Reddit, Inc. Q3 FY2024 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 Reddit's Third Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Jesse Rose, Head of Investor Relations. You may begin your conference.

Thank you, Rob. Good afternoon, everyone. Welcome to Reddit's third quarter 2024 earnings conference call. Joining me today are Steve Huffman, Reddit's Co-Founder and CEO, Jen Wong, Reddit's COO, and Drew Vollero, Reddit CFO. Before we get started, I'd like to remind you that our remarks today will include forward-looking statements. Actual results may vary materially from those contemplated by these forward-looking statements. Information concerning risks, uncertainties and other factors that could cause these results to differ is included in our SEC filings. These forward-looking statements represent our outlook only as of the date of this call. We undertake no obligation to revise or update any forward-looking statements. During this call we will discuss both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP financial measures is set forth in our letter to shareholders. Our third quarter letter to shareholders and accompanying earnings press release are available on our investor relations website. And now I'll turn the call over to Steve.

Thanks, Jesse. 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 DAU, an increase of 47% from last year. And for the first time, we exceeded 100 million DAU a few times during the quarter, which has been a longstanding milestone for us. Our Q3 revenue grew 68% year-over-year, and I'm proud to announce that we also achieved GAAP profitability. Reddit's influence continues to grow across the broader Internet. In 2024, so far, the word Reddit was the sixth most Googled word in the United States, underscoring that when people are looking for answers, advice or community, they seek out Reddit specifically. We saw this play out in real time when the White House came to Reddit to share critical information during the recent hurricanes, using 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 continue to see more businesses and organizations come to Reddit to find their audience. We remain focused on making Reddit the best place on the Internet for conversations and community, which means, quite simply, we're continuously improving the user experience by making discovery easier, making the platform faster and smarter, enabling seamless contribution and simplifying moderation. A few highlights from the quarter include our conversation pages, with conversation page views exceeding 90 billion, growing 40% year-over-year in Q3, as users are getting into the conversations faster and more often. We refreshed the Ask Me Anything or AMA product, which led to a fivefold increase in the number of AMAs created in the new format. We launched better tools for posting that have both increased posts and reduced moderator removals, which makes a better experience for everybody. 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. 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. After promising results with French in the first half of this year, we expanded our coverage to include Spanish, Portuguese, Italian and German. 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. As Reddit becomes a truly global platform, we are focused on ensuring everyone, regardless of their language, can participate in and benefit from the communities on Reddit. 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. 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. We know many users are looking for more than just answers. They are looking for authentic real-world insights and advice from the communities on Reddit. So, we're focused on making the experience of finding relevant conversations and content on Reddit easier and more intuitive. 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 communities on the Internet. Thank you again for being a part of this exciting journey with us. I'll now hand it over to Jen.

