Reddit (RDDT) Q3 earnings review

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Reddit reported earnings on October 29. The company guided and landed at the following,

Guides vs Actuals
Revenue 290-310M → Actual 348.4, +68% yoy
Adj EBITDA 40-60M → Actual 94.1M (vs -6.9 last year)

Notes from the press release and share holder letter,

  • US revenue +70% yoy
  • international revenue +57% yoy
  • DAUq (daily active unique users) +47% yoy to 97.2M
  • GAAP profitability with net income 29.9M, net income margin 8.6%, previous year -7.4M in GAAP net income
  • adj EBITDA margin 27%, improvement of 79.3M from previous year
  • operating cash flow 71.6M, free cash flow 70.3M
  • ad revenue +56% yoy
  • other revenue +547% yoy to 33.2M (licensing deals)
  • gross margin 90.1%, +280 bps yoy
  • Q4 guide of 385-400M (54-60%), adj EBITDA 110-125M
  • CapEx 1.4M, less than 1% of revenue
  • cash 1.74B vs 1.21M last year
  • record 100M+ DAUq on certain days in the quarter
  • WAUq 365M, +53% yoy
  • logged in users +27%, logged out +70% yoy
  • total “conversion page views” were over 90B, up +40% yoy
  • machine translation drove 4x incremental DAUq
  • ARPU $3.58, +14% yoy
  • advertising grew across the full funnel
  • 80% yoy growth in scaled channel which includes SMBs and mid size companies
  • achieved record first GAAP profitability
  • “Reddit” is the sixth most googled word in the US
  • White House came to share critical info on Reddit for hurricanes
  • making discovery easier, platform faster and smarter, simplifying moderation
  • AMA (Ask Me Anything) format that is new has led to 5x the number of posts
  • International DAU grew 44%, led by focus markets of France, India, and Phillipines which grew as a group +53% yoy
  • expanded from French to Spanish, Portuguese, Italian, and German, plan to expand machine translation to 30 countries in 2025
  • top of funnel metrics growing in France, engagement, posts, comments, and votes reached all time highs
  • translated posts are surfacing in search engines
  • verticals, strong growth in Auto, consumer goods, financial services and pharma
  • Reddit content and data licensing partnership with Meltwater, allows uncovering brand insights and industry trends
  • building for future, “contextual and interest based advertising”
  • Conversion Ads driving double digit improvements to click through rates
  • cost of revenue 34.6M, +31% yoy
  • OpEx 307M vs 201M, increase in stock comp related to IPO
  • adj OpEx 220M vs 188M year ago (expenses are barely rising compared to revenue and EBITDA)
  • revenue/head 163k, GAAP operating expenses/head 143.5k, adj OpEx/head 103k

