Ibotta, Inc. (IBTA) Q2 2024 Earnings Call Transcript

Greetings, and welcome to the Ibotta Second Quarter 2024 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Shalin Patel, Head of Investor Relations. Thank you, Shalin. You may begin.

Good afternoon, and welcome to Ibotta's Q2 2024 Earnings Conference Call. With us today are Bryan Leach, Founder and CEO; and Sunit Patel, CFO. Today's press release and this call may contain forward-looking statements, including our guidance for Q3 2024, that are subject to inherent risks, uncertainties and changes, and reflect our current expectations and information currently available to us. And our actual results could differ materially. For more information, please refer to the risk factors in our recent SEC filings. In addition, our discussion today will include references to certain supplemental non-GAAP financial measures. They should be considered in addition to and not as a substitute for our GAAP results. Reconciliations to the most comparable GAAP measures are available in today's earnings press release, which is available on our Investor Relations website. Also, during the call today, we'll be referring to the slide deck posted on our website. Unless otherwise noted, revenue and adjusted EBITDA comparisons to prior periods are provided on a year-over-year basis. Lastly, references to non-GAAP revenue growth reflect the exclusion of one-time breakage revenue benefits in 2023. This is due to an update we made in 2023 to fix the software error to correctly charge maintenance fees to inactive direct-to-consumer redeemers, which resulted in a short-term benefit to GAAP revenue last year. Please see Slide 26 in the appendix for more detail. With that, I'll turn it over to Bryan.