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 Q3 grew 68% year-over-year to $348.4 million. The advertising business grew 56% year-over-year to $315.1 million, driven by strong growth across objectives, channels, verticals and geographies. Let me discuss our ad revenue drivers in more detail. We saw strong year-over-year growth in 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. 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 road map. 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. We more than doubled the number of clicks this quarter as we continue to enhance our lower funnel capabilities. We saw continued momentum across channels. 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. 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 midsized customers. 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 sales force; and three, offering our advertisers Reddit-unique solutions and creatives. I'll discuss our progress in each. So first, driving performance of our ad solutions. 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. We continue to drive CAPI adoption and expand our partner ecosystem. We saw over two times more advertisers adopt CAPI this quarter versus Q2. 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 Tealium, mParticle and ActionIQ now include both CAPI and custom audience capabilities. Second, improving usability for our advertisers and productivity for our sales force. Over the course of the year, we invested across a few broad categories. Ads manager improvements that consolidate steps and remove manual work from campaign creation automation tools that make it easier to create performance campaigns and reduce the need for manual optimization. For example, multi placement optimization with auto bidding automatically sets bids and placement to maximize performance. We're seeing over 90% adoption of this feature across lower funnel campaigns. And AI-driven workflows for our sales force to extract product insights from customer interactions and streamlined sales support with an AI-powered knowledge base. We also continue investing in brand safety and recently launched pre-bid protection, which will expand our partnership to include brand safety and viewability reporting in the coming months; and third, offering our advertisers Reddit unique solutions and creatives. In Q3, we launched a refresh design of our Reddit unique ads product, conversation ads, driving double-digit improvements in conversion rate. We continue to test ad placements within the comments as we expand inventory and improve performance on the surface. In the near term, we anticipate this could reach up to mid-single digit of total impressions. Next, I'll shift to our data licensing business. We continue to address the data licensing opportunity and are in contact with a small set of potential partners. Other revenue was $33.2 million in Q3, driven by data licensing partnerships we signed earlier in the year. 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. Looking ahead, the landscape continues to evolve and we have limited visibility into the timing of additional partnerships. 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. Overall, this was another strong quarter for Reddit, and we are pleased with the traction we're seeing in the business. I want to mention a recent key addition to our sales leadership team, Mike Romoff, our new Chief Revenue Officer. 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. 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. 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 have sustained differentiated growth over the past quarters. We are monitoring for any potential impact from the upcoming elections, and we remain focused on our strategies and execution. 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. The business trends for Reddit in the third quarter have remained strong as we worked toward our key financial goals, specifically achieving profitable scaling. A significant highlight for Q3 is that Reddit reached breakeven on a GAAP basis, which has been an important goal for us. Our net income was $30 million, an increase of $40 million from the previous quarter, and this quarter showed several encouraging signs and key factors enabling us to achieve GAAP profitability. Here are three areas where we excelled: First, our revenue growth accelerated to 68%; second, we had strong gross margins of 90% and adjusted EBITDA margins of 27%; and third, we generated strong free cash flow of $70 million. Let’s delve a bit deeper into each point: First, revenues increased by 68% year-over-year, a notable acceleration from 54% in Q2 and 48% in Q1, driven by a 56% year-over-year increase in ad revenue in Q3, up 15 percentage points sequentially. To summarize three primary drivers behind this revenue acceleration: our investments in new ad products and enhancing our sales team resources are yielding positive results, and we're seeing solid traction with customers. Additionally, ad impressions have seen strong growth, which has been a consistent contributor to our growth throughout the year. Pricing growth for Q3 remained relatively flat year-over-year, contrasting with a slight decline seen in the first half of the year, attributed to improved ad performance and the value we deliver to advertisers, as costs per click decreased while click-through rates increased. Finally, across our channels, we observed widespread strength, with over half of our verticals seeing more than 50% growth year-over-year, and some even exceeding 100%. While revenues took off, our total adjusted cost growth was modest, up 19% in Q3, which is less than one-third of our revenue growth rate. The total adjusted cost growth in Q3 was higher than the 11% increase in Q2, partly reflecting our growth investments that fueled this revenue acceleration. Our total adjusted costs were $254 million, which is a $13 million increase from the previous quarter but decreased as a percentage of revenue from 86% last quarter to 73% this quarter. Our adjusted cost of revenue remained efficient, with gross margins exceeding 90% for Q3, up 280 basis points year-over-year. We benefited from additional revenue growth combined with efficiencies in cloud hosting, which more than countered increases in hosting costs due to user and ad growth and investments in machine learning to enhance our consumer platform and ad performance. Adjusted operating expenses increased by 17% year-over-year in Q3 and slightly rose sequentially, primarily due to higher people and machine translation costs. Our people costs were up in Q3 because of our annual merit cycle and hiring rates. Our total headcount grew by 4% sequentially and 7% year-over-year, slightly above last quarter's levels due to seasonal hiring from recent engineering graduates. During the quarter, we rolled out machine translation in five countries, with an additional 30 potentially planned for the future. Our translation efforts have been cost-effective, with translation costs for each language being under $1 million this quarter and total expenditures accounting for less than 1% of our revenue. We will continue testing how much content to translate. Given our strong revenue growth and modest cost growth, it is not surprising that our financials appear very positive. The adjusted EBITDA for Q3 was $94 million, translating to a 27% adjusted EBITDA margin, nearly doubling our Q2 margin of 14%. The adjusted EBITDA increased by $101 million compared to the previous year, attributed largely to a 72% flow-through on incremental revenues, marking the fourth time in five quarters with flow-through over 70%, demonstrating solid cost leverage. Our main goal is to turn profitability into cash flow, and our operating cash flow was $72 million, reflecting a positive change of $79 million from last year. For the first three quarters, the operating cash flow totaled $132 million. Our CapEx remains low, under $2 million in the quarter and less than 1% of revenue. Our free cash flow for Q3 was $70 million and $127 million year-to-date, which is 20% of Q3 revenue. Our cash balance at the end of the quarter stood at $1.74 billion, increasing by $46 million sequentially. It is particularly encouraging that we could grow our cash reserves while also returning capital. During Q3, Reddit executed a net settlement for the tax withholding on employee shares sold during the quarter. Overall, we net settled 1.2 million shares at a cost of $66 million, a strategy that helped reduce dilution for employee vesting. The total number of fully diluted shares outstanding in Q3 was 206 million, reflecting a sequential increase of 0.7% and a 1.3% increase for the year, excluding the IPO. We are on track to meet our medium-term dilution target of 2% to 3% for the year. Stock-based compensation for Q3 was $83 million, about 24% of revenue, consistent with peers of our size. For the quarter, net income stood at $30 million, or $0.18 per basic share and $0.16 per diluted share, an improvement from the previous year where both basic and diluted earnings per share were negative $0.13. Looking ahead, we will provide our internal forecasts for revenue and adjusted EBITDA for the fourth quarter, where we have the clearest visibility. For Q4, we estimate revenue between $385 million and $400 million, indicating a year-over-year growth of 54% to 60%, with a midpoint of 57%. Our adjusted EBITDA is forecasted to be between $110 million and $125 million, reflecting a 30% adjusted EBITDA margin at the midpoint. In closing, I would like to highlight our financial focus areas. In the short term, historically, Q4 has been our strongest revenue quarter of the year, so execution is key. For the medium to long term, Reddit is scaling profitably, and our financial strategy is centered around transforming differentiated revenue growth, high margins, and low capital expenditures into significant cash flow generation. Now, I will turn the call back over to Steve.