Adding some additional notes from the conference call not covered above,

  • “landmark quarter for Reddit”
  • thousands of businesses are now using Reddit Pro including the MLB and NFL
  • using AI to translate Reddit Corpus into other languages
  • search experience on Reddit is a key part of strategy
  • commitment to scaling profitability
  • saw strength in EMEA across large and midsized customers
  • “we saw nearly 50% growth in the number of conversions in Q3 versus Q2”
  • advertisers are adopting our automation tools including auto bidding
  • “expanding our partner ecosystem”
  • saw over 2x more advertisers adopt CAPI this quarter vs Q2
  • partnerships with Tealium, mParticle, ActionIQ now include both CAPI and custom audience capabilities
  • continue to test ad placements within the comments as we expand inventory and improve performance on the surface, “this could reach up to mid single digits of total impressions” (they have barely turned on ads in comments and successful so far)
  • partnership with Meltwater, accesses through API, provings brand insights and industry trends on the platform
  • net income of 30M, up 40M sequentially
  • “total adjusted cost growth continues to be be modest, up 19% in Q3, less than 1/3rd the rate of revenue growth”
  • cloud hosting efficiences drove gross margin, and more than offset higher spend for ad growth investments in machine learning
  • adj operating expenses were up 17% yoy in Q3
  • total headcount up 4% sequentially, 7% yoy, more hiring from universities for engineering teams
  • launched machine translation in five countries with potentially up 30 more on the road map
  • translation cost per language was less than 1M
  • will continue to test how much content to translate
  • adj EBITDA 94M, 27% adj EBITDA margin, nearly double the Q2 margin of 14%
  • free cash flow of 70M was 20% of revenue for Q3, “which is great to see”
  • cash on balance sheet is up 46M sequentially
  • fully dilutes shares outstanding up 0.7% sequentially, 1.3% per year, pacing well against goal of 2-3% per year
  • symbiotic relationship between Google and Google Search, will never celebrate or complain about algorithm changes
  • “machine translation is scaling”, drew in 4x as many users this quarter with translated content than prior quarter
  • over half of verticals are growing 50%+ yoy, like media entertainment, pharma, tech, and finance
  • adding new advertisers to platform, “TAM is really large compared to where we are today”
  • “ROI is quick, it’s immediate, it’s measurable”
  • will not manage APRU, it’s only an output of other metrics
  • we have really differentiated user growth, which we “feel really good about”
  • the bedrock of inventory is logged in users
  • we’ve done a number of deals where there was less than training and more access to real time information on Reddit, social listening, and financial services
  • enterprise level of APIs to support these businesses
  • “the future of Reddit, it’s really our ads business”
  • the market demands improving performance quarter over quarter and that’s what Reddit is providing
  • acquired a company Memorable AI, uses to “optimize creative”, understands components of what makes creative
  • search side will do a lot of heavy lifting in 2025 to optimize the platform for high traffic, good auto complete, “beautiful search results”, incorporating LLMs into making the results more sophisticated
  • previously COO thought election would have a negative impact on their business, but have not seen it affecting bookings
  • up to 40% of daily traffic is coming from Google

Reddit delivered way more than I expected this quarter. Their business is on a roll right now, as there are so many promising initiatives going on at once. Translating the Reddit corpus into the world’s languages seem to have a ton of value for users, and also generates tons of content which they can monetize via their ad network. Reddit is a top conviction position for myself especially after the results they achieved here.

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Interesting, I vaguely recall some information about Reddit, but probably have no investing info at all. Let’s see…

  • Just IPO’s on March 2024 at $34/share
  • Symbol is RDDT
  • Revenue seems to be trending correct direction Q3 2024: $348.4 million, 68% yoy, Q2 2024: $281.2 million, 54% yoy, Q1 2024: $243 million, 48% yoy, Q4 2023: not available
  • Gross margins look amazing - this quarter was 89.51% and twelve months to this June was 88.54%
  • Income streams seem to be - advertising (ho hum), premium memberships (boring), reddit coins (huh??), and data licensing…

On the data licensing, the couple of hits I scanned say that the recent IPO was related to ALLLL the data they have that can be used to train AI machines. So, the deal with the data licensing seems to be the differentiator here. (??) How much TAM does that give them, how long can that income stream make them money. This is all I could find…

So, each of these, I think, is contributing growth drivers. We are adding new advertisers. Every quarter, there are thousands of new advertisers onto our platform. Now it’s not at the levels that we think is possible. I think that TAM is really large compared to where we are today.

I’d say congrats to you, and some of those numbers look huge. My issue is that I have no idea what their future looks like. They don’t seem to know what they want to be when they grow up, and that makes me nervous. I still have a tiny bit of Duolingo, after I trimmed a lot, and that is my ‘advertising’ and ‘premium memberships’ type of company. They can extrapolate a TAM from the numbers of people learning languages, or maths, or need English as second language. They know where they are headed. The Reddit stuff seems to be hope and dreams?