Thanks, Shalin, and good afternoon, everyone. Thank you for joining us to discuss our second quarter results. We're happy to announce that we delivered revenue and adjusted EBITDA above the high end of the guidance range we provided on our first quarter earnings call. The IPN is resonating strongly with all three of our key constituencies: consumers, publishers, and CPG brand clients. The total number of redeemers on the IPN continues to grow at a rapid pace, increasing 158% year-over-year and 10% sequentially from Q1. We successfully rolled out the IPN to new publishers in the second quarter while announcing two new publisher wins with Schnucks and Instacart, demonstrating our success in building the Ibotta flywheel. Our redemption revenue grew 51% year-over-year on a non-GAAP basis, highlighting the value that our clients are seeing by leveraging the unique scale of the Ibotta platform. I'll dive into all three of these areas in more detail. First, regarding consumers. The IPN is reaching more Americans than ever before, setting a new record for redeemers at 13.7 million in Q2, which is higher than our seasonally strong Q4 last year. With persistent elevated prices and high levels of household debt, U.S. consumers are looking for value more than ever, and they are finding a greater quantity of Ibotta digital offers across a larger number of categories in more and more locations. We are still in the early phases of driving penetration and adoption across the large customer bases of our existing third-party publishers and are working hand-in-hand with each publisher to increase discoverability of our offers for both online and in-store shopping experiences. We have a long list of initiatives in the pipeline and expect our partners to continue upgrading their savings programs between now and the end of the year. The implementation of these best practices will help consumers more easily discover, clip, and redeem offers on each of our publishers' digital properties, ultimately resulting in continued redeemer growth. Moving on to publishers. We've seen an acceleration of inbound interest from potential partners over the last few months. I've never been more excited about our publisher pipeline. And I view it as confirmation of the market's strong desire for a new, more technologically advanced platform for delivering digital promotions. We are working hard to diversify our network by signing up new category-leading publishers across different verticals. In this way, we hope to accelerate the Ibotta flywheel, better serve our CPG brand clients, and capture the related network effects. On that note, we are pleased to announce that Instacart, a leading grocery technology company in North America, will soon be joining the IPN, giving Instacart's customers access to Ibotta's industry-leading catalog of offers and promotions. Instacart's marketplace of more than 1,500 retail banners with a footprint of more than 85,000 stores will give our CPG brand partners even greater opportunity to reach high-intent audiences as they build their shopping baskets. We believe Instacart's decision to entrust Ibotta as its preferred third-party coupon provider reflects their commitment to delivering the greatest possible value to their consumers as well as an alignment regarding the importance of technological innovation in shaping the future of the grocery industry. We expect our depth of offers, combined with our targeting capabilities and Instacart's UX, to result in strong redemption rates similar to or above what we've seen in the online-only businesses of our current publisher partners. To put in perspective the potential value of our deal with Instacart, according to eMarketer, Instacart's share of the grocery e-commerce market is two-thirds the size of Walmart at 18% and 27%, respectively. Our teams are working hard to get our digital offers live on the Instacart platform during the fourth quarter, and we believe that once this is wrapped up, it will be a significant ongoing contributor to our growth. Specifically with regard to Walmart, we are pleased with the growth of our audience there. While we don't break out our redeemers by publisher, we are tracking ahead of our expectations. We are in regular dialogue with our counterparts at Walmart, working together to drive greater awareness of our cash back offers and improve the online and in-store redemption experience for redeemers. In terms of our other publishers, we anticipate a successful launch with Schnucks later this quarter, which will deliver a more personalized savings experience for their customers. The joint R&D initiatives that we envision with Schnucks are still in their nascent stages, but we remain excited about the potential to integrate our digital offers into their retail media and other in-store technologies. We are more than one quarter through our rollout at Family Dollar, which began in early April. The partnership is off to a strong start, and we are continuing to refine the UX and the marketing communication around the new and improved Smart Coupon program. We also began to roll out Ibotta offers to the retailers in the AppCard network at the start of April. Because individual grocers are coming online at their own pace, this is a more gradual ramp than that of a typical publisher partner. That being said, it is in line with our expectations, and we are pleased with the progress being made. We have seen a step up in daily redemptions as more retailers have gone live. We expect that we should be fully rolled out to all retailers that ingest digital coupons from AppCard by the end of the year. Finally, switching gears to talk about clients. Our team of sellers and account managers has been focused on growing our budgets with existing CPG clients while adding new brand partnerships and expanding into new verticals and product categories. As we look out onto the horizon, we see three important tailwinds for Ibotta's business. First, there is a growing desire within CPG companies to use digital promotions to recapture consumers who are price-sensitive, many of whom have trended away from national brands and toward private label alternatives. Several of our CPG clients have recently commented publicly that they plan to increase promotional spending in the back half of the year to combat weaker volumes and respond to increasing price sensitivity among consumers. As an example, the CEO of General Mills made a comment in their last earnings call about their plan to increase coupon spend in the first half of fiscal 2025 by 20%, citing Ibotta as an example and underscoring the value of using first-party data to target specific customers in a more sophisticated way. We believe that the size and scale of the IPN will make it one of the biggest beneficiaries of the greater promotional investments these companies intend to make. Second, many large CPG companies are pulling back on marketing investments that have a less definite return on investment. In this environment, we believe our business is especially well positioned because we offer a pay-per-sale alternative that derisks their marketing investments and delivers measurable incremental sales in a highly cost-effective manner. When every dollar invested either converts to a measurable sale or you don't pay, CPG brand managers and their media agencies can invest with greater confidence. Third, we continue to hear from CPG leaders that they want to see a much higher degree of rigor when it comes to measuring the return on investment of their marketing spend. Until now, marketers have relied heavily on assumption-driven models to determine how much credit to attribute to various forms of media they buy. This can be a difficult task. After all, how can you disentangle whether it was your TV commercial, billboard, radio ad or paper coupon promotion that led to sales? How much did each tactic contribute? Should the attribution window be 7 weeks or 70 weeks? These are thorny problems, and different models often yield different results depending on their underlying assumptions. Further complicating matters, these modeling exercises can take up to 12 months, which prevents a brand manager from using them to optimize marketing mix in real time. Previously, promotions have been measured in a less rigorous way because these models assume they were one size fits all and little data existed on how consumers actually behaved after redeeming an offer. What if instead, you could look at purchase trends over time, paying careful attention to whether redeemers continue buying the product, and if so, whether they pay full price? Ibotta's data allows for more definitive answers to these questions. It also allows brand marketers to receive these answers right away, unlocking a much more agile approach to budget allocation that can become an important strategic advantage for brands. What becomes clear is that Ibotta's promotions are both far more measurable and more effective than historical forms of promotion. In short, this is not your grandma's coupon, and that message is starting to sink in. It takes time to effect a sea change in how marketing spend is measured, but we are encouraged by the momentum we see in the market. The median CPG budget on Ibotta for advertisers spending more than $50,000 year-to-date has grown by more than 50% on a year-over-year basis. Increasingly, CPG brands not only view Ibotta as a way of quickly moving the needle on sales to close the quarter, but also as one of the more efficient marketing investments. When it comes time to determine their annual marketing budget, we anticipate that CPG brands will continue to increase their investments in the IPN, particularly as we socialize the scale of the new opportunities on Instacart, the growth of our existing publisher audiences and the addition of new publishers. Within our existing CPG clients, some of our biggest year-over-year increases have occurred in the home care and personal care categories. In addition, some of our biggest category wins outside of grocery include general merchandise such as toys, pet, home, and lawn and garden care. We continue to make progress in these areas with general merchandise redemption revenue as a percentage of total redemption revenue almost doubling as compared to the same quarter last year. To wrap up, we believe our initiatives with our existing retailers, our recently announced publisher wins, and our growing confidence in our network effects and ability to continue adding new third-party publishers sets us up very well for strong redemption revenue growth in 2025 and beyond. With that, let me hand the call over to Sunit to discuss our second quarter results as well as our third quarter guidance. Sunit?