Thank you, Drew. We're going to begin with a few questions from our communities that were asked on the subreddit. I appreciate everyone who submitted questions there; there are many great inquiries. I'll address two questions now, and then Jen, Drew, and I will cover several more that we'll report later after our call today. The first question is about the White House now having an official account. Will Reddit be able to secure more official accounts from government officials or agencies for disseminating information? What steps will Reddit take to facilitate this process? Broadly speaking, we want businesses, brands, creators, and individuals to have an official presence on Reddit. You can see the initial steps we've taken with Reddit Pro and these official accounts. Historically, there hasn't been a dedicated space for businesses or entities, including creators, on Reddit. This has created a gap in our product, and we need a distinct space for them to serve as a launch pad to engage with communities. We want Reddit to be an inclusive space for everyone, and it needs to be well-defined and intentional. We're already seeing many businesses join this year, and it's particularly exciting to see the White House on Reddit, especially in how they are using it to connect with local communities and provide timely updates and information. The next question relates to Google. One concern is that Google shows volatile trends, particularly with logged-out Daily Active Users (DAUs). Most of us would expect logged-in users to outpace logged-out users, but logged-in is at 27%, while logged-out is at 70%. Even looking at two-year stacks, logged-out DAUs significantly outnumber logged-in ones. My questions are about the dynamics of these users. It would be helpful to have some insight into their conversion rates, their intentions with Google searches, and how worried we should be about Google potentially diverting traffic in the future. Also, could you comment on the idea that some people believe that Google is losing ground and turning to Reddit for their queries? Thank you for the question. We’ve always had a symbiotic relationship with Google and especially the Google Search platform. If you look at the traffic from Google, there are two major types of users to acknowledge. The first group consists of individuals who go to Google specifically intending to access Reddit. As I noted in my opening remarks, many of these users are making themselves known since Reddit has become the sixth most searched term on Google in the U.S. this year. These users are actively typing "Reddit" into Google, fully aware they are directed there. The second group involves users conducting more general searches on Google who then find their way to Reddit, which is also valuable. We view these users as a chance to demonstrate that Reddit provides answers to their inquiries, making them a great source of new users and an opportunity to showcase what Reddit represents. While it’s true that the algorithm can fluctuate, we neither celebrate nor complain about changes to it. Ultimately, Reddit offers outstanding content that addresses the questions and provides the advice and perspectives consumers seek, regardless of whether they arrive directly at Reddit or through other channels. Now I’ll turn it back over to the audience.

Great. Thanks, Steve. Thanks, Jen, Drew, I really appreciate it. Rob, why don't we open the line for questions from the analysts that are on the line, please. Thanks, Rob.

