Reddit, Inc. (NYSE:RDDT) Q1 2024 Earnings Call Transcript May 8, 2024
Reddit, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Julian, and I will be your conference operator today. At this time, I would like to welcome everyone to Reddit’s Q1 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Jesse Rose, Head of Investor Relations. You may now begin.
Jesse Rose: Great. Thanks, Julian. Good afternoon, everyone. Welcome to Reddit’s First Quarter 2024 Earnings Conference Call. Joining me today to share our results are Steve Huffman, Reddit’s Co-Founder and CEO; Jen Wong, Reddit’s COO; and Drew Vollero, Reddit’s CFO. Their remarks will be followed by a Q&A session. We issued our first quarter letter to shareholders earlier today and is needed available on our Investor Relations website and our Investor Relations subreddit r/RDDT. Before we get started, I’d like to remind you that our remarks today will include forward-looking statements, including those regarding our future plans, objectives, expected performance and in particular, our guidance for the next quarter. Actual results may vary materially from today’s statements.
Information concerning risks, uncertainties and other factors that could cause these results to differ is included in our SEC filings, including those stated in the Risk Factors section of our filings with the SEC. 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. Additionally, the matters we will discuss today will include both GAAP and non-GAAP financial measures. Reconciliation of any non-GAAP financial measures to the most directly comparable GAAP measures is set forth in our letter to shareholders. Non-GAAP financial measures should be considered in addition to, not as a substitute for GAAP measures. Finally, today’s conference call is being recorded and webcasted.
Now I’ll turn the call over to Steve.
Steve Huffman: Thanks, Jesse. Hi, everyone. I’m Steve Reddit’s Co-Founder and CEO, and I’ll be kicking things off for us today. Welcome to our first earnings call as a public company. I’d like to start off by saying thank you for spending a bit of your time with us today. We believe that great companies are built in the public markets, and we’re proud to have made the transition this quarter. Our IPO was an important moment for the company. And I want to say thank you to our employees, our users and investors who all made it possible. And I also want to say welcome to our new investors, particularly to our new user investors for users to be able to own some of Reddit has long been dream of mine. Starting today and going forward, we want to include the community in this process.
A content marketing website showing the audience reach of the company’s products.
Our current plan will be to answer a few of the questions on this call, and then we’ll do a few more on RDDT subreddit after this call. This process will likely evolve as we go forward. I also want to acknowledge the research analysts who have been with us on this journey, helping us to prepare by not doing just one but eight practice earnings calls over the last two years. Very much appreciated. Thank you. We’re happy with our progress this quarter. More people are visiting Reddit than ever before. Users grew 37% year-over-year in the first quarter. We averaged over 80 million users daily and 300 million users weekly, and we grew across logged in, logged out and within the US and abroad. The most reliable way for us to grow Reddit is to make Reddit better.
As such, our primary focus this year is to continue to make Reddit faster, easier to use and safer. Our new web platform, Shreddit is up to 100% of users, and it’s more than twice as fast as the platform that replaces, feed equals retention, retention equals growth. We also recently updated our native apps with instant comment loading, comments and conversation at the heart of Reddit and we made it faster and easier for users to join in. Our investments in machine learning and AI will continue to improve relevance, engagement and moderation. We have and will continue to use machine learning to improve our ability to help users find communities they’ll love, which in turn increases engagement across the platform. And for moderation, we’ve trained our own large language models that have dramatically reduced the time required for communities to enforce their own rules.
We’re in testing with this in a couple of communities right now, and we’ll be rolling out more broadly soon. And to grow outside the US, we’re using machine translation to unlock our mostly English corpus. We believe this will not only drive growth in the near-term, but also over time, will allow users from all over the world to connect regardless of the languages they speak. Now turning to some of our emerging areas as we think about the next generation of Reddit. A few of the initiatives we have here are the user economy, developer platform and search. The user economy refers to a family of features that will allow users to spend and earn money on Reddit. Launching soon is a revamped version of user awards and Reddit Gold, which is our virtual currency that enables both of these things.