Thank you, Bryan, and good afternoon, everyone. We delivered strong revenue, adjusted EBITDA, and free cash flow growth, with revenue and adjusted EBITDA 3% and 20% above the midpoint of the guidance range we provided on our first quarter earnings call, respectively. We were particularly pleased with our free cash flow of $32.7 million in the quarter and nearly $50 million year-to-date, which for the first half of the year represents a free cash flow margin of 29%. We saw significant growth in third-party redeemers across the IPN on both a year-over-year and a quarter-over-quarter basis, highlighting the unique scale that we can bring to our clients. Revenue in the second quarter was $87.9 million, representing non-GAAP revenue growth of 29% year-over-year, excluding $9.4 million in one-time breakage revenue in the prior year period. We delivered Q2 adjusted EBITDA of $25.3 million, representing an adjusted EBITDA margin of 29%. Adjusting for the $9.4 million in one-time breakage revenue last year, this compares to a 20% margin in Q2 of 2023 and implies north of adjusted EBITDA growth of 80% year-over-year. In Q2, redemption revenue comprised 84% of our total revenue, with ad and other products comprising the balance of 16%. This compares to 75% in Q2 of last year. 3PP redemption revenue comprised 47% of total revenue, with D2C redemption revenue representing 37%. This compares to 17% and 55% for 3PP and D2C non-GAAP redemption revenue, respectively, a year ago in the second quarter of 2023, and also illustrates the dramatic mix shift in our business. In Q2, our redemption revenue was $74 million, up 51% year-over-year on a non-GAAP basis. Our total redeemer and redemption growth continues to be strong, and we continue to see an accelerated mix shift with relatively stronger performance than we thought in our third-party publisher business compared to the D2C business. Third-party publisher redemption revenue was $41.7 million, up 255% year-over-year, while D2C redemption revenue was $32.3 million, down 13% on a non-GAAP basis, excluding the one-time rate benefit in Q2 of last year. Ad and other revenues, now at 16% of our revenue or $14 million, which is similar to the first quarter and down 27% year-over-year. We are seeing CPG brands reallocate their dollars towards fee-for-sales promotions on our network at the expense of non-performance-based banner ads on our mobile app, which is evident in the strength of our redemption revenue. As many other companies in the advertising ecosystem have highlighted, certain display ads and other non-performance ad spending by large CPG brands has been weaker. While we see opportunity to be more aggressive in executing our advertising go-to-market strategy, we have continued to see more client interest on the redemption side of our business. Turning to our key performance metrics. Total redeemers were 13.7 million in the quarter, up 158% year-over-year, driven by, one, the rollout of Ibotta Power Manufacturer offers in Walmart to all U.S. Walmart customers with a Walmart.com account towards the end of the third quarter of 2023; two, the subsequent growth of Walmart's audience; three, Dollar General launching in July 2023, and four, Family Dollar launching in April 2024. Redemptions for redeemers were 5.9, down 39% year-over-year, driven by the growth in third-party redeemers, which have a significantly lower redemption frequency as compared to our D2C redeemers. Redemption revenue per redemption was $0.92, down 4% year-over-year on a non-GAAP basis, primarily reflecting the mix shift toward third-party redemptions. This was partially mitigated by the growing contribution from higher MSRP general merchandise and like-for-like price increases. As a reminder, redemption revenue per redemption can vary quarter-to-quarter based on seasonal patterns but also due to variations in offer mix. Turning to third-party publishers. Redemption revenue was up 255% year-over-year. Redeemers were 11.9 million in the quarter, up 253% year-over-year. Redeemers rebounded strongly in Q2 after a normal and expected seasonal decline in the first quarter of 2024. Redemptions per redeemer were down 6% as compared to the prior year period to 4.4 and offset by redemption revenue per redemption, which was $0.80 or up 7% year-over-year. Turning to our D2C business. D2C redemption revenue was down 13% year-over-year, excluding last year's one-time breakage revenue benefits. We expect D2C redemption revenue to be down year-over-year in Q3 as well as we are lapping a high benchmark of 20-plus percent growth in the same period last year, similar to the comparison in Q2. The year-over-year comparison for D2C redemption revenue should ease materially in Q4 as revenue growth in Q4 of 2023 slowed to 7%. D2C redeemers were 1.8 million, down 7% year-over-year while redemptions per redeemer were 15.9, down 13% year-over-year, leading to a decline in total D2C redemptions. Our D2C redemption revenue per redemption was $1.13, an increase of 8% year-over-year, excluding last year's one-time breakage revenue benefit. Although D2C redemption revenue is down year-over-year, we remain focused on overall redemption revenue growth, which is very robust. Given the outperformance of third-party redeemer growth, a greater portion of budgets are getting consumed on third-party properties, leaving relatively fewer redemption opportunities for D2C redeemers as offers are distributed across the IPN democratically. Ultimately, however, advertiser budgets follow audiences. And thus, we expect client budgets to grow in proportion to the growth in redeemers network-wide as we've seen over the last couple of years. A combination of strong revenue growth and operating leverage resulted in adjusted EBITDA over our guidance. We generated $25.3 million of adjusted EBITDA, which represents an adjusted EBITDA margin of 29%. Q2 non-GAAP gross margin was 86%. Adjusting for the one-time breakage revenue benefit in Q2 of 2023, non-GAAP gross margin would have been up 40 basis points year-over-year. Non-GAAP operating expenses as a percent of revenue were 58.9%. Adjusting for the one-time breakage revenue benefit in the prior year period, non-GAAP operating expenses as a percent of revenue would have declined by approximately 800 basis points. Within that, our non-GAAP sales and marketing grew by 7% as we increased our brand marketing spend year-over-year, offset by a decline in less efficient D2C marketing expense. Non-GAAP research and development expenses increased by 15% as we continue to prioritize investing in product and technology. Lastly, non-GAAP general and administrative expenses increased by 24%, reflecting $1.5 million in one-time IPO costs in the quarter as well as recurring public company costs. We delivered adjusted net income of $19.9 million and adjusted diluted net income per share of $0.68. Our adjusted net income excludes $44.8 million in stock-based compensation and $11 million loss on the convertible notes and derivatives which were extinguished at the time of the IPO and a negative $2 million adjustment for income taxes. We generated $32.7 million of free cash flow in the quarter and have generated $49.6 million of free cash flow year-to-date. We ended the quarter with $317.9 million of cash and cash equivalents. We realized $198 million of net proceeds from the IPO. For Q3, we are estimating approximately weighted average fully diluted shares outstanding of 34 million. Turning to our third-quarter outlook. We currently expect revenue in the range of $91 million to $96 million, representing 12% non-GAAP revenue growth at the midpoint. We expect third-quarter adjusted EBITDA in the range of $28 million to $32 million, representing a 32% adjusted EBITDA margin at the midpoint. I'd like to provide you a little more color on our Q3 outlook. Similar to last quarter, we are seeing strong redemption revenue growth, offset by softer ad revenue performance. Within our redemption revenue, third-party publisher redemption revenue is continuing to outperform, driving a greater mix of third-party redemption revenue as a percent of total redemption revenues relative to our prior expectations. We anticipate that this strong growth in third-party redemption revenue, driven by better-than-expected third-party redeemer growth, will drive healthy year-over-year revenue growth in our total redemption revenue. We anticipate third-party redeemers to continue to step up in Q3 as our partnerships with existing publishers ramp and get a seasonal bump from back-to-school. Similar to other companies in the ad space, non-performance-based ad revenue has been impacted by a softer macro environment. We expect ad and other revenue for the quarter and the rest of the year to be in line with the second quarter. However, promotions should continue to see strong demand, given their role as a performance-based alternative to traditional brand advertising and the tangible impact on our clients' volumes. As a result, the implied third quarter non-GAAP redemption revenue growth rate at the midpoint of our guidance range is in the mid-20s. We are not planning for significant improvement in our ad revenue for the balance of the year. As we lap easier advertising comps in 2025 and benefit from continued growth in our redemption revenue, we do expect our overall revenue growth rate to reach a trough in Q4 before reaccelerating in 2025. On the expense side, we estimate stock-based compensation expense to be about $14 million per quarter in Q3 and Q4 of this year, with that number declining to about roughly $10 million a quarter next year. We anticipate a GAAP tax rate in the mid-30s for the balance of the year, with an expectation of a more normal GAAP tax rate of mid-20s in 2025 and beyond. We expect our adjusted tax rate to be approximately 22% to 23% in the second half of 2024 and beyond. In conclusion, we generated strong revenue growth with healthy adjusted EBITDA margins above the high end of our guidance range for Q2. We continue to expect strong third-party publisher redeemer growth both from our existing publishers and from new publishers that we are in the process of launching. Signing the Instacart deal gives us further confidence in our revenue growth in 2025 and beyond. Ultimately, we measure our performance through three main lenses: one, redemption revenue growth; two, redeemer growth; and three, the pace of new wins with additional third-party publishers. We are pleased with our progress along all three dimensions and believe it puts us on a path to deliver long-term shareholder value.

