all our objectives. I think it's still an efficiency driven market.
Speaker Change: So I do think at the mid and lower funnel, there's still pressure to improve ROAS year on year. But I do think that there is healthy interest and investment in brand.
Speaker Change: That's our view so far.
Speaker Change: Your next question comes from the line of Doug Anmuth from JP Morgan. Your line is open.
Doug Anmuth: Great, thanks for taking questions.
Doug Anmuth: Maybe two for Steve. With Google and OpenAI already under contract, how would you characterize the demand for future large language model partnerships currently? And do you feel like you're making progress in working through some of those data and privacy requirements that you've talked about? So that's one. And then maybe second, this is a frequent question that we get from investors, but hopefully you could just help us think through some of the puts and takes.
Doug Anmuth: of getting up to 40% of daily traffic coming from Google. Thanks.
Speaker Change: Okay, so first question is on the data partnerships. So you mentioned a couple of big ones, Google and OpenAI.
Speaker Change: Like, as I mentioned, we are talking to folks. It's important that in, I think,
Speaker Change: any commercial agreement or non-commercial agreement for that matter as well, that the partners are respectful of our users. So that's inclusive of our public data policy. Then also it needs to be, you know, fair to our business. And so,
Speaker Change: I think those, those deals have so far been complex. I wouldn't say, I mean, not even close Reddit, but none of them are existential for Reddit.
Speaker Change: I'd say they're all kind of nice to have.
Speaker Change: Our general principle is we're open and open for business.
Speaker Change: but it needs to be on terms that work for us, our business and our users. So we're kind of working through.
Speaker Change: each of those. But as you've also seen, we're not afraid to block people or cut people off if we don't think we're going to come to terms there. And so I think there'll be a range of outcomes.
Speaker Change: and then on the kind of more traditional external search side,
Speaker Change: Yeah, look, I think, as I mentioned, we've long had a, I think, symbiotic relationship with the Google search platform. It's a, it's high utility for some of our core users, those users are going to come to Reddit regardless. And it's a great source of new users, effectively a marketing channel to educate
Speaker Change: new users about Reddit. And like we've seen Google algorithm change a lot over the years and of course it always will. And then Google of course experiments with all sorts of new
Speaker Change: search products, some help, some hurt, but we, you know, we've been on this journey for 19 years.
Speaker Change: So yeah, there's volatility in that traffic. But if you look over
Speaker Change: The last few years.
Speaker Change: Our logs and growth has been very stable and reliable. Our app growth has been stable and reliable. And that's where the majority, the vast majority of our revenue is.
Speaker Change: is there. So yeah, volatility on the logged out users on the external users. But our actual business has been very stable and reliable growth, you know, over that time period, and that's what we see looking forward as well.
Speaker Change: Our next question comes from the line of Alan Gould from Loop Capital. Your line is open.
Alan Gould: Thanks for taking the question.
Alan Gould: So, Jen, I know you said you don't manage towards ARPU, but your domestic ad ARPU had a significant
Alan Gould: uptick this quarter from minus 12% year-over-year in 2Q to plus 2% year-over-year in 3Q. I know Drew said pricing has improved. How much of that is pricing and how much and what other areas are contributing to that?
Alan Gould: Um
Alan Gould: So.
Speaker Change: I mean, ARPA is going to bounce around quarter to quarter. That's just the reality of being focused on the revenue growth and user growth. And, you know, so.
Speaker Change: And you do that by growing volume of clicks and conversions, which increases the value per impression that an advertiser gets, right? And it's increasing their return and the efficiency that we're delivering to them.
Speaker Change: and that just increases the value of every impression because of the click volume and the conversions that they're seeing from advertising on Reddit.
Speaker Change: So I do think that delivering performance.
Speaker Change: is definitely helpful for advertisers and for us in delivering.
Speaker Change: Return on Ad Spend for advertisers, which drives demand, which drives spending, and which can drive pricing and competition and interest in those objectives and scaling those objectives. So I do think it's driven by a lot of the work we've done in the ad stack to deliver performance.
Speaker Change: Next question comes from the line of Dan Salmon from New Street Research. Your line is open.
Speaker Change: Unknown Speaker 05.
Speaker Change: Hey guys, this is Ability Lovers speaking for Dan Semmon from New Street. Thanks for taking our question. I'm just wondering, could you guys give us an update on your go-to-market strategy for data licensing, how it's evolving, both for large-language model trainers and mid-sized customers? It'd be great to hear about your latest learnings. Thanks.
Speaker Change: Sure. So Steve mentioned before,
Speaker Change: You know, our go-to-market is kind of a barbell. We have discussions with a small group of folks who are developing, you know, training AI models.
Speaker Change: The other side is maybe marketing intelligence firms or verticals who are interested in slices of reddit data And those tend to be smaller deals But more more volume and and the training folks, you know There's usually a combination of both freshness that they're interested in as well as the total corpus of information to train on
Speaker Change: Unknown Speaker ... ... ... ... ... ... ...
Speaker Change: Look, I think that we continue to, you know, we're
Speaker Change: We continue that talk to like what I say is a small group of folks who are in the world of AI training. You know it's a really evolving landscape.
Speaker Change: Many of those companies are trying to figure out their own strategies, what their product is going to be, what they're building, how they're investing, how Reddit fits into it.
Speaker Change: So I think we are, it's well known that we are there to help and be a thought partner in this, etc, but I think, you know, it is an evolving landscape where they're sifting out their strategies, and we're a part of that strategy. So, you know, it's, that's just, you know, where we are in the landscape.
Speaker Change: The other side of the go to market is it's a very small team, you know, but is out there talking to marketing intelligence companies and also looking at some verticals.
Speaker Change: There, what we're doing is
Speaker Change: We're both engaging who would be the client, the customer to us, as well as their end customers, right? So if you're a marketing intelligence firm, you might have customers who are brands and companies. If you're a financial services firm, you might have an end customer who's.
Speaker Change: Financial Services Firm.
Speaker Change: Show the value to their end customers and make sure that their end customers have a great experience in Understanding with the reddit data how the reddit data can bring value and that's how we sort of grow that business we get more people excited about what you can learn and the insight you can get from reddit data and To continue to see value in it. And so that's what that work looks like
Speaker Change: Thanks, Rob. Yeah, I think we'll wrap here. You know, appreciate everyone joining the call today. If anyone has any follow-up questions, please do not hesitate to reach out. We, of course, look forward to keeping the dialogue open. Thanks, everyone. Thanks all.
Speaker Change: This concludes Reddit's third quarter 2024 earnings call. You may now disconnect.
Speaker Change: We're gonna leave it at that.