Thank you. Your first question comes from Benjamin Black from Deutsche Bank. Your line is open.

Great, thank you. Thanks for taking my questions. So first one is really on search, and it would be great to get sort of a status update on your efforts to improve on-platform search. What incremental investments you need from here on out, how could search potentially improve the DAU growth? And how do you think about sort of the pathway and timeline to monetization of search? And secondly, just quickly on machine translation. Can you just double-click a little bit on sort of your early learning here 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.

Okay. First question is search, on-platform search specifically, yes. Important part of our strategy and will be a focused investment for us heading into 2025. I think search is a unique opportunity because it strikes out 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 and answer their questions. And it's a monetization opportunity. So, it's one of the few products that kind of touches everything. So, we're working on this as an investment area in 2025. I think the timeline for monetization is, first, we think about the consumer product. 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 stable configuration, then we can start working on monetization, which I think is, of course, a big opportunity. So, first users, then the monetization, but it's one of our top investments heading into next year. Your second question on machine translation, what are the early learnings? Well, this is a feature that has had a lot of nice stories to it. First, our primary objective was to translate English content into other languages. In this case, French has been our focus in the first half of this year, which was our first language. Can we attract French-speaking users in France on translated content? The answer is, yes. Following that simple learning, we're rolling out a full immersive experience into five countries. We’re also beginning to translate the larger corpus of Reddit into 30 languages over the course of next year. Machine translation is scaling. We drew four times many users this quarter as we did last, so we like that trend. Machine translation has some other positive externalities. One is that the translated content gets indexed into other search engines. We start to see new users from external search who are arriving on the translated pages. We’re also beginning to see some of that native language content get translated into English and show up for U.S. users. I think over time, we’ll see more and more of that. That just speaks to one of the fine reasons to use Reddit, which is to get a view of the world through the lens of somebody else. Machine translation, I think from that point of view, is really helping us fulfill our mission of connecting people around the world. So thanks for the questions.

Great, thanks for taking the question. I wanted 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. 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, I would love to hear your thoughts on newer advertiser demand as SMB and others join the platform. That's question one. And then, Drew, more specifically, you highlighted operating leverage, again, over 70%, clearly achieving positive GAAP operating income, which is great to see. Talk to us about just how you view investments versus growth and whether we think we turned the corner on profitability going forward. Thank you, guys.

Yes. I think 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. First of all, some of the drivers were things like vertical diversification, like over half of our verticals are growing more than 50% year-over-year, like media entertainment, pharma, tech finance. These are areas where we made intentional investments to develop that capability and those client relationships to bring on new lines of business and new customers. So that's really go-to-market driven. Then 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 almost doubled year-over-year in terms of an objective. That's because we're delivering more conversion volume, right? Our revenue grows when advertisers find the outcomes they want at the volumes and prices they want in our marketplace, and we're 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. Finally, international grew 69% year-over-year, so in EMEA, in particular, we continue to develop, build agency relationships as well as a book of business across both channels, our large customer and mid-market channels. 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 are possible. I think that TAM is really large compared to where we are today. There are many more lines of business and thousands more advertisers that can be on our platform, but we are adding them and acquiring new customers onto the platform. So those are obviously seeds that are planted for the future while we continue to grow our base book of business. So, I think both were contributors.

Ron, regarding investments, we're currently experiencing growth. The positive aspect of our business is that it's straightforward to invest in, with quick, measurable returns. We have a tendency to invest, especially as a young company with a 90% gross margin. The investments we are making now are quantifiable and offer short-term paybacks, making them simple financial decisions that yield strong returns. We're focusing on ad tech, enhancing our capabilities to ensure measurable products and direct visibility into customer interactions with our platform, allowing us to assess returns immediately. On the personnel side, we're expanding in channels and countries where growth is obvious, and we are entering new markets with clear performance indicators. For instance, the sports deals we discussed last quarter, which were a small investment we made about six months ago, have already enabled us to secure valuable licenses with prominent leagues. Overall, this is a clear-cut decision that is reflected in our P&L. Over the last four quarters, our cost growth has been 5%, 7%, 9%, 11%, and most recently, 19% year-over-year. This illustrates the positive impact of our investments, which are measurable and have short-term payback. The main considerations we face are whether the organization can handle this growth and whether we can execute effectively. The ROI decisions are not challenging at this moment because the returns are robust, bolstered by our high gross margin.