Our first question comes from Bernie McTernan with Needham & Company.

Great. Congrats on signing the Instacart deal, that's really exciting. That's where I wanted to focus my questions. Maybe first, Bryan, if you could just provide any additional help in terms of sizing the potential benefit of the deal and any timing. And then as a follow-up, just any color that you can provide if there was any equity associated with the deal or revenue sharing relative to other third-party publishers that you signed?

Thanks, Bernie. We're really excited about our partnership with Instacart, which I believe will be a significant catalyst for future growth. According to eMarketer data, their e-commerce grocery business is about two-thirds the size of Walmart's. Most of our current redemptions at Walmart come from their online transactions, so we see a substantial opportunity at Instacart that gives us a good understanding of the potential size. We anticipate a strong user experience and a commitment to marketing the program, along with considerable interest from the entire CPG brand community eager to reach this fast-growing audience. Regarding timing, we aim to launch before the end of the year. While rollout timing can be tricky and requires ensuring everything functions smoothly without any issues, we're careful not to set fixed shipping dates and then rush them out. Both teams are eager to present this opportunity to their shoppers, and we believe we can achieve that by year-end. There will be a ramp-up period for consumer awareness and regular usage, but we are confident we can make that happen in the fourth quarter. Looking ahead to 2025, I see this as a major driver of redemption revenue growth. As for the commercial arrangements, we don’t disclose specifics, but I can confirm there's no equity component to this deal like the warrant arrangements seen with Walmart. I hope that clarifies things.

That's great. Thanks, Bryan.

Our next question comes from the line of Ron Josey with Citi.

Bryan, I wanted to ask more about the direct-to-consumer and third-party network expectations. I believe you mentioned that third-party redeemers are performing better than expected at Walmart. I would like to understand what is contributing to the strong performance in Walmart partnerships, which clearly had a positive impact this quarter. Additionally, I am interested in the challenges faced in direct-to-consumer operations. I know you've mentioned several, but I would like to get more insight as the third-party segment grows in importance for the business.