Here is link to Seeking Alpha (SA) for the transcript - Reddit, Inc. (RDDT) Q3 2024 Earnings Call Transcript | Seeking Alpha

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Obviously, failure to take a position was a boo-boo. So be it. I just didn’t see the potential. I’m not so sure I even see it now, despite the fantastic report. It appears that a lot rides on the licensing deals. Do you have any more you can add about how these contracts work? Are the volume based? Do they work more or less like a subscription? So far all I really understand is that they provide AI training data. For sure, a valuable contribution, but is it sustainable?

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From what I’ve seen they’ve been clear that ads is their primary business. One direct quote from the earnings report was, “the future of Reddit, it’s really our ads business”.

What I like about their ads business is they have not really optimized that much yet, and are now doing so. For example, they said that ads that take place between the comments section are new and in test. They’ve been talking a lot about making the ads platform better, scaling it, making the ROI more apparent to customers.

It appears that a lot rides on the licensing deals. Do you have any more you can add about how these contracts work? Are the volume based? Do they work more or less like a subscription?

I see the licensing deals as a nice unexpected bonus but I doubt this will become their primary business. The licensing is in the category of “Other Revenue” for them and makes up about 10% of total revenue. In the quarters since they have been public it has gone from 20.3M → 28.1M → 33.2M

Sounds like each deal is custom depending on the use case. The user data is anonymized and protected so that individual users cannot be targeted. There are some uses like Google and OpenAI which need data from humans to train their AI models on. Reddit is one of the few places where there is a lot of genuine discussion that is not AI generated.

In the intro thread there are some details of what I was able to gather on the Google and OpenAI deals. Some of their newer deals for the information are doing more analysis like fashion and industry trends.

For sure, a valuable contribution, but is it sustainable?

I believe it is sustainable as new content and discussion is being generated by users every day. I’ll give one example of how I use Reddit which may make it more clear how the platform works. I’m following the Russian/Ukraine war and Reddit is an excellent way to track developments.

There’s a live thread in the r/worldnews (49M members) for every day of the war with a lot of comments and links, it also have a feed of Twitter related posts.

There’s a few more specific subreddits like r/ukraine (915k members), r/UkrainianConflict (470k members), r/UkraineWarVideoReport (824k members), r/ukraina (130k) Ukrainian language forum. There’s also pro Russian subreddits like r/UkraineRussiaReport (92k members).

Each subreddit has its own rules and moderators. When you consider this platform has the entire full information of links for every single day of the war from multiple perspectives, then it may be easier to see why OpenAI wants to train on this type of data that is based on real people discussing as opposed to click bait articles put out by other places.

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@wpr101 thanks for the detailed reply, I appreciate it. I now see that Reddit, like Google, Facebook, Instagram and other social media companies will derive most of their revenue from advertising. I had mistakenly thought that licensing AI training data would comprise a large portion of their revenue. While 10% of total revenue is not insignificant, it’s it’s clear that licensing is not the major source of revenue that I thought.

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Interesting. Did he/she provide any further details on why? Being RDDT is advertising, this would be a different dynamic than say TTD.

As I’m sorting through this, that’s how I’m starting to group APP, RDDT, and TTD. They are all ad-tech, though accessing it in separate ways. TTD simply facilitates transactions while APP and RDDT are also providing an in-house audience (which is what ROKU tried to do but failed). It also appears TTD has a more mature, dialed-in business model while APP and RDDT are still honing theirs.

@wpr101 Do you know enough about RDDT and APP to say whether they are letting customers measure their own ROI or is it more the closed-wall model GOOGL and META have sometimes been criticized for?

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I think that’s a misperception. APP’s software segment and TTD have a lot in common. They do not sell adverts and they don’t sell content. The provide a service that helps advertisers place their ads. Of the two, it’s my perception that APP has the more advanced technology in that they will guarantee return on advertising spend, so far as I know TTD does not do this. However, APP refuses to take business beyond that which they know they can guarantee. In simple terms, say an advertiser wants to spend $10,000, but they know they cannot guarantee return on spend beyond $5,000, they will refuse half the advertiser’s desired spend.