And our developer platform, third party developers will be able to push the boundaries of what subreddit can be, and we’re excited with the early progress here. For example, wallstreetbets has livestock tickers for training stocks and a number of sports subreddit have built live scoreboards to track gain. Historically, the value of Reddit for users has been in conversation about recent topics, but with improvements to on-platform search, we can unlock the huge amount of latent value in past content, including all the answers, reviews, and advice that we have, and we’re going to continue to invest here. It’s an exciting time. The technology landscape is evolving and Reddit is becoming more important and valuable. Reddit is one of the largest places for authentic connection and conversation online, and more and more people are discovering and appreciating this.
We believe Reddit is more important now than ever before, not only as an alternative to traditional social media, but as we enter the AI era where the value of our corpus continues to grow. The paradox I see is that as more content on the Internet is written by machines, there’s an increasing premium on content that comes from real people. And we have nearly two decades of authentic conversation, unique perspectives, earnest advice, honest reviews and answers the questions about every topic imaginable. There are multiple ways, Reddit benefits from the evolving ecosystem, and we’re still in the early stages of exploring use cases for Reddit data. This includes both internally to improve the platform and experience for users and externally through partnerships.
We remain committed to the open Internet, but we need to be considered of where Redistata ends up and what it’s used for. And we need to find the right balance between open and fair and respectful of our users. To wrap up, this was a strong start of the year for Reddit and we’re executing better than ever. We see so much opportunity and could not be more excited about our future. Thanks again for taking time with us today. And now, I’ll hand it over to Jen.
Jen Wong: Thanks, Steve. Hello, everyone. Our IPO was an important milestone for Reddit in our communities, and I’m thankful for everyone that helped make it possible. I couldn’t be more excited about what its future as a public company. Reddit is still early in its monetization journey, I’m proud of what we have achieved to-date with our advertising business and our new and emerging businesses in data licensing and user economy. We aspire to be a leader in contextual and inter-space advertising. And every day, we are working to improve our advertiser solutions and bring new advertisers to the platform. In the first quarter, we successfully scaled and diversified our business, expanded partnerships, and executed on our ads platform roadmap.
Total revenue growth accelerated in the first quarter and grew by 48% year-over-year to $243 million, the fastest year-over-year growth since Q1 2022. We continue to see traction with our strategies alongside a more favorable ad market versus last year and made progress in our emerging data licensing business. Total U.S. revenue grew 53% and international revenue grew 30% year-over-year. International revenue represented 18% of total revenue in Q1. Advertising revenue grew 39% year-over-year to $223 million, the third consecutive quarter of accelerating growth year-over-year. Other revenue grew over 450% year-over-year to $20 million, primarily driven by new data licensing agreements we signed in the first quarter. I’ll first discuss our ad revenue drivers.
Our investments enabled us to drive performance for advertisers. Click volume doubled and we improved click-through rates by over 40% year-over-year in the quarter. Our full suite of solutions across the marketing funnel continue to position us well for a broad set of advertisers. Our performance advertising business, which drives traffic and conversions, drove more than half of our growth in the quarter. Ad revenue growth was primarily driven by increases in impressions delivered against a year-over-year decline in pricing. We saw revenue growth across all of our managed channels. Our scale business, mid-market, and SMB grew at a faster pace than total revenue. This is an investment area for us and was in line with our expectations. Our large customer service channel, which accounted for slightly over 60% of total revenue saw broad-based growth.
Looking at verticals, the tech vertical returned to growth and we experienced particular strength in the finance, pharma, and CPG categories, each growing over 50% year-over-year. I’m pleased with our progress to diversify our revenue. And in Q1, there is no vertical that exceeds 20% of our ad revenue today. In terms of geography, international revenue increased 30% year-over-year to $43 billion in the first quarter, an acceleration from 21% year-over-year growth in Q4 last year. This was driven by strength across large and mid-market customers in EMEA. We’ve also made meaningful progress against our ad tech roadmap. Here, we’ve our focus on a few key pillars; number one, improving usability for our advertisers and productivity of our sales force; number two, driving full funnel performance of our ad solutions; and number three, offering our advertisers Reddit unique solutions and creative that they can’t find anywhere else.