Thanks, Ron. We'll start with Walmart and the strength of 3PP redeemers. I think overall, you have the opportunity to save money in this climate is extremely compelling, especially at a place like Walmart, where the mission is to save money and live better. We have strong offer content available to Walmart shoppers, and they're taking advantage of that, coming back, using it more frequently, telling their friends, growing organically. There are a number of initiatives that we are excited to look out to that we think will further catalyze growth at Walmart. And so the growth that we've seen and the strength that we've seen in 3PP is not as if it's on the back of all of our best ideas. In fact, it's mostly organic, and I think that's really promising. I will say, in terms of the D2C business, I wouldn't say there's a challenge to the D2C business per se. I would say that there's been so much strength in the 3PP growth of that redeemer audience that there's been a lot more mouths to feed in terms of just the amount of opportunity to redeem an offer on D2C or the length of time that, that offer might be available is somewhat less than we might have anticipated because there's a lot of interest in redemptions occurring on third parties. And that mix shift, as you know, strategically is one that we're excited about. We believe the opportunity to scale this network is especially strong in the third-party environment. And as we see that grow, we're excited because there's very strong economics in that environment as well. We do think that as overall audience size grows, so too go advertiser investment levels. And so these are not completely continuous processes as we step up and are able to go back to our advertisers and say, look, we're really growing faster than anticipated here. In terms of overall redemption revenue, we're doing really well. We're growing. And then third-party, we're way ahead of expectations, and that mix shift has kind of accelerated. We're confident that they will allocate the kind of budget to take advantage of not only the third-party growth but also the exciting audience that we have on D2C. So again, we really focus on overall redemption revenue growth, and we're very pleased with how that's playing out.

Thank you, Bryan. Congrats again on Instacart.

Thank you.

Our next question comes from the line of Eric Sheridan with Goldman Sachs.

Maybe two, if I could. One, I don't think you mentioned it so I just want to come back on the Instacart partnership. Is there anything we should be keeping in mind between now and the end of the year in terms of either integration costs or things that might put a more one-time pressure on EBITDA that obviously would fall away as you move past the integration and they were fully on the IPN? That would be number one. And then number two, Bryan, when you think about the share-taking position you're in with respect to CPG and in marketing budgets more broadly, what do you think longer-term is pretty critical in terms of putting in place to continue some of that momentum on the advertising side as you look out, not towards the back part of this year, but the budgeting cycle ahead of 2025?

Thank you, Eric. First question, Instacart. No is the short answer. I don't foresee any one-time integration costs of note that were not anticipated. It's in the ordinary course of our business. I will say that we're getting better at launching these programs more quickly. We've done it now many, many times. And I think that that's going to benefit the timeline as well as the cost profile. There's just a certain amount of reusable technology APIs and so forth that are largely in place. And I would say much of the cost is on the publisher side to get up to speed, and even that is not very significant in the grand scheme of things. So that's exciting. And then on the second question about taking share. Given this position we're in and kind of this countercyclical element to our business, the performance element to our business, I think that since the IPO, I've been on a sort of second roadshow, and I've been visiting with C-level executives at many of our top 20 CPG accounts. And what I think is absolutely critical is to get across to them that these types of promotions are targeted, they're intelligent. They're not subsidizing just people who are going to buy your product anyway needlessly. And they can be designed in a way with a very measurable payback period. And there's a way to do that with the data that we have that truly has never been introduced to the market. In terms of looking at kind of a test and a control and tracking behaviors into the future, that kind of scientific method is really exciting to an industry that, frankly, Eric, has had to settle for a lot more blunt instruments in the form of some of these assumption-driven models. And so as that conventional wisdom around the limitations of the promotions of old falls away, what you get is both a really immediate lever to regain market share but also a super efficient tactic that I think is getting a really serious look from much more senior people within these organizations. So it's continuing to demonstrate that this is a function of not only the scale of our network but also the intelligence of being able to put the right offer in front of the right consumer. I'll also just highlight, I think there's a lot of opportunity for us in the tools that we make available to clients. That is something that really focuses on real-time optimization. We're in a moment of transition from someone calls us, we help them configure an offer, there are a certain set of parameters or rules that are sort of manually put in place and then it runs, to a world where it is dynamic, where AI can determine a lot of the parameters where you're solving for a key metric, much the way that digital advertisers have done for years in environments like Facebook, Google, TikTok, et cetera. So that agility that it enables, that is something that's really exciting, and it's going to take some time to get out there and socialize just what a major opportunity that is because you can now really be opportunistic and let dollars flow to the most efficient channel intra-quarter. So those are some things I'm focused on.

Our next question comes from the line of Curtis Nagle with Bank of America.

So I guess just going back to the 3Q guidance. I think I understand the thesis here, right, so just kind of looking at 2Q, right, some weakness obviously from advertising flowing through. 3Q redemption revenues particularly well. I guess it’s sort of simply, Bryan, you mentioned that some of your CPG clients and kind of the industry in general are either pointing to more pricing investments, right? Let's get volume up. To what degree is that baked into the guidance for 3Q, if at all?

Yes. If you consider our guidance, based on our discussions with clients, we believe the ads business will remain consistent with what it was in the second and third quarters. However, in August, we've observed strong interest from clients in increasing their budgets, positively impacting both our third-party publisher business and our direct-to-consumer business. This trend goes beyond just a seasonal increase. We have specific clients discussing their goals to raise volumes without identifying themselves. For instance, in the chickens category, there is a focus on achieving certain volume targets. We are noticing the effects of macro trends that CPG clients mentioned during their earnings calls, as they aim to drive more volumes. We expect to benefit from this recent strength in the market.

Yes. I just want to clarify the structure of the revenues. Did you mention that you still expect total redemptions to increase by about 20% year-over-year? I didn't quite catch that, if you could please repeat.

Yes. What we're indicating is that if we assume third quarter ad revenues remain stable compared to the second quarter, which stands at approximately $14 million, this would suggest a midpoint for our revenue guidance. Consequently, the overall growth in redemption revenues would lead us to expect mid-20s revenue growth in the third quarter.