Another differentiator is that at this point APP’s advertising market is people who use mobile apps, primarily games. TTD is largely focused on CCTV, though I believe they also target radio. APP has a current pilot which is targeting web based ecommerce. Early reports are that it is performing better than anticipated. In addition, they bought a company called Wurl which has been engaged in CCTV for many years (I’m not sure in exactly what capacity). The primary reason for buying the company was to get access to a ready made pool of CCTV training data for their AI engine which is at the heart of the service they provide.

As I see it, RDDT is no different than Facebook, Instagram, Google, etc. when it comes to advertising. Essentially, they are a social media company that has ton of data about the members of their user community. They provide filters for an advertiser to target an audience based on criteria derived from the data they have accumulated on their user base. So far as I know if you buy advertising from RDDT you can only place the adverts on RDDT. This is also known as a “walled garden.” The only way to place an add on Facebook is to buy the placement from Facebook. Same for Instagram, Google and other social media apps.

I’m not an expert on this stuff, I know more about APP than the others because I have a large position in it. I’ve also had first hand experience advertising on Facebook and Instagram, so I base my comments on that experience rather than an in depth study of the business.

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Not too sure on the COO reasoning, but the CEO Steve Huffman had this to say about targeting ads to users from the recent Goldman Sachs conference,

Okay. So the question is, can we target more on context? And so broadly on Reddit, there’s 2 reasons you will see an ad. That advertiser is either targeting you based on your broad interest on Reddit, right? So you go to the skiing subreddit, you’ll start seeing outdoors ads, for example.

Sometimes the connection isn’t as obvious, right? The advertiser says, “Hey, we want to target outdoors people, but we’re selling energy drinks or whatever.” So it may not be super obvious to you, the consumer, but the advertiser’s basically targeting your interest that you’ve expressed on Reddit. The other is the context of the content you’re looking at. So there’s many, many pages on Reddit, we call them conversation pages, where people are talking about a very specific product, a brand, a company. And so if you’re on that page, you may see an ad targeted to that specific thing.

I think that’s what the user is asking about, but you may see an ad targeted to you as a person. Both are really important. On the latter, of course, that gets better and better as we grow the number of advertisers, increase advertiser density and make sure we have a customer that fits perfectly. But that won’t always be the ad you see. Now one thing we don’t do is target based on your personal and private information, your Internet browsing habits.

And so this is one of the trends that I think is really important online right now, is making advertising more transparent and predictable and explainable as opposed to what I think we’ve been through the last 10 years where ads are, for lack of a better word, creepy. That’s not us.

One thing I like about what the CEO is saying, the want the ads to not be “creepy” and the whole management team seems to prioritize building a solid user experience that does not have excessive ads. I believe Reddit extremely cautious compared to others on how many ads and which ads get shown. It’s most likely the CEO who doesn’t like political ads so they are not allowed.

What I like about the cautious strategy that Reddit has implemented, is now they have a whole lot of runway to expand from without flooding the users with ads. The ARPU for Reddit is less than $4 while Instagram is projected to get a global APRU of $50. ARPU is measured monthly for how much ad revenue the user generates for the company. Instagram’s ARPU being over 10x Reddit’s indicates to me they have a huge amount of room to expand by showing more ads on their platform.

Do you know enough about RDDT and APP to say whether they are letting customers measure their own ROI or is it more the closed-wall model GOOGL and META have sometimes been criticized for?

It is more of a closed platform where the advertiser is using Reddit’s interface and tooling to create the ad campaigns. I am not sure how much can be automated. It would be interesting to know if Reddit collaborates with any partners for the distribution of their ads or if the entire platform is developed in house, not sure on that part.

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Is this not the basis of all advertising? If you buy advertising on FOX, you are only placing the ads on FOX. It seems there is an enormous advantage of ad focus RDDT. On FOX you are paying for ski ads going to millions, but only 5% ski. On RDDT you are only paying for ads that are delivered only to the 5% of users with an interest in skiing. and ignoring the cost of ads going to the 95% who have no interest in your product.