I am tempted to ask one question with 27 parts, but I'll contain myself. Sorry, I just couldn't resist. As we think of this sort of follow-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, it's obviously a lot far more measured and slower; it's solid overall, but obviously a lot slower than what you're seeing in terms of user growth. I guess the question 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 is why we're asking is 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. And 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.

Thanks for the question, Rich. We have consistently stated that we do not manage based on ARPU; it is merely a result of our revenue, user counts, and user demographics. Factors like user geography and the ratio of logged-in to logged-out users influence ARPU, but we don't target it directly. Our revenue growth, as I've mentioned before, is primarily driven by advertisers achieving their desired outcomes at favorable volumes and prices. We are confident in our notable revenue growth and also in our unique user growth. While we don't concentrate on ARPU each quarter, we do recognize potential for growth because we value Reddit users. Over time, engagement among Reddit users increases as they spend more time on our platform. It's important to note that our core inventory consists of logged-in users, and we are consistently enhancing the value of our most valuable users—those who are logged in. There has been steady growth among logged-in users, which is another perspective to consider. Again, while we do not manage to ARPU, we see potential for future growth over time.

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 growth? I understood there's limited visibility, but can you help us understand kind of the guardrails of where this could go? Thanks so much.

We are currently operating in a market with two types of customers. On one hand, we have larger customers in the training sector, where we’re still in discussions, but the number of potential deals is limited. On the other hand, we have a greater number of smaller deals focused on providing real-time access to information related to Reddit, social listening, and financial services. These are the customers we are aiming for. It’s still early for us in this area, and we have developed enterprise-level APIs to support our business. This segment is secondary for us, and we will continue our discussions. However, when considering the future of Reddit, our primary focus will be on our advertising business, search, and on-platform initiatives. Reddit's data holds significant value, not just for us but for various players in the market as well. Internet users are actively seeking out Reddit’s content for different reasons. We are open to opportunities and believe in finding a balance between making this data accessible and developing our own products around it.

Great, thanks a lot. So, it's great to say conversation pages are up 40%. Can you just maybe talk about the ad road there, where do you think you are in that opportunity in terms of monetizing just that runway?

I believe you're inquiring about monetizing conversation placements. We're currently testing ads and comments, and we are still in the early stages regarding the design of that page from a consumer experience standpoint. There is significant potential here, as it is a high-intent page where users seek information. We are also in the initial stages of developing the right ad format for various sections of the page, including the part of the post we launched a couple of years ago and the ads in comments. There is a lot of opportunity ahead, although this represents a small portion of our inventory at the moment; however, engagement in this area is increasing. I see this as an opportunity, and we are addressing both aspects concurrently. We have plans for enhancing the user experience on that page, guiding users in obtaining the information they need, and the ad experience will evolve accordingly. There is room for growth here. We are focused on designing effective ad formats rather than concentrating on ad load as a metric. Our priority is to create formats that deliver results alongside the growing number of users on the platform, meaning our inventory expands as our reach does.

Thanks so much for taking the question. Maybe following up on that last answer and asking one of Jen. Jen, 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 of the yield of building additional revenue scale in the years ahead?

Yes, thanks, Eric. It's a number of things. So end-to-end for performance, we're still continuing on our CAPI drive. It's really important. Measurement is incredibly important to performance. That's proceeding nicely, but it takes time. We want ideally 100% of our conversion revenue covered by a measurement like CAPI, but we're not there yet. This is an IT-driven process with our customers, but measurement is incredibly important. The second is automation simplicity. We’ve now developed a product that is market competitive in terms of performance outcomes, which is 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 and allows them to scale, especially with the increased reach of our users. That's great. But it has to be simple in order for smaller advertisers to take advantage of that, which means automation, really end-to-end simplicity, and we're not there yet. That's something that we're building more end-to-end automation in the world of performance. But that will unlock more advertisers. The third is in the lower funnel is shopping. Shopping is just a different sub-objective within lower funnel performance. It requires catalog ingest, its own machine learning models, more complicated measurement, and we're building that capability, but 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 those three things.

Hey, thank you. Question about just how are you using Gen AI in your ad tech. Maybe talk about what impact have you already seen with advertising adoption among the lines of, Jen, you mentioned reducing friction in the automation? Perhaps what category of new customers are coming as a result of any new tools that you're providing such advertisers around Gen AI?