Our next question comes from the line of Chris Kuntarich with UBS.

I just want to go back to the Instacart partnership. You called out in the press release, they have about 6,000 CPG brands versus your 2,400. Could you just maybe help us think about how a marquee partnership, such as this one, either helps you engage with either new brands or reignite that conversation with existing brands that may not have been over the line and just kind of how should we be thinking about the incrementality from the brand side of things with this Instacart partnership?

Yes. First of all, you have now joined me in conflating the word Instacart and Instagram potentially in every other sentence in my life. So as far as that specific question, you're absolutely right. I mean, think about all the places where you can use Instacart. It’s not just in the grocery store. It's also at Costco, it's also at Lowe's. It's also at Best Buy. So it really does support our effort to reach out beyond the core grocery brands and expand into new verticals in general merchandise. It is a way of diversifying our network. And that is very, very important to our CPG brands because when you can say there’s this much volume coming from non-Walmart sources, that is really important in terms of making sure you're accessing the largest possible national budgets. We don't want to be pigeonholed in the sense that there's only people saying, well, this is principally a Walmart vehicle, et cetera. So I think that it is important in that sense. I think it's also a different audience. It is an incremental audience that is different from what you might find at Dollar General or Family Dollar, for example. And so getting in front of this younger, technologically savvy audience is super important to brand managers that are thinking about this in terms of lifetime value. I'd also point out that it gives you access to the e-commerce budgets within these companies. So there are general brand manager promotional budgets. And in many cases, they have a special focus in dollars allocated to e-commerce. And while we have a very large e-commerce presence today in our network, a pure-play e-commerce grocery of this kind is really important to those people. And frankly, they cannot afford to sit outside of this kind of flow and shape purchase behaviors at this moment in the inflection of online grocery. I want to emphasize the importance of this partnership. Instacart is a very knowledgeable organization that could have selected various partners. The fact that they chose to collaborate with Ibotta to enhance their promotions for customers, helping to reduce delivery costs, sends a significant message to CPG brands. It indicates that they recognize our expertise in the future of technology and grocery. You may have noticed some of their innovative in-store initiatives that are truly cutting-edge. We feel privileged that they trust us, and this trust is not overlooked by others who want a consolidated approach to executing a national promotional strategy. And this is a network effect business. So for us to carry that momentum, I think, will help us in this vertical more broadly. And it will then, I think, accelerate the addition of new publishers, all of which brands are going to see and want to get out in front of with their allocation of budgets especially as we head into 2025, and we get those budget allocations refreshed. Everyone is on a different fiscal, but as those refresh, this is going to be a very important factor.

Got it. Very helpful. Maybe just one quick follow-up on Walmart. Anything to call out as it relates to the 3P redeemers in 2Q as it relates to in-store Walmart activity? Any movement on initiatives there worth calling out?

There have been some developments regarding initiatives, but out of respect for our partners, we cannot disclose their upcoming projects. I can say there haven't been any significant initiatives at Walmart during the second quarter. We're pleased with the organic growth of the Walmart Cash program, which has benefited from a favorable macro environment and is more successful than we anticipated. It's well-liked by Walmart shoppers, which we've observed in various ways. We've also been testing a few new capabilities with Walmart and other publishing partners this quarter that, if implemented more widely, could have a substantial impact. We're looking forward to a couple of initiatives between now and the end of the year, and we'll see how they perform. As I've mentioned before, we adopt a wait-and-see approach, preferring to announce completed projects rather than preliminary steps. We've seen some of these capabilities reflected in data previously, while others have not. We'll monitor the full rollout closely. Sometimes, we receive notifications a few weeks ahead of time regarding when these developments will go live, but not exact schedules. As we gather that information and determine when it becomes stable and predictable, we'll share it.

Our next question comes from the line of Andrew Marok with Raymond James.

Maybe a bit of a follow-on to a prior question, but now that Instacart is on board, I guess, is there any change to the thinking about prioritization for the different types of IPN partners? Is it the case where you still will take national and regional grocery chains as the relationships develop? Or does the Instacart agreement maybe give you a bit of a toehold and some momentum among those types of companies?

Thank you, Andrew. The most surprising outcome for me following the IPO has been the increased interest in joining our network. It’s encouraging to see this interest coming from various sectors. While our primary strength remains in the mass grocery sector, now that we have this grocery technology delivery service publisher, we can demonstrate its effectiveness. This serves as validation and is attracting attention from other e-commerce companies. We've been engaging in discussions within the specialty retail sector and with non-retailer publishers who also see potential opportunities. I believe we have the capacity to pursue various opportunities simultaneously with different publishers. This particular opportunity is particularly exciting due to its scale and the alignment between their product offerings and our existing catalog. Their reputation as a tech-savvy company with innovative in-store and online developments enhances our position. As we continue to showcase what’s possible with an exemplary publisher—highlighting user experience, lifecycle communications, and future in-store technologies—we are likely to draw more interest from others wanting to associate with our best-in-class offerings, which in turn generates more content for our catalog. Similar to a library, as we attract more publishers and expand our audience, we encourage further interest in joining our catalog. The growth of Instacart is expected to benefit our current publishers by providing them with more offers, and it will also support direct-to-consumer initiatives. Additionally, I believe it will enhance our success rate in turning both incoming inquiries and ongoing outbound discussions into conversions. However, only time will tell, and I remain optimistic.