Gray

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I can hopefully help provide a foundation for how to think about these companies, or at least my perspective having been in or adjacent to the media buying industry for 15 years. I have personally bought Reddit, Roku, and TTD advertising (it’s been a few years but I think I’m relatively up to date), but never AppLovin.

There are roughly three main types of media targeting: contextual, audience and behavioral. Contextual means you’re buying a context - a radio/tv station or program, a time of day, subject matter on a website, a Google search. Audience means you’re buying a user (regardless of context) based on data from various sources. Behavioral means you’re buying an audience that has done something, usually online but could be offline (credit card purchase or mobile phone tracking).

Audience data is becoming very unreliable because of recent privacy protection laws and Apple privacy moves. Behavioral data is what revolutionized the industry going back to the dawn of digital ad networks in the mid-2000s, it created the performance marketing industry, made social media a viable industry, etc. Behavioral data has also come under attack from the privacy movement, and also due to brand safety concerns as the internet & especially social media becomes more controversial. And so, I believe that contextual is making a bit of a comeback, albeit slowly/early stages. It’s very old school…buyers have to do more thinking and creative legwork to imagine in which contexts that their brands & ideas would have more of an impact. I’ll loop back around on this.

The term “walled gardens” normally/originally refers to platforms like Meta not participating in 3rd party measurement tools. For instance, I used to measure all media channels through Kantar, but Meta would not allow for their campaigns to be tracked by Kantar, so you can basically never directly measure them against another partner like, say, Spotify. You can also not run Meta through Google’s campaign manager, which makes it a problem to even track and verify delivery. Now I think people are using “walled garden” to refer to anything that has it’s own 1st party data, but if it allows measurement by 3rd party sources, it’s not really a wall, just a single media property.

Many media platforms, vendors, etc. will usually succeed more in terms of long-term brand building vs. engagement vs. short term performance marketing (sales today). No media channel really does all of them super well at once.

So setting that foundation here’s how I’d position the platforms that have been mentioned:

META: The purest walled garden, operates only in Audience & Behavioral Data targeting, and they are considered the best at it. It’s really an engagement and sales driver but tries to sell itself as a brand builder due to it’s crazy reach. There are certainly a lot of advertisers that have been turned off by Meta especially since the 2016 election but it remains a behemoth and only the biggest/most confident of brands really have walked away.

TTD: It’s correct that they are a technology solution more than an owner of media space. It provides a platform for targeting based on demographic, behavioral or contextual data, although much of that data these days is questionable due the what I mentioned above. With their recent partnerships, they’re contextual buying capabilities are getting better. In the past it would be more like buying categories or keywords of web content across the web, but that could pretty much still put you anywhere. This is all “remnant inventory”, meaning it’s not the most premium stuff that the media owners sell directly.

APP: Although I’m not personally familiar, App clearly specializes in performance marketing which means they are using behavioral data (in-app activity or purchases) to tie it back to what advertising produced the interaction, then using AI tech to predict how to maximize the ROI. It makes sense that they started in gaming because the Gaming App industry (Candy Crush) is notorious for being the very best at driving ROI. It’s not the first to ever have a guaranteed ROI (I worked with one back in 2013 in fact), but clearly it’s figured out how to scale it with AI, whereas the other attempts did not last. But this is obviously going to be incredibly attractive for those focused on short term ROI, which has been a 15 year trend in the advertising industry. I assume this is also mostly “remnant inventory”, but it sounds like they also own some of their app network, so they have some 1st party data and inventory as well that they can leverage on the App side of things.

RDDT: Reddit is kind of the best of both worlds because it’s Contextual, so you know exactly what/where you’re buying, but the subreddits are so specific that you can get pretty close to precise “behaviors” that you want to target. It’s not done by following someone around the internet or listening to their devices. Which is what the CEO is speaking to. And it’s not a walled garden. They own their inventory but they allow 3rd party measurement so they can be compared against the rest of your media buy. My perception is that they are a brand builder more than anything, a decent engagement driver but I would assume that they are not a proven short-term ROI driver, as that basically requires an intensive data approach which is not their style. They do provide access to their inventory through the exchanges but I bet they do most of their deals direct.