So, first, to improve usability for advertisers, we focus on cutting down the campaign setup time for self-serve and small businesses. We’re using advancements in AI to remove friction and reduce set of time. We launched an AI-driven headline generator for Simple Create, which is namely the self-serve creation flow for small businesses, and we’re seeing promising early activation and adoption rates. Next, to improve performance and measurability of our ad solutions, we made progress building out our conversion API ecosystem to capture more signals and improve our models that drive performance. We launched our [indiscernible] late last year and this quarter, we announced integrations with [indiscernible], a leading customer data platform and Google Tag Manager.
We continue to innovate with our ad products to bring our advertisers closer to our communities. We launched free-formats, which provides advertisers with a versatile and creative format to drive deeper engagement with users. Testing has shown that free-formats have a meaningfully higher click-through rate than other ad types, and we’ve seen double the number of campaigns per day since its launch. We also launched Reddit Pro, a free suite of AI-powered insights and tools to provide businesses an opportunity to establish and grow a meaningful organic presence on Reddit. We’re currently in beta with over 1,000 businesses, including Taco Bell, Wendy’s, NFL, the Wall Street Journal as well as several SMBs. We’re also continuing to lay the foundation for the future of shopping on Reddit.
Users come to Reddit during their purchasing journey and value the rich human-powered product and review discussions on our platform. We launched our first shopping ads and catalog ingest capabilities last year and are now testing dynamic product ads. We’re pleased with the early results. Next, I’ll share an update on our data licensing business. Our data licensing business continues to grow and evolve as the market is still nascent. In the first quarter, we signed licensing agreements with various companies in the social listening space and with Google as we previously announced. The financial impact of the signed partnerships are reflected in our Q1 financials as other revenue and in our revenue guide for Q2, which you’ll hear from Drew shortly.
Over time, we will strategically explore data licensing partnerships, as well as other uses for Reddit data internally, which we believe is also valuable in improving the platform and experience for our users and customers. Overall, we delivered solid results in our first quarter as a public company and remain focused on executing and fulfilling our mission. I hope you share the same excitement that we have in Reddit’s future and look forward to the journey ahead. Now I’ll turn the call over to Drew.
Drew Vollero: Thank you, Jen, and good afternoon, everyone. As we often say, Reddit has a powerful financial model that’s straightforward, advantaged and scalable. The power of the financial model was evident in the first quarter, we reached an important inflection point. In the first quarter, we were adjusted EBITDA profitable, which is both a marked difference from a year ago and a positive start to 2024. The key to that success was that revenue grew over 5x as fast as total adjusted costs. In the quarter, revenues grew 48% year-over-year and total adjusted costs grew 9% year-over-year. Let’s summarize the highlights. AUQ averaged $82.7 million, up 37% year-over-year, driven by structural product changes that have increased speed, onboarding, simplicity and consumer connection to more relevant content.
Domestic users were 50% of total users in the quarter, logged-in users were about 48% of the user base. Sequentially, we added 9.6 million users in the quarter, our largest increase in 3 years, with 60% — with over 60% of those users being logged out. Revenues were $243 million, up 48% year-over-year, driven by both a strong acceleration in the ad business and the incremental data licensing revenue from new large and small deals. Other revenue was $20 million in the quarter, up 454% from last year. International revenues were $43 million, up 30% year-over-year and 18% of total revenue. Reddit’s business model has a couple of distinct advantages, which really shined in the quarter in 2 areas. First, our gross margins remain best-in-class. Gross margins were 88.6% in the first quarter, up 500 basis points versus last year, driven by high-margin revenue gains, lower hosting contract prices, tax dep efficiencies and the accretive margin tailwind for the new data licensing deals.
Second, our CapEx remains very light. CapEx was about $3 million in the first quarter and just over 1% of revenue. Low CapEx was a contributing factor to our positive free cash flow that was $29 million in the quarter. As we scaled our business, we saw great operating leverage in two areas: first was leverage in operating expenses and headcount. Non-GAAP operating expenses were up 10% year-over-year, as we continue to hire selectively in strategic areas, such as sales, ad tech and machine learning. Total Q1 ending headcount increased 2% sequentially and 4% year-over-year. Second was operating leverage on incremental sales. In Q1, revenue increased approximately $79 million year-over-year, and adjusted EBITDA increased about $60 million year-over-year, implying that over $0.75 on the incremental sales dollar reached the bottom line in the first quarter.