Our next question comes from the line of Andrew Boone with JMP Securities.

I wanted to ask about expanding budgets. They were really healthy, right? $50,000 budgets grew, I think, 50% this quarter, but it sounds like some 3 key redemption, just demand, pushed out demand on D2C. And so the question is, can you help us understand how you can unlock more budgets to better match supply and demand across the network? Is that a thought or am I misinterpreting that? And then secondly, general merchandise almost doubled year over year. Can you just help us understand the drivers of that growth, just given the potential size of that category?

Thank you, Andrew. Great question. So let's take them in turn. First, we expand budgets within the CPG universe. The thing we've seen over the last 12 years consistently is that advertisers want to capitalize on large and growing audiences. And so as the overall redeemer audience on our network grows, so too is the interest in getting out in front of the audience very high, I think, particularly so because of the macro. Sometimes, we have a company that is not yet in a kind of agile posture. I described earlier that some of our measurement techniques will enable a world where you can actually monitor the efficiency of your campaign live and decide, wow, that is one of the most efficient channels that I have, look at how well it's paying back, how high that return is. And you can then allocate kind of dollars intra-period, but we're dealing with an industry that, for decades, has had sort of a fixed annual planning process and then they may have some dollars that have some discretion with their media agencies. And so what we've been doing is getting out in front of them and saying, look, we're ahead of pace here on growing this network. Look, this is a very efficient tactic if you actually look at this test and control and so forth. And that is starting to, I think, cause them to take a look at this as a much more strategic pillar within their marketing program, not just a layer or a tactic that rides along a seasonal marketing campaign. And then there are competitive dynamics. As you see a competitor, Sunit mentioned chicken, we've seen over the summer, a very large spike in investments by one major chicken producer lead to offers from another chicken producer, and we've seen this consistently as these companies are vying to capture that consumer. I believe the key to achieving this is to clearly demonstrate our capacity on the network. We might be underestimating this capacity, but we always strive to have a clear understanding of it. Additionally, we need to consider the efficiency and actual return on investment, and I feel we're making a strong impression as thought leaders in this area. It may take some time to integrate these methodologies into our market approach, but I'm more excited about our updated strategy than I have been in recent years. This, I believe, will be crucial for successfully increasing budgets. While these things may not happen continuously, we often see upward trends. Our primary focus remains on driving growth among redeemers across the network and ensuring redemptions are where they need to be. Regarding your second question about general merchandise doubling and its drivers, our sales team has concentrated on promoting performance marketing to sectors that have yet to embrace it. It's essential to highlight that we can now support a wider variety of publishers offering those products. As I noted earlier, examples like Instacart being available at Best Buy, Lowe's, and Costco are significant. This remains a relatively small part of our revenue, representing substantial potential. This is indeed a considerable opportunity. The real challenge isn't our offering; it's that this industry hasn't recognized the effectiveness of this model historically and hasn't typically utilized tools like paper coupons. Nonetheless, I'm proud of the strides we're making, and I see it as a major growth driver for the future.

Just one other thing on the previous question. I mean he asked a question on budgets. We've literally more than doubled the business over the last couple of years and still seeing significant growth. So sometimes you might see slight lags. But as I was saying, we are seeing interest pick up a lot with our clients just here in this month. So over time, we've not had that issue that audiences have grown. We've generally been able to grow our budgets with our clients without much of a problem.

Yes, when you're seeing a 254% year-over-year increase in third-party redemption revenue, substantial investments are necessary. One reason we established the network is that we consistently heard the need for a scalable model. Clients appreciate the fee-per-sale approach but require greater scale. They want to shift away from methods lacking efficiency and predictability. I don't have to worry about whether a specific advertisement will convert. Even if measurement seems possible, it remains challenging to determine if an ad will be effective. With our system, that risk is eliminated; if an ad fails, there’s no redemption and no fee. This concept combined with scale has been crucial. With our recent high-profile publisher additions, it will be evident that brands will want to know about our strategy in the U.S.

Our next question comes from the line of Mark Mahaney with Evercore ISI.

Two questions, please. With Instacart, you now have Walmart and Kroger, along with potentially others, a significant portion of the top 10 grocery chains. Can you provide an update on how many of these major chains you have? Additionally, do you have any expectations regarding your ability to onboard other large grocery publishers? Secondly, while I understand you're not sharing specific details about your relationship with Walmart, could you give a general sense of your adoption or market penetration among Walmart Plus or Walmart.com customers? This would help us understand what the growth trajectory looks like moving forward.