Yes, thank you for the question. A few quarters ago, we launched a headline generator using Generative AI that allows users to input their website URL, generating Reddit-style headlines that enhance ad performance. Utilizing these types of headlines in advertisements significantly improves their resonance. This is just one example of the potential for ad creative. We also acquired a company called Memorable AI, which specializes in analyzing creative elements and their performance drivers, such as the hero image, color, and text type. They provide insights for optimizing creative content. Our plan is to integrate those insights into our ad stack, using Generative AI to perform tasks informed by this data. Although we have just acquired Memorable AI and are in the integration phase, we are enthusiastic about an extensive and promising roadmap for ad creative with Generative AI. Additionally, we will introduce further automation in our platform, incorporating AI to streamline end-to-end performance by simplifying campaign setup and optimization processes.

Great, thanks for taking my question. You talked last quarter about conversation ads creating some pricing headwinds. Can you talk about if conversation ads are still putting pressure on CPMs and also discuss the impact on pricing, early adoption, and the reception of some of your newer premium conversation ads?

Sure. Yes, I would say that the conversation placement compared to the feed still has less demand in that placement because it's newer. We are testing ads in comments right now. Adoption for a new ad unit like that does take time. But there are ways that we've been growing that demand. For example, I mentioned earlier the multi-placement optimization, where customers can get the benefit of us optimizing across both pieces of inventory, 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, and they're kind of indifferent to the placement. 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 of having to set up different ad groups, et cetera, and think about those two ad units as we adjust the creative and the optimization across both. So I do think there is increased demand. We're seeing good increased demand against that unit. But of course, we're also seeing a lot of supply, as I 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. It's extremely contextual, extremely high intent. It is a high converting page with great outcomes. We’re still early in the ad formats and designing the ads for that page. So, it’s just an incredible opportunity.

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. Jen, could you just kind of walk us through, as we think through all the ad innovation that you're most excited about, which of the products have you built the back-end tech stack for that are going to roll out into '25 that you think could really be the next driver of performance and ad budget growth for you guys? And then the second one, Steve, can you just walk us through your conceptual timeline about search, building search, and then starting to test monetization of search.

Yes. Happy to talk about the ad stack. So, for '25, I would say we're continuing on the same journey in terms of our strategy. We want to be a full funnel solution for advertisers. We want to deliver market competitive outcomes across brand and performance advertising. I think we're doing that in the objectives that we have across brands and impressions, brand lift middle of the funnel for traffic and lower funnel in terms of key conversions, things like at the card purchase and app installs. There's more there, and we're just at the beginning of that journey. There’s more that we can do in terms of our modeling. More that we can do on measurement—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. Remember that can scale with user growth, which is a really nice position to be in. We will still deliver more efficiency. 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. In addition to that, we see an opportunity to enhance the brand part of our proposition. On the brand side, we've always been successful because of the high engagement and the big unduplicated reach on a monthly basis. The 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 to reach at our lowest cost—the things that we've given to advertisers on the performance side that drive some automation for them. We can do that in brand as well, which will be something that we’re investing in. The second is on the lower funnel, while we have a really nice foundation in conversions in 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. Those would be the second piece. The third, which I think we're now at the moment that we can do, which is the end-to-end automation. You've seen this with Advantages and Performance Max from Google. It really does make optimization campaign set up much simpler and scalable for advertisers. In order to do that, there are two steps: you have to have every part of the ad stack in place before you automate over it, and 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 now. We’re investing and starting to put together these items into a more automated experience. So those are the three things that we've been starting to invest 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.

Okay. And so then on the search side, look, we'll be doing a lot of heavy lifting throughout 2025, so high-level roadmap, modernizing our search products, so kind of bringing it up to table stakes or what are table stakes in this era. So really good auto-complete, beautiful results pages. We'll start integrating large language models into making our results more sophisticated, helping users navigate all of the results that come back from Reddit. There’s a lot of back-end work as well, which is improving our own ability to do retrieval, getting more sophisticated ranking, and creating more entry points in search as well. So, 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. 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, we need to have some stability in the product, right? It's hard to monetize products when the pickles are moving all over. So, the simplest answer is that most likely is we'll find some products we like next year, and that’s something 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, and I think the opportunity is really big, and we’re looking forward to getting there. But it is a multistep process. But you’ll be able to follow along with us each quarter as we go next year.