These highly profitable incremental revenue dollars really helped drive positive free cash flow and swim our business into profitability on an adjusted EBITDA basis. That said, we did have a GAAP net loss of $575 million in Q1, driven by stock-based compensation related taxes from the IPO. Stock-based compensation, including related taxes for the quarter was $595 million, up from $13 million a year ago, driven primarily by one-time expenses related to the vesting of restricted stock units in connection with our initial public offering. On a non-GAAP basis, adjusted EBITDA was approximately $10 million in the first quarter, nearly a $60 million improvement from the first quarter of the prior year. This marks our first profitable Q1 on an adjusted EBITDA basis, which in digital advertising is traditionally the slowest quarter of the year Positive adjusted EBITDA was a strong driver of cash flow for the quarter.
Cash from operating activities was $32 million in the first quarter, driven by improved performance and working capital improvements in DSO and DPO. A couple of other financial notes of interest on cash and shares. At the end of the first quarter, cash and marketable securities ended at $1.67 billion and includes all IPO proceeds at this point, dilution from employee grants was about 0.6% of our fully diluted shares outstanding, as we issued about 1.2 million shares to employees in Q1. We view stock as a cost of our business and plan to manage dilution to be in line with peers in a low single-digit percentage range over time. As we look ahead, we’ll share our internal thoughts on revenue and adjusted EBITDA for the second quarter, which is where we have the greatest visibility.
In the second quarter of 2024, we estimate revenue to be in the range of $240 million to $255 million and adjusted EBITDA to be in the range of $0 million to $15 million. So in summary, Q1 was a strong start to the year, with accelerated user and revenue growth and modest cost growth, which fueled solid margin expansion, adjusted EBITDA profitability and positive free cash flow. Now let me turn the call back over to Steve.
Steve Huffman: Thanks, Drew. Thanks, Jen. Okay. We’re going to take a couple of questions from the community quickly, and then we’ll turn it over to the call here. The first question from the community, how are your initiatives going in terms of licensing data for AI data models, plans to expand beyond Google? The short answer is yes. But we’re being considered and selective with our partners, especially for the larger scale search and training deals. We need to be very considerate of where our data goes and what it’s being used for. I can’t comment on deals that are under negotiation, but the landscape is bifurcated. There are a handful of large players and then there are many more smaller opportunities, and we’re looking in above.
That said, not all plays an ecosystem. I think are good fits for Reddit. We’re in early days here. I’d say, big picture, we have seen an increase in interest in Reddit/stata for various uses. And so we’ll see — look forward to how this grows looking forward.
Jesse Rose: Okay. Second question, Jen, I think this one for you. Can you go into specifics about what types of advertising are most responsible for the strong increase in earnings? Is that mostly increased sales on previously existing types of advertising or new types of advertising on the platform?
Jen Wong: Sure. Thanks for the question. We actually saw growth in both supply and demand. Let me talk about the demand side. So across the funnel, we saw — we saw growth across the funnel sort of the Brand upper funnel, mid-funnel which is traffic driving as well as the bottom of the funnel, which is driving conversion. Brand, in particular, had a nice quarter and showed strength, certainly relative to — I think Q1 2022 was the last really strong Brand quarter. So it was really nice to see Brand come back. And mid is doing really well because we have made those improvements in CTR, 40% year-over-year, doubling click volumes, a lot of efficiency for advertisers. We also saw broad-based strength across the managed channels, particularly in mid-market and our large customer channel in North America and Continental Europe.
And then we have strength in verticals like finance, pharma, CPG and tech return to growth. On the supply side, while designing new ad placement is an opportunity. These — our inventory today really consists of two core ad types. It’s the ad in the feed and the ad in the conversations with the comment page. We did see strong growth in conversation placement inventory from users spending more time reading comments and diving deeper, as well as from some ad platform work. So both supply and demand were helpful in drivers in our business.
Jesse Rose: Great. Thanks, Jen. Julian, why don’t we open up the line, take some questions from folks online.
See also 11 Best Delivery Stocks to Buy According to Hedge Funds and 16 Best US Stocks To Invest In Under $10.
To continue reading the Q&A session, please click here.