Sure, Mark. Regarding your first question about the top 10 in core grocery, we view our network in terms of retailers as a type of publisher. Within that framework, there are categories like core grocery, mass, club, as well as pharmacy, convenience, and specialty retail. It's a broad category. If you're asking about the top 10 in terms of total sales volume, we are engaging with all 10 of those companies regarding the potential of Ibotta. Some of them are already active on our platform, while others, like Target, are not yet participating. We believe we can offer significant value to their customers, and there is no reason for them not to access our national content, especially given the intense price competition. Some of the reasons we haven't partnered with certain companies yet are fairly routine, related to their strategic planning cycles or the prioritization of their roadmaps, or waiting for the right moment when a contract becomes available for us. However, we are concentrating on establishing category leaders in each segment. For instance, Walmart serves as a leader in mass retail, while Dollar General and Family Dollar are dominant in the dollar channel, which is very significant. We also have Instacart on board and are exploring opportunities with Amazon, Target, Walgreens, PetSmart, and specialty retail. There's no fundamental reason preventing us from providing them with this engaging capability, and that's the responsibility of our business development team led by Amir El Tabib. The second question you asked is about the adoption rate and potential for growth at Walmart. There is significant opportunity for expansion at Walmart, as we are still in the early stages and only reaching a small percentage of the total addressable audience. Most of the current activity is driven by online grocery behavior, which is promising for Instacart. When considering the other 85% of Walmart shoppers, we still need to focus on increasing awareness of this program and simplifying the process for them to navigate to products with manufacturer offers and redeeming them. Currently, users must scan a QR code within the Walmart app to receive their Walmart Cash, and we are exploring ways to make this process easier. We have many ideas stemming from our extensive experience and collaboration with Walmart to enhance awareness of these opportunities. Therefore, we are far from reaching saturation at Walmart, and there will be ample opportunity for us moving forward.

Our next question comes from the line of Ken Gawrelski with Wells Fargo.

I want to discuss the issue of supply versus demand constraints in the marketplace because it seems to me that you are making significant progress on the demand side by adding more redeemers or potential redeemers. How should we consider the ability to meet that demand with the necessary supply to capitalize on both the existing partner demand and as you bring Instacart online? Please help us understand and frame this in terms of demand versus supply. I know you have historically mentioned being more demand constrained, but it feels like where the business stands today is somewhat different. Could you elaborate on that point, please, Bryan?

Yes, Ken. Thank you. I appreciate the question. Yes, look, I mean, the big picture is that we've grown the average spend or the median, I should say, the median CPG budget on Ibotta for advertisers who spent more than $50,000 has grown by 50% year-over-year. And in many cases, obviously way more than that. There is a kind of outer limit to how much you can go to a brand and say, trust me, volume is going to go up 3x. I need you to allocate 3, 4, 5, 10 times what you allocated last year. And they tend to say in the industry, okay, that sounds really exciting. I can't park that much money on your assurance. Let's see you go ahead and get this audience. Let's see me run through a budget in 7 days and miss out on a huge opportunity to further gain market share. Let me see data that shows that my market share is moving by 2 percentage points while my competitor is live and I'm not live, and then I will go get you the budgets that you need to continue to make sure I don't lose market position. As long as you demonstrate that this is an efficient and cost-effective solution, they will likely respond positively. However, influencing them to spend significantly more, potentially 100% or 200% extra, is a common challenge we frequently overcome. The median increase of 50% is quite good. One of the difficulties we've encountered is that much of the growth has been among existing publishers who are seeking diversification. They are looking for new growth catalysts like Instacart. They are eager for the new tools we offer that enhance targetability, which in turn makes their cost per additional units sold appear more appealing. This is because you present a less expensive offer to someone who is already familiar with your brand, while offering a more attractive deal to those unfamiliar with it. This aspect is crucial to understanding the efficiency of our approach. Improvement in the tools is important. The growth in redeemers is significant, and we continue to see a lot more redeemers than we had previously, which will help unlock further growth. Throughout our 12-year history, we have essentially never faced supply constraints, although there have been some slight delays at times. It's about growing, as performance-based offerings are considered very attractive for investment. We just need to demonstrate that the scale is there. I'm confident that our agreement with Instacart, along with the chance to reach a broader audience in e-commerce and the availability of separate e-commerce budgets, will benefit us greatly in the upcoming quarters.

Can I just ask a quick follow-up question? As we consider the advantages of the DSP model, which operates entirely online, it's important to note that while Walmart has a large audience, much of it is offline and in-store, making it challenging to penetrate that market. In contrast, Instacart provides a fully online, logged-in user base, suggesting there should be strong immediate demand. Should we anticipate a delay in meeting that demand from supply, given what you mentioned? How long do you think it will take to fully capitalize on that demand?

Yes. We will find out soon. We haven't brought a publisher into the network like Instacart before, which is why we are cautious about making predictions. It could be that when we speak next, I'll be telling you that we've engaged with every e-commerce team and have an abundance of content ready, with no delays anticipated. Alternatively, there might be a slight delay as we gather more resources beyond what is currently available from certain brands. You are correct that the overall approach is shifting from a fixed annual client budget to a more flexible, real-time bidding process for these valuable participants. This shift should significantly improve redeemer counts in the long run. The more redeemers we have, the more we can leverage this agile model. You'll see a new generation of marketers, both within brands and media agencies, realizing how to effectively utilize this tool, knowing how to allocate funds to it because it offers one of the best returns on investment. I appreciate the lifetime value of this group, among other factors. Language we regularly use in the context of digital businesses, such as the original Ibotta D2C business, is now becoming possible due to our ability to analyze physical world purchases over time. This data enables real-time optimization, which I believe will represent a significant paradigm shift. While I cannot confidently predict how long this shift will take, I am already observing strong positive signs that the market recognizes this as a long-awaited level of thought leadership and thoroughness. Thank you for those questions, Ken, and thank you everyone for joining us on this call. We appreciate your investment and interest in our company, and we look forward to speaking with you soon.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.