ROKU: Since it was mentioned above, I did want to say that Roku DOES own their own 1st party data which makes their CTV targeting capabilities more technically accurate than buying through the exchanges, although I’m not sure media buyers and brands really care. Roku operates in demo and behavioral data through 1st and 3rd party data, and contextual through The Roku Channel.

Hopefully this helps with how to think about these companies and the industry in general. Sorry for such a lengthy response.

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Only because it’s so thorough. Thanks for taking the time.

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@Graydrake “walled garden” is the model for advertising on most social media platforms, but it’s not the model for print ads, conventional TV ads and some CCTV (for example Netflix used to be a walled garden, but they now allow organizations such as TTD place ads for their customers to a limited extent).

You mentioned FOX, I really don’t know about their policy, so I’m kinda guessing here, but I’m pretty sure they follow the traditional advertising model and allow agency campaigns, TTD placement, etc. Disney TV was a walled garden, but I’m quite certain they’ve changed their policy, but I could be wrong.

To tell the truth, advertising has changed radically in the digital world and I would not be surprised to learn that there are numerous models. The models I’m most familiar with are Facebook (including Instagram) and AppLovin.

Facebook is a classic walled garden. Every ad you see has been purchased on Facebook by the advertiser. When you place an add on FB you receive a “pixel,” to simplify, it’s a unique number that belongs to you as an advertiser. The pixel is the vehicle that informs you of how many people have seen the ad (impressions), how many have clicked on it and so forth, I don’t remember all the jargon.

AppLovin does not advertise on their platform. Rather they negotiate with content providers (mostle mobile game publishers) to allow ads from their clients to be displayed on their content. They are no beholden to any particular content provider and the content providers do not give AppLovin exclusive rights to place ads on their content.

I may have messed that up somewhat because the whole world of advertising is quite confusing and I’ve not studied it in depth. But I’m quite sure I’ve got it right at a high, broad brush level.

That’s a very long winded and maybe not precisely accurate answer to your question. In brief, the answer is no, that is not the basis for all advertising.

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Thanks Brit. I just wanted to underscore the importance of the RDDT structure to direct ad dollars directly at an interested audience.

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Applovin (App) Is not a walled garden. They allow TTD to advertise on their platform using the The Applovin Exchange.

https://investors.applovin.com/news/news-details/2022/AppLovin-Integrates-with-The-Trade-Desk-to-Provide-Unmatched-Access-to-the-Largest-Mobile-In-app-Ad-Exchange/default.aspx#:~:text=PALO%20ALTO--(BUSINESS%20WIRE,EMEA%20and%20Americas%20at%20AppLovin.

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Thanks, @buynholdisdead. Reading that, it looks like APP is more on the supply side then at least for its mobile business.

One concern I’m seeing in APP’s numbers is it came in right at the top of its guide last Q with some lumpiness in its beat history (I have 2.8%, 8.0%, 2.5%, 8.5%, and then 0% the last five Q). Something similar would send APP’s growth from 44% to 31% with a significant QoQ drop from last Q3.

In that respect, TTD has shown a much more consistent cadence to its seasonal trends. Not surprising as APP builds out this portion of its business, but at least worth noting I think.

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They aren’t just supply side, they are also demand side just like TTD. The deal with TTD was to allow access to its App inventory, because TTD has traditionally been more on web and CTV (and digital out of home and digital audio).

Many of these companies (there are many others) are similar, but APP’s special sauce appears to be it’s AI solution plus it offers some app analytics/monetization products. So it’s very end to end on the App front whereas TTD doesn’t offer that for websites.

TTD’s special sauce is…they basically won the “ad network” game. They are the best known, many programmatic buyers are versed in the platform, and they have unparalleled inventory at this stage. With now some special partnerships with streaming services.

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