Jen, maybe for you. 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.

Thanks for the question. Yes, I'd say, look, probably when we last spoke, I had some caution about Q4 around the election. What I would say is, it doesn't seem to be affecting bookings. There is caution around delivery timing. There might be advertisers who are going to be a little quiet 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 what we've seen so far. In '25, it's early, but I would say the signals are that it's stable and there's probably some optimism. I think most folks at the Holocaust will say that they are going to be up in general, unless there's been major client or share shift, which I think is good. Brand advertising has been really healthy. We've seen strength across all our objectives. I think it's still an efficiency-driven market, so I do think at the mid- and lower funnel, there are still pressure to improve ROAS year-on-year. But I do think that there is healthy interest and investment in brand, which I think is always a good sign. The full funnel is actually all in a healthy place in terms of investment. That's our view so far.

Great. Maybe two for Steve. With Google and OpenAI already under contract, could you characterize the demand for future large language model partnerships currently? Do you feel like you're making progress in working through some of those data and privacy requirements that you've talked about?

Sure. The first question concerns data partnerships, particularly with Google and OpenAI. We are engaged in discussions with various partners. It is essential that any commercial or non-commercial agreement respects our users, which aligns with our public data policy. These partnerships must be fair to our business. While these deals have been complex so far, I wouldn't say they are critical for Reddit; rather, they are more of a nice addition. Our overall approach is to be open for business, but the terms must work for us, our business, and our users. We are navigating through each of these discussions, and as you've noted, we are willing to block or terminate relationships if we cannot agree on terms. Various outcomes are possible. On the traditional external search front, there’s significant utility for some of our core users. Those users will continue to come to Reddit, which serves as a valuable marketing channel to attract new users. We've experienced algorithm changes over the years, some beneficial and others detrimental, but we've navigated these challenges for 19 years. Therefore, traffic can be volatile. However, over the last few years, our log-in growth has remained strong and dependable, as has our app growth, which constitutes the vast majority of our revenue. While there may be fluctuations among logged-out users, our overall business has demonstrated stable and consistent growth during this period, and we expect that trend to continue.

Thanks for taking the question. So, Jen, I know you said you don't manage towards ARPU, but domestic ad ARPU had a significant uptick this quarter from minus 12% year-over-year in Q2 to plus 2% year-over-year in Q3. I know Drew said pricing has improved. How much of that is pricing? And what other areas are contributing to that?

ARPU is going to bounce around quarter-to-quarter. That's the reality of being focused on revenue growth and user growth. I don't necessarily read too much into quarter-over-quarter movements in ARPU, but yes, the drivers of ARPU in general are definitely things like pricing, and ad formats or ad load are contributors to ARPU growth. The way I think about it is our business has really grown significantly in the mid and lower front. You do that by growing volume of clicks and conversions, increasing the value per impression that an advertiser gets. It’s increasing their return and efficiency that we're delivering to them, thereby increasing the value of every impression because of the click volume and conversions they’re seeing from advertising on Reddit. Delivering performance is definitely helpful for advertisers and for us in delivering return on ad spend, which drives demand and spending, which can drive pricing and competition and interest in those objectives and scaling those objectives. So, yes, I think it's driven by a lot of the work we've done in the ad stack to deliver performance.

Hey guys. This is Bill speaking for Dan Salmon from New Street. Thanks for taking my question. I was 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 its size customers. It would be great to hear about your latest earnings.

Sure. As Steve mentioned before, our go-to-market is kind of a barbell. We have discussions with a small group of folks who are developing training AI models on one side. The other side would be marketing intelligence firms or verticals interested in slices of Reddit data. Those tend to be smaller deals, with more volume. The training folks are usually interested in both freshness and the total corpus of information to train on. We continue to talk to a small group of those who are in the world of AI training. It's an evolving landscape. Many of those companies are trying to figure out their strategies, what their product will be, what they're building, how they're investing, how Reddit fits into it. It's well known that we're here to help as a thought partner. The other side of the go-to-market is a small team engaged with marketing intelligence companies. We're helping them show the value to their end customers and making sure they have a great experience in understanding what Reddit data can bring.

Yes. Thanks, Rob. Yes, I think we'll wrap here. I 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.

This concludes Reddit's Third Quarter 2024 Earnings Call. You may now disconnect.